As deadline looms for mortgage fraud protection, cost of cover may leave partners bankrupt
Huge hikes in professional indemnity (PI) insurance ahead of the renewal deadline on 1 October are forcing law firms to shut down. Legal firms with fewer than four employees and a large book of business in conveyancing are most vulnerable.
Insurers fear that solicitors may get sued for failing to spot mortgage fraud or, at worst, be part of criminal rings now coming to light that have swindled banks and building societies.
Joe Golstein, partner of two-man law firm B&G Solicitors, handling a mix of litigation and conveyancing, said his firm’s PI premium has increased by 20 times during the past two years.
He was quoted £4,000 in 2007, which rose to £20,000 last year. Then, this year, it hit £80,000 plus £10,000 excess by Quinn.
Golstein said he would have to “consider carefully” whether it was worth continuing to run his business. “As a two-partner firm we would literally be working for nothing, despite the fact we have had no claims. You are going to see a lot of solicitors going bankrupt. It’s crazy.”
Frank Maher, partner at Legal Risk in Liverpool, said he knew of one firm going into administration and predicted “it would not be the only one”.
The most serious problems, he said, are faced by “firms that have discovered a material mortgage fraud over the last few months and insurers cannot be sure that they have been told everything. [Insurers] are running scared. There are a few parts of the country that have mortgage fraud rings.” These rings typically involve a gang of people submitting false information to artificially raise the value of targeted properties.
Heath Lambert financial and professional risks specialist Chris Milne said a rise in claims over the past two years was driving PI rates up. “Although the smaller firms have been responsible for their fair share of claims, the premiums that they pay are far outweighed by the claims that they are responsible for, and insurers will probably never receive back the money they have paid out. With the larger firms, in the long run insurers may be able to turn a profit.”
An ABI spokesman said the cost of PI reflected the risk insurers were taking with small solicitors, which were vulnerable to mortgage fraud.
If solicitors fail to obtain PI insurance by the 1 October deadline, they will enter the assigned risk pool, the last chance to obtain cover.