Taking cover

Before you head off to the beach with your bucket and spade this summer, there is one thing you must absolutely do: make sure you have sent out your indemnity insurance application to your broker. This is the Law Society's message to practitioners as the indemnity insurance renewal season is about to open.

This time last year most conscientious lawyers were already working on their application, ready to send it out in July. Even so, in many cases, this was not sufficient for their brokers or insurers to get back to them on time, resulting in over 200 firms making an emergency landing in the assigned risk pool (ARP). This is between five and ten times more than the annual average; and around 40 firms have still not climbed out of it.

Since then, the conveyancing market has continued to plummet and claims against solicitors reaching the courts have risen (see solicitorsjournal.com, 17 March 2009), prompting fears that firms will be facing even higher premiums or, in the worst cases, not be able to secure cover at all.

'Last year underwriters appeared to be concerned that the fall in property prices would lead to errors in valuation '“ involuntary or otherwise '“ resulting in a possible rise in claims against solicitors,' says Jeffrey Forrest, a sole practitioner in central London. 'One year on it is difficult to say if this risk has materialised but practitioners are worried that there might be a repeat of last year's problems.'

Negligence claims against solicitors is the sort of commercially sensitive information that insurers are not likely to disclose readily but it would be a safe bet that if there had been a rise in claims, insurers would put this forward as a justification to raise premiums across the sector.

And looking at previous recessions, practitioners are worried. Even more so as, unlike the 1990s where indemnity insurance was arranged through the Solicitors Indemnity Fund ('SIF'), this time around market rules apply.

Be prepared

Law Society chief executive Des Hudson confirms that the market appears to have hardened around certain segments. 'What we saw last year was a localised set of problems,' he says. 'While over three quarters of firms went through the renewal process without a ripple '“ with low increases and even decreases '“ the rest, mostly smaller firms and those doing mostly conveyancing, saw their premiums jump.'

In response the society commissioned a survey to understand what went wrong and draw lessons for this year's round. The findings paint an alarming picture for higher risk practices. 'For every per cent of the firm's turnover derived from conveyancing or personal injury, premiums went up by over eight per cent, irrespective of track record, while in crime and debt collection, premiums went down,' Hudson continues.

Influencing the premium policies of large insurance companies is not within the immediate powers of the Law Society, but the profession's representative body is nonetheless determined to help.

Last month it re-issued its practice note on indemnity insurance and it is rolling out a series of roadshows to impress on solicitors the importance of getting their applications in early and in an orderly fashion.

This may be common sense but Jeffrey Forrest, who is facilitating some of the roadshows, says that too many firms are still leaving it too late or sending in incomplete or poorly prepared applications.

'Indemnity is one of the biggest expenses for a law firm, so it has to be sorted out properly and firms should give themselves plenty of time in case the insurers come back with questions,' he says.

And being prepared for questions will be critical in making sure the process can be as smooth as possible, according to Nigel Day, managing partner at Hague Lambert, in Manchester, and chair of the Law Society's indemnity sub-group.

'If 50 per cent of your income comes from conveyancing, insurers will be looking more closely at what you are doing,' he says. 'It doesn't mean the premium will necessarily rise, but you have to be ready to provide detailed information about your files and case management systems. It is possible that some firms may be quoted higher premiums, but ultimately insurers want to write the business.'

For Day, this is part of a bigger change in the profession. 'Firms that are looking to move into the 21st century should be prepared to face greater transparency,' he continues. 'That means transparency to the regulator, with your clients, with your employees and with your insurer; and as far as indemnity insurance is concerned, if you embrace transparency, you will be an attractive client to insure.'

But this still leaves the question of the level of premium relative to turnover in firms doing mostly conveyancing, with many solicitors with a nil or low claims record worried that, with the property market at rock bottom, they will not generate enough business to afford the premiums.

Day replies that it is acknowledged that firms are faced with circumstances outside their control, 'but if you show that you have minimised the risk '“ for instance if you are Lexcel-accredited or can show a low claims record '“ then insurers will be more easily convinced that you are a low-risk client'.

Jonathan Smithers, managing partner at CooperBurnett, in Tunbridge Wells, generally agrees but says that it's not always straightforward. 'Lexcel helps but it's not everything. It's not enough to go through a tick-box process; you must show that you have a risk-assessment mechanism in place. And that's a long term effort over the years.'

Solicitors Journal regular Russell Conway puts it even more bluntly: 'The big question is how desperate the insurers are to keep the business,' he says. 'A lot of the premiums are just based on turnover '“ though in some ways, this is right: the more transactions the greater the risk of errors creeping in and of claims being brought. But insurers seem to have little interest in whether you have Lexcel accreditation or in your claims record.'

But no matter how early applications were put in last year and however transparent they were, the process turned to a fiasco when so many firms only got a response less than a fortnight before the deadline because insurers got cold feet over risk exposure and were suddenly rethinking their commitment to the sector.

Avoiding the danger zone

'Last year was disastrous,' says a sole practitioner in Lancashire who asked to remain anonymous. 'I sent in my application at the end of June and pursued my insurer all summer; a week before the deadline I got a letter saying they didn't wish to renew cover.'

With seven days to go, he plunged into the market at a time when most companies had already closed their books. He managed to get a quote from an insurer for £40,000, which he turned down, securing cover just in time through a broker for £8,000 less '“ with the same insurer.

'The truth is that insurers don't want my kind of business,' he says. 'They want large firms '“ big premiums for no risk. Every year I dread that I will end up with no cover and fall into the assigned risk pool, waiting to be wound up.'

Back in London, Russell Conway recounts a similar experience. He had been a loyal customer of one of the larger companies and balked at the £40,000 premium quoted for renewal. When he asked them to reconsider the quote they simply refused.

'I asked them to reconsider but they said no. They clearly felt they did not need to negotiate,' he says. 'They were good, very touchy-feely, and I liked working with them, but not at this price. They seemed to have lost the plot and become quite arrogant. So I went to a local broker who got me the same cover for half the price.'

The process was much easier for Jonathan Smithers, though as an immediate past president of the Kent Law Society he reports that many local firms encountered difficulties.

'We got a quote early on but we waited as I was trying to get three,' he says. 'It's a time-consuming process and eventually we went with the quote offered through our broker, which was virtually the same as last year even though our turnover had gone up by more than ten per cent; but we have a no claims record and we're seen as a good risk firm.'

What, though, if your firm's client base does not consist mainly of high-net-worth individuals and the practice is not looked upon as favourably?

'The general advice, including that given by brokers, is that if you pretend you're perfect, there will be a suspicion that you must be hiding something,' Smithers continues. 'The more open and honest you are, including mentioning complaints that did not escalate into claims, the fewer questions will be coming back.'

Early bird or patience game

What seems to have struck lawyers though is the counter-intuitive way in which the system seems to work.

Already a restricted market with limited competition, the market was thrown into temporary chaos when AIG collapsed at the end of last summer. In the end the UK arm of the US company was unaffected but, as competitors pondered the situation, it was sufficient to make things worse for firms that had not yet agreed cover.

Stability has now been restored and ten years after the SIF was put into run off and solicitors started seeking indemnity cover on the open market, the insurance industry appears to have developed a greater

understanding of the legal services market. But there is still an unwritten rule, almost at odds with the Law Society's recommendation, that the market operates in its own idiosyncratic way, and that the earlier, seemingly acceptable quote may not be the most advantageous.

'The advice from brokers is to wait, because that's the way the professional indemnityinsurance market works,' says Jonathan Smithers.

Some solicitors even say that brokers manipulate the market '“ though ultimately, practitioners Solicitors Journal regularly speaks to appear satisfied with their brokers who they say are often able to get cheaper quotes.

'We get a lot of junk mail from brokers, but you must make sure you have a good broker, preferably through recommendations,' says Smithers. He adds that this should not stop solicitors from getting quotes separately, to make their own picture of the market.

Russell Conway meanwhile, who also says that brokers should come recommended, hammers the point that firms should not be afraid of negotiating. 'Firms are so afraid they will be turned down they will not negotiate. But you have to, and negotiate hard,' he says.

In the meantime, the Law Society has been working with BIBA, the British Insurance Brokers Association, on a model retainer that solicitors could use with their brokers. The document would require applicants to provide clear terms as to what they are expecting from their brokers, and a commitment on the brokers' side that they would come back within a given timescale. It is hoping to start similar discussions with insurers.

The difficulty for the time being remains to convince firms to take the matter seriously enough to make time for it. Like other non-revenue-generating, paper-driven matters, renewing your indemnity insurance may feel like a secondary issue to address in your spare time. Those that read the practice note and attend the Law Society's roadshows are possibly already clued up about how to go about it in the right way. According to Des Hudson the take-up for the road shows has been very good, with most of them already full, but that still leaves a good number of firms not making the time.