An alarming increase in claims against solicitors, linked to mortgage frauds, could have a destructive impact on the solicitors’ professional indemnity (PI) market, experts warned this week.
Insurers have reported an unexpectedly high number of claims notifications, suggesting mortgage fraud against solicitors.
Large scale claims would be another blow to a market that has increasingly experienced rate reductions due to intense competition and saturation.
There have been warnings this week that it could force some PI insurers out of the market.
The issue has already sounded alarm bells for the Solicitors Regulation Authority, which is keeping a close eye on the situation,and liaising with insurers, a spokesman for the body said.
Anna Fleming, solicitor and claims manager at Zurich, said the current level of claims has not been seen since the devastating housing market crash of the mid-1990s that led to mass repossessions.
She said: “We are seeing an increasing number of notifications of claims against solicitors that smell of mortgage fraud. There are some concerning signs out there and it wouldn’t take much to tip it into a serious situation. We weren’t expecting to see this at this stage in the market.”
Frank Maher, a solicitor at Legal Risk, said he was aware of a handful of high street law firms that have been refused PI cover from their current insurers because of evidence that there may be pending claims in connection with mortgage frauds.
The property market crash in the 1990s led to a large increase in solicitor PI premiums.
But even if the property market were to drive up solicitors’ PI premiums, Fleming said there was unlikely to be enough capacity to cover the cost of the claims, which could leave some law firms uninsurable.
Fleming said it could be up to two years before the full impact of the mortgage fraud scandal is revealed to insurers.
She said she would not be surprised to see some smaller insurance companies forced to pull out of the solicitors’ PI market.
Fleming said: “This is highly sophisticated fraud that sometimes involves organised gangs. Sometimes solicitors are in cahoots with these gangs. There are some solicitors who know exactly what they are doing and they need to be drummed out of the market.”
The warning came as the annual solicitors’ PI renewals closed with brokers pointing to rate decreases of more than10% for some firms.
Mortgage fraud uncovered
The frauds can involve organised criminals cutting deals with developers to purchase numerous houses at a lower cost which they will then refurbish and quickly sell.
Other frauds involve individuals fudging salary details in order to qualify for higher mortgages they cannot afford to repay.
Solicitors could face claims through their involvement
in the transactions.
When the property market is strong, mortgage fraudsters are able to mask crimes by recovering the loss of the loan.
But when the market turns, overpriced homes cannot be sold and mortgages cannot be repaid. Then the claims start piling in.
But claims are already arising despite property prices remaining inflated.