Soaring premiums and shrinking capacity mean PI insurance will be harder to come by in the next 12 months. After Enron and WorldCom, it has become more necessary than ever, says Sarah Grant
This subject of professional indemnity
(PI) is never far from the news. With soaring premiums and shrinking capacity, we are heading for an interesting 12 months.
In September 2000 the Solicitors Professional Indemnity Market opened up. The Solicitors Indemnity Fund (SIF) closed to new business and went into run-off. The field was thrown open to 35 qualifying commercial insurers. In reality only a relatively small number of these wrote business.
In the first 12 months a significant number of law firms saw their premiums fall. Since then, there has been a significant shake-up of the new insurers - the main players have emerged as St Paul Insurance, Zurich, QBE, Norwich Union and Royal & SunAlliance.
The message for this year's renewal is that premiums will rise. Since the 1 September renewals last year the insurance industry has had to contend with the effects of 11 September. There is also a perception in the market that the profession got its cover cheap in September 2000.
Scarce cover
Commercial insurers now have a clearer understanding of the legal market and will look carefully at the risks they are being asked to underwrite. Firms that produce a disproportionate number of claims will find it harder to find cover.
Risk management has always been a feature of PI insurance and the new market has been quick to appreciate the importance of this and to continue to build on SIF's legacy. Firms that do not address risk management, and are unable to demonstrate a systematic approach to it, will see their premiums rise quicker or find business difficult to place.
The legal profession has seen significant changes over the past few years. The introduction of the Civil Procedure Rules and some significant courtroom decisions have kept everyone on their toes.
The profession breathed a collective sigh of relief when the House of Lords gave its decision in Cave v Robinson Jarvis and Rolfe. This decision has seen the fear of a flood of previously time-barred claims recede. The profession's concerns about run-off cover have also lessened to an extent. The "cradle to the grave" cover offered by SIF is no longer provided, and practitioners were faced with the daunting prospect of having to continue to obtain run-off cover for the rest of their lives.
Managing risk
Another landmark case is the House of Lords' decision in Royal Bank of Scotland v Etridge. The case laid down guidelines on how solicitors should act when advising a wife who is giving security over her share of the matrimonial home to secure her husband's business debts. This situation is fraught with conflicts and has long been a fertile area for solicitors' negligence claims. These are elements of risk management that should be addressed.
The vast majority of solicitors continue to do a good job. Unfortunately when something goes wrong, the culture we live in encourages people to try to find someone to blame. The "where there is blame, there's a claim" approach, is showing no sign of abating; lawyers cannot afford to be complacent.
The Enron debacle has thrown professionals' failings very sharply into focus. The collapse of Enron, and subsequently Andersen, will have a dramatic impact on the professional sector. The speed with which such a powerful professional global brand unravelled is frightening. All professionals have been tarnished by the scandal.
Whenever there is a significant company failure, the liquidators and creditors will generally look to the professional advisers, including lawyers, for possible recompense.
More than ever before, professional advisers will need to be able to demonstrate that they are beyond reproach. All firms must look to their own internal systems and risk management. Risk management is no longer an optional extra, it is a necessity.
The financial press have been speculating about a recession and/or a crash in the property market for some time - both have yet to materialise. The property crash of the late 1980s/early 1990s spawned a huge number of claims against lawyers involved in domestic conveyancing. The claims were driven by lending institutions faced with a shortfall of many millions of pounds, in many cases as a result of negative equity. As now, the value of property rose at a phenomenal rate for a substantial period. First-time buyers and homeowners felt that if they did not move onto or up the housing ladder they would be left behind. There was tremendous pressure to buy. The current loss of confidence in the stock market has caused those with money to invest to move into the buy-to-let market.
Whether we will see a repeat of the late 1980s/early 1990s crash remains to be seen. Solicitors have learnt painful lessons and now understand the conflicts that arise from acting for lenders and borrowers. In view of the lessons learned from the last boom and bust cycle, great efforts have been made to change working practices.
Lessons learnt
Lenders are much more rigorous in their lending procedures. In conjunction with the Law Society, they have produced detailed packages of instructions that were not available previously, in which attempts have been made to agree standard terms of engagement for solicitors undertaking joint retainers.
While lawyers are generally much more "streetwise" and alert to the small print, the combined effects of pressure of work and reduced fees (which often have the effect of pushing the work down to more junior fee earners) must create a climate for potential claims. In a buoyant market, people work under pressure and against deadlines and inevitably make mistakes. I predict the
mistakes that solicitors make will be of a more conventional nature, such as failure to ensure that all charges are discharged on completion, or failing to pick up inaccuracies in local searches.
Professional negligence is not all about claims payments and increased premiums. Professional negligence claims damage a firm's reputation.
While PI insurance will cover claims payments, there is no insurance available to cover the loss of reputation to the firm concerned or the profession as a whole. Professional negligence also has a human price. For a competent, diligent professional, the professional negligence claim will cause worry and distress.
A proactive approach to risk management within every firm will help to protect the firm, its premiums and enhance the valuable brand of the firm.
Last but not least, it will enable more solicitors to sleep peacefully at night.
Sarah Grant is a partner in the professional negligence department at James Chapman & Co
