It feels like 2014 again as the SRA pushes for an upheaval to the PII market amid benign conditions for insuring law firms. But with negligence claims mounting, how long can the calm last?
In what felt to many in the profession like a bureaucratic version of Groundhog Day, the Solicitors Regulation Authority (SRA) again issued a discussion paper on professional indemnity insurance (PII) in July. Groundhog Day, because the SRA put back on the table many of the proposals it had originally suggested around the same time last year, again suggesting a reduction in the minimum compulsory cover levels for PII from £2m-£3m to £500,000 and the requirement that law firms assess the PII cover level appropriate for their work themselves.
Despite a lengthy consultation in 2014, which drew successful (or so it appeared) opposition from the City of London Law Society, the Association of British Insurers, Nationwide Building Society and Zurich Insurance, all concerned at the proposed reduction in minimum cover, no final reforms were brought into force.
In addition to the reprised proposals for cutting the cover required by the SRA’s Minimum Terms and Conditions, other fresher suggestions include only covering consumer claims; an aggregate limit on cover, rather than on any one claim; defence costs cover, except for consumer claims; dropping protection for non-disclosure and other policy breaches; and the removal of partner fraud cover.
But Frank Maher, a partner at niche law firm Legal Risk, who advises many of the top 100 law firms when it comes to their insurance claims, is concerned about the focus on PII and believes it is the wrong place to start – the cost of professional negligence claims is the problem for City firms, rather than the volume of claims against smaller firms.
‘Firms are a lot better off because of the bulk purchasing power they have and the SRA’s suggestions seem like they are throwing away the family jewels and getting nothing in return,’ he says. ‘I can remember when we truly had a hard market in 1986/87 and the cover available for firms was substantially reduced from where it is now. To get cover above the compulsory cover limit was more difficult and terms were more restricted.’
‘At the moment we can’t cap our liability under £3m, to give clients the benefit of the minimum terms, and if we are working with accountants and others who cap around multiples of their fees or a maximum of say £1m, it can be quite difficult,’ she says. ‘There is something to be said for allowing a bit more flexibility. In any case most of our clients are large and sophisticated businesses so they don’t need so much protection over terms of business.’
Smith agrees the breadth of cover provided by the current minimum terms is very good for the protection of the profession.
‘It is helpful for us and clients to be able to know that all SRA-regulated firms have cover that meets the requirements of the minimum terms without needing to see the [details of the insurance] policy,’ she adds.
And Martin Ellis, executive director of the UK PI practice at Finex Global, part of insurance broker Willis, believes that changes to minimum terms will make little difference to the top 100 law firms.
‘The top 15 to 20 firms are covering themselves for £300m to £350m and for those in the top 50 to 100, this figure is around £100m to £150m. The SRA proposals are not going to apply to them and they are not going to reduce their cover. Although I welcome the concept that one size does not fit all, for the larger firms it is business as usual.’
More of the same
So with the renewals season coming around again (this despite the much-publicised scrapping of the single renewal date for PII in 2013), do firms expect to see a marked hike in their premiums or will market conditions remain, like previous years, consistently soft?
On this point views are mixed. Mark Aizlewood, partner and head of professional indemnity at niche insurance firm Carter Perry Bailey, expects premiums for City firms to remain consistent for the foreseeable future.
‘We are in a benign environment in terms of insurers’ claims exposure,’ he says.
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Giles Bentley, executive director and senior vice president at Aon Risk Solutions, agrees. ‘There are a plentiful number of excess layer insurers who think they can make a profit out of insurance for City lawyers and, unless claims deteriorate significantly, it’s likely this will continue. I expect stability.’
Recent news would support Bentley’s claim, with July seeing the launch of Pelican Underwriting Management’s UK law firm business, offering products backed by Great Lakes Reinsurance, a wholly-owned subsidiary of reinsurer Munich Re.
But with the size of claims against some of the City’s better-known firms (see box, ‘Stacking up’) on the rise, how long can these conditions stay the same?
Angela Robertson, general counsel and director of risk at Taylor Wessing, senses that, for some firms, the market could harden. ‘The impression I got after the last renewals round was that some firms had seen some quite heavy increases in their premiums. That has not been my experience but some firms have seen 10% increases.’
She says that the major reason for premium rises is a firm’s claims record. ‘It is an interesting market because there have been firms out there that have suffered substantial negligence claims against them to the tune of several million and I think insurers are getting increasingly concerned about the actual value of claims, that is something that is very much on their radar.’
Ellis says that insurers will struggle to keep premiums the same if a firm has been subject to a claim which stretches into the millions, while Smith says overall, if both the primary and excess layers of insurance are taken into consideration, she expects premiums to hold.
That said, securing adequate PII tends to be more of a stressful experience for smaller and high street law firms and, as Bentley puts it: ‘City firms can generally buy broad cover at a premium cost that they find acceptable and negotiate what they want.’
Stacking up: PII claims on the rise against large City firms
Insurers and firms cannot escape the fact that there have been a number of high-profile claims brought against law firms over the last year. According to Frank Maher at niche firm Legal Risk, the claims history for some of the larger firms is changing. ‘At one time they did not have much claims experience but now there is. This meant that insurers in the past were getting money for old rope. This is no longer the case.’
In December 2014 RPC reported that High Court cases against law firms for professional negligence had increased by 192% from 143 in 2013 to 418. Although the primary reason for the sharp jump was because the time limit for pursuing professional negligence claims arising from losses stemming from the global financial crisis is closing, there has been a notable spike in claims against Legal Business 100 firms.
In July, Lewis Silkin was found negligent in advising Tim Wright, the former chief executive of an Indian Premier League cricket franchise, on his employment contract and ordered to pay £2m in damages. Wright, who was installed as chief executive of Deccan Chronicle Holdings in 2008 after the group bought a cricket franchise to launch in the now lucrative annual India Twenty20 cricket tournament, was fired following the financial crash but his advisers had not included a jurisdiction clause in his £10m severance guarantee.
Wright had instructed Lewis Silkin’s joint head of employment Michael Burd to advise him and draw up the necessary paperwork ahead of taking the post. While Burd claimed that the absence of a jurisdiction clause in Wright’s contract was a deliberate omission after he had advised on the ‘pros and cons’ of specifying a particular jurisdiction, Wright argued no such advice was given. Lewis Silkin said that it was looking into the possibility of an appeal.
In June, Bird & Bird lost a professional negligence dispute brought by former client and offshore company Orientfield Holdings at London’s High Court and was ordered to pay out £1.8m in damages plus interest.
The dispute arose when in 2010 Orientfield instructed Bird & Bird for its purchase of a large residential property in St John’s Wood for £25m, which was later bought by media executive Elisabeth Murdoch. However, the court found that the solicitors failed to advise Orientfield of a proposed development close to the property which would have negatively affected its intended use.
In the same month, Watson Farley & Williams defeated a £10m professional negligence case after the Court of Appeal found that the firm’s drafting of contracts was not at fault following the claim brought by international businessman Itzhak Ostrovizky that the firm had acted negligently in the advice it gave on investments he made in a number of Greek solar energy projects before the financial crisis which then failed, incurring losses of around €13m (£9.5m).
And in March, Baker & McKenzie successfully defended an £11.7m professional negligence claim brought by German food flavourings maker Symrise and its Mexican subsidiary. The claimants were suing Bakers alleging that the firm’s advice on ‘aggressive financial engineering’ as part of a complex M&A deal in Mexico over a decade ago, failed when the company had to pay out £11.2m in tax.
Broker Martin Ellis, UK PI practice leader at Finex Global, part of Willis, says that ‘spike claims’ arising from corporate deals gone wrong post-Lehman Brothers, and the financial crisis have led to a number of big value claims but that most disputes are settled before they get into the public domain.
And as Giles Bentley at Aon Risk Solutions, puts it: ‘In terms of professional negligence cases, I don’t think anybody knows what is out there.’
Moving the goalposts
Bentley also believes that the broad terms of the PII coverage large firms can secure mean that it does not really matter what the structure of the firm is or how work is deployed.
But even the largest firms with the smallest claims history know for themselves, and are often advised by brokers and underwriters, to clearly explain the nature of their business, the make-up of their staff, their strategy, and their history to allow insurers to fully understand their risk profile.
In practice this means that a firm’s relationship with its brokers, underwriters and claims managers is of paramount importance all year round and not just during the renewals season.
Robertson says that Taylor Wessing holds regular claims meetings throughout the year to update its insurers on ongoing claims and where it sees exposure, alongside more general meetings where the firm’s latest developments are discussed.
‘If we have decided on a new strategy or we are embarking on international expansion, we keep the dialogue going so they understand our strategy as a firm. I also like to do presentations once a year and invite 30 to 40 insurers from both the primary and excess layers. This can be quite a powerful tool where insurers have an opportunity to meet very senior people at the firm and understand us as a business.’
Smith agrees, saying Eversheds has a broker it is in touch with frequently, while during the year her team meets with the primary insurer and usually with some other insurers. For renewal, the firm provides a proposal pack which includes, among other things, information on turnover, work types, staff numbers and claims records. It kept its primary insurer abreast of developments during its June merger with Heisse Kursawe Eversheds to form Eversheds Deutschland.
‘Whenever we enter into a new association we tell them. We update insurers on our business strategy and direction of travel,’ she says. ‘We talk about our approach to risk management in some detail… we are quite open with our insurers.’
Yet with an increasing number of firms reorganising themselves to include alternative business structures (ABS) and with the increased use of paralegals, how does this fit in with their PII policies and their relationships with insurers and brokers?
The consensus is that most insurers are mature enough to understand that firms are evolving when it comes to their structure, and it is a given that firms will include detailed information about how they are structured in the proposal pack they supply to their insurers each year.
Maher says that while simple ABS for larger firms do not often pose any problems, it becomes more complicated when a financial services firm enters into the legal profession. However, one thing insurers want to see, and that firms need to be alive to, is the issue of cover for staff secondments.
Carter Perry Bailey partner Simon Thomas says while insurers will want to ensure adequate cover for secondments it is not normally a big problem.
‘Clients are driving value for money and want the right people doing the work, but insurers also want the detail of who at the firm has been working on a case as well,’ he says.
Firms have non-owned offices, international networks and associations, best friends relationships, or might be instructing a firm in a given jurisdiction that they have never worked with before. This can throw up a raft of risk management issues both for the firms themselves and their insurers.
Bentley says that all firms should give proper consideration to whom they sub-contract with and how, while Ellis also points out that a firm’s international exposure will limit its choice of primary layer insurers because not all insurers have an appetite for global risk.
‘We have seen more claims coming in from international-related problems,’ says Ellis. ‘What insurers ultimately want to see is a uniform approach to risk management and that all of a firm’s offices are singing from the same hymn sheet so that when it comes to a claim they can take some comfort in knowing that a firm has not got a random approach to risk, particularly around client engagement.’
He adds that insurers will also question the amount of due diligence and risk assessment a firm has carried out when it is expanding or merging. ‘We are doing more work advising on due diligence and international expansion than ever before, insurers will want to know exactly why a firm has decided to merge.’
Robertson says that most international law firms have at least one risk management team and that most risk management policies emerge from that central team.
‘Generally insurers appreciate that firms have different and complex structures and that they are not all going down the owned-office route, but they want to have an understanding from a pure risk management perspective about how we can ensure visibility of what is going on in each office. Where it is more complex is where you have best friends firms, insurers like clarity but are realistic enough to know that clients don’t want to instruct a number of firms directly. Insurers do get that.’
Aizlewood says that ensuring robust client engagement terms across all offices is of increasing importance to insurers who are keen to avoid scope creep.
‘Insurers will want to see that head office has got effective risk management wherever they are in the world with a properly integrated culture and they will want evidence of that,’ he says.
With further changes to the PII system proposed by the SRA, a plethora of recent high-value public claims against the larger firms and international expansion continuing, law firm risk managers are busier than ever before. Professional negligence cases against firms are becoming increasingly high profile and many will be hoping that worsening claims history against the upper end of the market will not have a knock on effect on premiums. LB