Solicitors’ professional indemnity insurance: market update

Solicitors’ professional indemnity insurance market update
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Plentiful market capacity is mostly keeping down prices, though firms with conveyancing work will continue to face additional challenges as could those with cyber-related claims.

Professional indemnity insurance market conditions for solicitors have shown little change over the last few years, either for sole practitioners or magic circle firms. 

Capacity continues to be sufficient to meet insurance buyers’ needs. Some insurers have attempted to hold or increase rates across their portfolio, but with limited success because competition remains strong.

The market is more likely to be affected by the catastrophic losses in the wider insurance market rather than by negligence claims against solicitors. Last year was a momentous one for the global insurance market, with hurricanes in Florida and the Caribbean, earthquakes in Mexico and fires in California. Total insured losses are estimated at around $140bn.

While there is a hardening of attitudes among PII insurers, there remains plenty of capacity.

Lloyd’s of London reported its first loss in six years, resulting in a pre-tax loss of £2 billion. More specifically, the tragic Grenfell Tower fire in London raised concerns among professional indemnity insurers that the cause of the fire could result in significant potential mitigation claims on similarly cladded buildings.

In 2017 three Lloyd’s syndicates – Novae, Channel and Brit – all withdrew from writing excess layer professional indemnity insurance. Brit’s departure was the most recent and most eye-catching. Professional indemnity insurers have experienced rate reductions for many years, suffering double-digit reductions at the peak of the soft market, which have coincided with rising claims severity.

Excess layer cover above the compulsory limit has always been seen as catastrophe protection; however, the increase in the severity of claims has led insurers to rethink their rating and treat the first excess layer as far more vulnerable to being triggered, and to increase the price accordingly.

While there is a hardening of attitudes among professional indemnity insurers, there remains plenty of capacity from both insurers and Lloyd’s syndicates.

Claims experience

The level of difficulty a solicitor has in renewing their professional indemnity is largely determined by their claims experience.

Property-related claims continue to dominate, both in number and by value.

Regardless of the type of work undertaken, there are common underlying factors that cause most claims that are made against solicitors:

• Poorly scoped instructions,

• poor supervision,

• poor record keeping,

• failure to apply the law correctly,

• bad drafting,

• advising under pressure or outside a lawyer's expertise, and

• inadvertent acceptance of liability to third parties.

Firms with a significant amount of conveyancing will always find it more challenging than other practices, as a number of insurers avoid providing professional indemnity to firms that derive more than 25% of their revenues from conveyancing. Property-related claims continue to dominate, both in number and by value, especially from commercial work, which has been on the rise.

Residential conveyancing continues to be the work area that attracts the most claims notifications, representing over a third of all notifications. When combined with commercial conveyancing, the total arising from property work is 53% of all claims.

Firms with a significant amount of conveyancing will always find it more challenging than other practices.

Residential conveyancing also remains the highest producer of the overall cost of claims, with failure to comply with the requirements of the CML handbook for conveyancers remaining one of the main causes of residential property claims.

Claims against solicitors for failure to alert their clients of escalating ground rent provisions have been pursued by purchasers of new build leasehold houses. The onerous ground rent formulas incorporated into leases by some developers has led to a wave of claims on the basis that the value of their houses has been affected. One developer, Taylor Wimpey, has announced a scheme to remedy the issue but not all tenants will qualify. While the cost of residential property claims has been affected by increasing house prices, this has been partly offset by low interest rates.

There have been a number of claims against solicitors arising from stamp duty land tax (SDLT) mitigation schemes, about which the SRA issued warning notice in 2012. The SRA has issued a further warning against the profession’s involvement in tax schemes. Some claims have been advanced against solicitors who had only been retained to put the transaction into effect, on the basis that they had allegedly failed to warn about the risks associated with the scheme.

Technology is a growing cause of potential claims. The word 'cyber' encompasses many different risks that law firms face, from information security breaches to sophisticated frauds resulting in payments of money to wrong parties. Firms that have suffered from cyber-related claims will undoubtedly see their premiums increase, and this is only likely to develop in the future. 

Professional indemnity insurers have traditionally calculated their rates based on long-tail liability negligence claims, whereas cybercrime claims have distorted their loss ratios, with insurers having to settle losses almost immediately without the usual opportunity to consider a defence.

For more information, please contact Steve Holland on:

steve.holland@uk.lockton.com

+44 (0)20 7933 2444