As the summer draws to a close, law firms with a renewal date of 1 October for their Professional Indemnity Insurance (PII) will be looking to obtain cover at the best available price and on the most favourable terms, if they haven’t already done so. The SRA specifies that “where the insured firm is a relevant recognised body or a relevant licensed body (in respect of activities regulated by the SRA in accordance with the terms of the body’s licence)” cover of at least £3 million is required (for any one claim), “and in all other cases, at least £2 million”.
CLC-regulated firms should also be aware that, under new requirements (Minimum Terms and Conditions and Participating Insurers Agreement), which came into play on 1 July this year, they must submit at least one application for PII two months ahead of the renewal deadline. Furthermore, from 2023, insurers receiving applications must respond no less than one month before the deadline. The new requirements have been introduced to make the renewal process smoother and provide more time for practices to seek alternative/more suitable cover if needed. A new automatic 90-day extension of cover will also benefit CLC- regulated firms that are unable to renew (based on a pro-rata premium of their most recent policy). Such firms are prohibited from new work during the extended cover period.
With an increase in claims activity (both number and value), ongoing remote working, and a looming recession (with claims against law firms increasing during such times), there is no doubt that choice is decreasing. This means that premiums are often higher than firms are comfortable with. The cost of PII has shot up. Some insurers have been forced to withdraw from the market due to trading losses, resulting in less competition and less range. In this ‘hardening’ market, a 2022 Howden’s report stated that premiums had increased by 27% on average, with predictions that this trend would continue throughout the 2022 renewal season.
In response, some firms have been forced to close because they could not obtain or afford cover. And, to make matters worse, an increasing number of insurers are demanding personal guarantees, meaning some directors will put their assets, such as their homes, on the line in return for essential coverage. Take all this together and it’s no wonder that the UK Legal Services Board has identified the PII issue as one of its key priorities.
Of course, the best way to deal with such a challenging market is to reduce the risk associated with a firm and make it attractive to insurers. Most firms will have examined their risk profiles over the last two years as they navigated issues brought about by Covid-19. Nevertheless, now that the worst of the pandemic is hopefully behind us, law firms cannot rest on their laurels. Ensuring a well-run practice with a low level of claims requires a constant commitment to sound risk management.
So, how do you reduce your firm’s risk profile and benefit from lower PII renewal costs?
A few key factors will influence any underwriter’s pricing model (e.g. type of work, amount of revenue, number of partners/employees, claims history, etc.). Your firm’s awareness of the risks it faces in line with the type of work it performs (e.g. conveyancing and probate bring greater risk factors compared to criminal or planning law) will be considered. In addition, when deciding if your firm is risk resilient, an insurer will also consider the ratio of managers to staff, how employees (including remote workers) are supervised, and who is responsible for managing risk.
Investments you have made to improve how your firm operates and manages risk will always be looked at favourably. This includes case management systems and quality standards obtained; both of which help to demonstrate that a firm’s processes and procedures are working. Periodic risk reviews, how your firm spots and red-flags potential problems, a clear audit trail, and how it ensures issues do not escalate and/or replicate will also be counted. Insurers will also look at how your firm has responded to previous claims to avoid recurrence.
Managing risk is no small task. But, aside from the wider benefits to firms and their clients, with costs rising steadily and well-run firms having lower PII premiums, not investing in risk management is not an option. The good news is that help is at hand. Outsourced, independent file reviews, complaint handling, risk and compliance gap analysis, and other complementary services are available to support your firm and provide a constructive approach to continually improving your risk and compliance systems.