The insurance regime for law firms faces more upheaval amid reforms to rules on minimum cover. Legal Business assesses the latest controversy
In July, following a short consultation earlier this summer, the board of the Solicitors Regulation Authority (SRA) announced a number of reforms, including proposals to reduce the minimum compulsory cover levels for professional indemnity insurance (PII) from £2m to £500,000 and the requirement that law firms assess the PII cover level appropriate for their work themselves.
However, in early August the Legal Services Board (LSB) extended the initial 28-day period in which to assess the proposals to 90 days, meaning it now has until the middle of October to assess the move. This means that the changes will not now come into force ahead of this year’s PII renewal round, which traditionally starts at the beginning of October, as the SRA had hoped.
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Professional indemnity: PI insurance – dos and don’ts
– Sandra Neilson-Moore, Marsh
It is a substantial – and some would argue dangerous – shift for the legal profession. The consultation brought its fair share of detractors, not least at the speed with which it was conducted. The City of London Law Society (CLLS) declared in an official statement in June: ‘Lowering the mandatory levels as a starting point for risk-based differential regulation threatens to expose firms to greater risk, to disrupt that consumer assurance and to introduce a serious element of uncertainty and risk for the more vulnerable end-consumer – for whom the redress process may be lengthy, costly and not guaranteed.’
In August, around the same time as it extended the assessment period, the LSB published correspondence from a number of interested parties on its website, including the Association of British Insurers, Nationwide Building Society and Zurich Insurance, all voicing their concerns at the proposed reduction in minimum cover.
For its part, the SRA’s response has been unequivocal. ‘The Law Society speaks for its own members and its concerns were listened to, but we also consulted law firms, insurers and brokers, and by looking at past evidence we tried to come to a sensible view,’ says executive director Crispin Passmore.
As one of a firm’s most significant overheads – typically equal to around 1.5% of turnover but varying hugely between individual firms, PII is of great concern to legal practices regardless of their claims histories. Consequently, with some City solicitors perceiving a lack of competition between rated insurers and with the renewal period looming, it is crucial that firms consider carefully what level of cover they need and which provider they wish to insure with.
Cause and effect
According to Passmore, the new proposals must be seen in context. Around the same time as the consultation, the SRA also issued a new policy statement. ‘The changes are part of the SRA’s revised approach to regulation – it wishes to be clear on when regulation is needed,’ it said.
Ultimately the SRA wants to bring more insurers to the market, get costs down that do not offer consumer protection, and have products that are value for money. It also aims to balance the need for consumer security with the protection of the rule of law. Consequently, it is challenging itself more. ‘Even existing regulation must be justified as part of a drive towards de-regulation so as to keep costs down for law firms,’ asserts Passmore.
Notwithstanding the CLLS reaction, others recognise the need for substantive changes at the lower end of the market. ‘This was a brave move and may enable very small firms to purchase insurance at levels more suitable to their needs,’ says insurance broker Marsh’s financial and professional liability practice managing director, Sandra Neilson-Moore.
She was also surprised by the negative reaction from some quarters. ‘I understand that the SRA has done some homework on this and that claims of the type most common to the average consumer of high street legal services generally come in at under £500,000.’
In an attempt to reduce premium cost, the change could lead to some small firms reducing their PII cover. Confirming that the minimum cover reduction concerns sole practitioners and firms with two to three partners, Passmore tells Legal Business that around 2,500 sole practitioners are currently not doing any obvious high-risk work.
‘They will benefit from the reduction – our advice is that costs might fall between 5% and 15%,’ he says.
Others do not believe that the proposal will reduce costs for legal services providers precisely because the majority of claims fall below £500,000.
And the reduction will not impact large law firms, according to executive director and senior vice president of Aon Risk Solutions, Giles Bentley. ‘They are generally able to buy coverage that meets their needs at a premium cost they think is acceptable,’ he says.
Alison Smith, Eversheds’ head of professional indemnity, believes it makes sense to allow firms that do not need £2m-£3m of cover to buy a lower limit, but is also unconvinced that many large firms will only need £500,000 of cover per claim.
Furthermore, the levels of insurance the larger firms buy are driven by the demands of their client-base rather than regulatory requirements, according to Juliet Tainui-Hernandez, Addleshaw Goddard’s director of risk and compliance. ‘We will not change our PII approach as a result of the proposed change,’ she says.
A more significant change is the requirement that firms themselves assess the level of PII cover that is appropriate for their work, according to Passmore. For example, firms specialising in catastrophic personal injury cases should assess whether even £2m-£3m is sufficient cover – there isn’t currently a requirement to have more appropriate levels of cover.
Firms may get it wrong – some could have higher claims than their cover value and lose out – but insurers will also be assessing firms’ claims records very carefully before issuing cover.
Other changes the SRA consulted upon include a cap for insurers in any one year by an aggregate limit on claims, and reducing the run-off cover for firms no longer trading from six years to three. These will be considered in due course. ‘We want to get this right, so there will be a call for evidence with regard to changes to the minimum terms and conditions (MTC),’ says Passmore.
Ultimately, the SRA is trying to ‘normalise’ the legal insurance market so it operates like other sectors. ‘It will get there in the end,’ says Marsh’s Neilson-Moore. In her opinion, further changes should include the policy excess being applicable to defence costs, as it is to loss, and a limit on the defence costs that are paid in addition to the policy limits. ‘That is not consumer protection and therefore should not be necessary to the MTC,’ she says.
Significant upheaval
The recent proposals come on the back of reforms introduced in 2013, the most important being the closure of the assigned risks pool (ARP) – the repository funded by all qualifying insurers for firms that cannot find cover. The only means of obtaining PII now is through a participating insurer.
‘The closure is about risk transfer and, with the safety net now gone, should work to ensure that firms that should not be insured are not,’ says Jo Riddick, compliance officer for legal practice and money laundering reporting officer at Macfarlanes.
Eliminating the ARP was a positive move, according to Neilson-Moore, even if it is a nuisance to the legal profession and its regulators. ‘The insurance industry should not be cleaning up the messes of the legal sector.’
Despite this, although firms with bad claims records or poor risk management procedures will find getting insurance much tougher, many consider that the PII market needs to be more competitive. Eversheds would like to have more choice in the primary layer and more price competition, according to Smith.
However, it is hard for new insurers to enter the PII solicitors market. ‘I hear that insuring solicitors has its difficulties and the profit margin is low, which will deter new entrants,’ she says. Furthermore, large firms change primary insurers infrequently – also dampening competition.
Notwithstanding PII being something of a niche market and there being a limited number of insurance companies writing PII policies, Neilson-Moore believes there is sufficient capacity offering competitive quotes to most leading practices from the top 100 firms, while for small practices, there is a reasonably competitive market.
Nonetheless, making the MTC less insured-friendly would potentially encourage more providers to enter the market, but it is debatable as to whether such an approach is to the long-term benefit of the firms and the consumers of legal services, believes Aon’s Bentley.
For example, Smith is happy with Eversheds’ cover because of the MTC and would prefer to have a stable set of insurers committed to writing solicitors’ PII than new entrants who might withdraw from the market quickly.
And even if increased competition does bring reduced pricing, City firms are unlikely to move unless and until the newcomers can satisfy other requirements, according to Riddick. Firms choose a primary insurer carefully and for the long term – they need to have good working relationships so price, while important, is not the determining factor.
Come October – Renewal time
The professional indemnity insurance (PII) renewal period is typically around the beginning of October. Although the Solicitors Regulation Authority scrapped the official single renewal date of 1 October last year, giving firms the opportunity to align PII renewal with their other financial arrangements and release pressure on the market generally, most firms remain in the cycle of renewing around this time of year.
There are several key issues for firms to consider when renewing their insurance ahead of the autumn. Most importantly, risk management partners must understand their choices and how to access the competitive insurers that do not have exclusive relationships with brokers.
Firms then need to prepare their submissions properly. ‘They must present themselves convincingly to providers as if going to ask for millions of pounds in a Dragons’ Den episode,’ says one senior broker.
Firms must also disclose any material issues that could affect cover or run the risk of it being invalidated. If a firm is embarrassed about an issue, that is a clear sign it must be mentioned, however painful the revelation. Insurers will look more favourably on firms that have dealt robustly with past, systemic problems than those that have simply replaced wrongdoers. Furthermore, legal practices should put a good spin on presentations, telling the absolute truth in the most compelling way, so that insurers will want to provide cover and help the firms through claims should they happen.
Unsurprisingly, Sandra Neilson-Moore, Marsh’s financial and professional liability practice managing director, recommends using a broker to access the market and, where possible, firms should avoid moving around too often, even if they can find cheaper quotes. With the right broker, only insurers that meet certain criteria are approached, she tells Legal Business. If firms go to the market directly for cheaper options, they could face problems later on, but it will be too late to complain. ‘As consumers they are responsible for their own choices,’ says Neilson-Moore.
Value for money
Even without further competition, many industry observers consider PII to represent good value.
According to Bentley, at a recent Aon event, attended by several large firms, 65% commented that their current cover was good value for money. ‘The predominant reason for this is that it provides broad cover and is valuable to law firms as sleep-easy balance sheet protection,’ he says.
It is also a matter of risk appetite for the firm as to whether it wishes to pay lower premiums and have higher self-insured excess levels. ‘We bear an excess of our choosing that means we keep the smaller risks, and we insure against higher value, infrequent issues in a way which evens out the cost of claims,’ says Smith.
From her perspective, PII is value for money and the insurance market provides catastrophe cover efficiently. The insurers she speaks to are keen to differentiate themselves and stress the service they provide on claims handling and risk management information.
According to Riddick, the PII market currently available to City firms offers insurers and brokers that have: suitable covenants; specialist claims management; broadly comparable pricing; and understand their businesses.
To that extent it is fit for purpose. ‘It’s a small world, where the faces at underwriters, brokers and risk teams are well known, and many of the players have, over the years, held various roles with different key enterprises,’ she says.
If a law firm never has a claim against it, or is over-insured, it may believe that PII is poor value for money – like all insurance, its value is only apparent when used. However, when things do go wrong, they can go spectacularly wrong.
Nonetheless, there is a vocal minority of firms feeling disgruntled with the insurance market. Often it is their own fault, with some firms putting in sloppy submissions that are handwritten and illegible, or even contradictory (see box, ‘Come October – renewal time’, above).
Overall the market is robust, argues Martin Ellis, legal services practice team head at global insurance broker Willis Group: ‘There are more PII providers around than in the past, the worst of the financial crisis is seemingly behind us, and pre-2008 issues are reaching the end of their primary limitation period, resulting in a competitive environment for the better risk-managed law firms.’
He has also seen a reduced frequency of claims, particularly real estate-related cases. ‘The top law firms are in better shape, reporting good growth; if they’ve had no particular problems, their October renewal premiums will see flat rates,’ he says.
But more reforms are on the way for the PII solicitors market and the key players, be they at insurers, brokers or firms, must prepare themselves for another round of upheaval. LB