With renewals earmarked for 1 October and a possible economic recession ahead, solicitors’ professional indemnity is back in sharp focus, Insurance Times finds out why

The chances of a Covid-19 induced economic recession are high, and this has called solicitors’ professional indemnity (PI) insurance back into question as the renewal date approaches on 1 October.

This line has been laden with historic challenges over the years, and now the potential economic strain could make the premium payment even trickier for many solicitor firms.

And this is why the International Underwriting Association (IUA) recently issued an open letter calling for the right to cancel PI insurance, as it fears this line could become “unsustainable” should premiums or excesses go unpaid.

This is according to Chris Jones, IUA’s director of legal and market services. He told Insurance Times: “We know with an economic downturn that payment of premium becomes an even bigger issue.”

The IUA hopes to highlight the Solicitors Regulatory Association’s (SRA) minimum terms and ensure insurers are aware of PI risks.

If solicitors’ PI could be cancelled, Jones said that it would provide more stability for credit control, allow better priced risks, and give cover flexibility.

Balancing act

However, solicitors’ PI, which covers professional negligence, could also see further problems such as higher premiums and increasing claims.

“The problem is there are no non-payment provisions, essentially there are no rights in that regard for the SRA’s minimum terms – and it’s been like that for a very long time,” Jones said. ”The SRA’s rationale is that it is a consumer protection point – they feel that the current situation is beneficial for consumers because they will not lose out.”

Giving the example of a third-party claim being filed there will be insurance behind it even if the solicitors do not pay the premium, Jones added: “The fact that we have these restrictions makes it very difficult for us to offer flexible terms and conditions and premium payment conditions for the insured. It impacts everyone, including the majority of firms that pay on time – it is the increased credit that is behind it. The SRA understands the concerns of insurers, but its balancing act.”

Meanwhile, for firms that go into run-off, in theory they will have six years cover as well as an indemnity fund.

The SRA’s minimum terms states  that law firms must have a minimum level of indemnity insurance of £2m, rising to £3m for incorporated firms.

Firms must also have an “adequate and appropriate” level of insurance that covers the business firm’s conduct sufficiently.

The latter is also the case for freelance solicitors, those who offer “reserved services” [a service offered to the public through which the solicitor will be handling client’s money or protecting liberty], as well as those that work for a not-for-profit or public sector organisation.

But the SRA sets no requirement level for solicitors that work in non-regulated businesses, in-house or freelance where they are not offering reserved services.

Jones said it is now up to individual insurers to decide on the availability of cover.

Ideally the IUA would like to see that that solicitors’ PI policies could be cancelled for non-payment of premium in SRA’s minimum terms, that the six years run off cover should only take effect when premium is paid and make excess payments mandatory, and if they are not paid to be able to offset this on claims payments.

Not new

But this is not a new problem, Simon Lovat, Inperio’s director, said that the problems solicitors are facing are the same problems every industry is facing with a reduction in capacity, and an increase in price in a supply and demand market where cover is compulsory.

“There is a lot of focus that goes into solicitors; PI because the prices are up and the number of insurers are down,” he said. “It feels like it’s a pressure point in the market, it’s because something like 40% of solicitors will renew on [1 October]. But if you compare it to a broker or independent financial advisor who is renewing PI, they will be facing similar challenges.”

As solicitors’ PI is a regulated purchase, they do not have a choice of buying less or having lower grade cover as they have a standard to upkeep, Lovat continued.

He warned that with the chances of a recession being high in the next 12 months, increased claims could see higher premiums, as “reduced capacity as people retract from insurance, leads to high prices”.

No obligation

Previously in August, the Law Society’s president Simon Davis said: “Firms should brace themselves for an average increase of 30%, but those with bad claims histories should expect higher claims increases.” He advised firms to make speaking with brokers a priority.

Speaking of solicitors PI as a regulated purchase and the requirement of a particular standard, Lovat continued: “It is absolutely clear to me, if you gave the insurer the ability to come off cover if that premium wasn’t paid that would reduce the cost of that policy. It must be one of the few industries where you can obtain an insurance policy and not have to pay for it.

“In a market where premium is going up anyway [and] where law firms’ turnover has fallen over the last nine months, why not reduce that exposure point?

“If you are a solicitor, you have no obligation to have a capital requirement, no obligation to pay for insurance or run off policy, but it’s okay for the insurance market to take that risk?”

Claims rising

The claims arising from Covid-19 falls into two distinct time periods – those arising from constraints from home working and secondly those from a Covid-19 induced economic recession.

Agreeing with Davis, Paul Castellani, PI specialist from the Forum of Insurance Lawyers (FOIL) and law firm Kennedys partner, cited that insurers seem to be pricing for increased claims with 30% premium hikes this year.

He highlighted that this might be “particularly difficult” for firms with reduced income, especially with the furlough scheme ending in October and other schemes such as tax deferrals.

“We therefore expect that there will be some distressed sales or mergers of practice over the next month and insurers will need to look carefully at successor practice issues,” Castellani said. ”In the longer term, if there is an economic recession, we would expect, consistent with previous ones, claims against solicitors to increase.”

The SRA has been contacted for comment.

Read more…Briefing-Looking back at the history of problems in the solicitors PI market 

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