Give yourself plenty of time to sort out professional indemnity insurance for the coming year, as underwriters are driving a hard bargain under the current economic circumstances. Simon Lovat offers a broker's view
Despite nearly every news report, public policy announcement and price increase being preceded by the words “due to the credit crunch” — almost to the point of monotony — it is nonetheless the case that the recent global economic downturn has had, and will continue to have, a major impact on law firms — particularly those that engage in commercial practice.
As we enter the solicitors’ professional indemnity insurance renewal season, it is abundantly clear that many insurers are shying away from firms for whom activities in the commercial and credit-based arenas make up a large proportion of their work.
Despite the market remaining soft overall, underwriters are being far more cautious, investigative and ultimately selective in offering both renewal and new business terms. Even practices with clean claims histories and good risk management strategies are likely to see an increase in their premiums this year.
Immediate effects
The effects of the credit crunch are not limited to property work undertaken by smaller private practices. A lack of liquidity and available cash means that many of the medium and larger City firms are already seeing a decline in the amount of merger and acquisition work, and work undertaken on behalf of hedge funds, private equity and investment groups.
In the short term at least, this trend is only going one way. A number of firms are already having difficulty in getting clients to pay their fees, and it is likely this number will continue to increase. Debtors will only add to the woes of firms that have already started to see a decrease in their fee income.
Professional indemnity underwriters are seeing the return of the counter claim for negligence as a client tactic to reduce or avoid paying their bill completely. This behaviour has been rife in residential conveyancing cases and is likely to be replicated in the broader arena. Such counter claims for negligence can often see a bill for, say, £10,000 turning into a claim for 10 times the amount — the insurer is obliged to defend the claim if they believe it is spurious, and by the time counsel has been instructed (and an appeal either way), the original £10,000 bill has gone through the roof.
Even if all of the counter claims were ultimately found in favour of the defendant, the costs would still have to be recouped somehow, resulting in further increases in premium.
An easy target
In fact, two separate insurance companies have received claims in the last few weeks from property developers attempting to claim against their solicitors when they found they could not sell their properties for the amount they intended. Unfortunately the solicitor is seen as an easy target, which ultimately costs them money regardless of whether the claim is paid or successfully defended in court. While it will be interesting to see whether the insurance companies in question choose to fight on principle or settle on economic grounds, the firm yet again finds itself stuck in the middle and primed for some manner of financial loss. In some cases, insurers will pay low-level claims or those on the border between the county court and the high court limits merely on economic grounds and on a solely ex gratia basis.
As claims are expected to increase sharply over the coming 12 months, these costs will be ultimately passed on to the insured firm. Solicitors again find themselves stuck in the middle as any claim paid out, even without admission of liability, will be displayed on their claims record, which is likely to increase their premium in the following year. This is combined with a general increase in premium rates, if insurers find themselves paying out for an increased number of claims.
Losing out on both sides
In a marketplace where a 100% loss is considered a reasonable success, and loss ratios of 30% above total premium intake are not uncommon, insurers’ ability to make money from the capital they hold in the form of premiums is vital to the level at which premiums are set. The global economic downturn has not only affected law firms’ ability to garner fees, but also insurers’ generation of alternative income. This then comes full circle, in the form of an increase in premium.
Solicitors, and in turn their professional indemnity insurers, are smack bang in the middle of the current economic problems and are losing out on all sides. For many years, solicitors and their professional indemnity policies have been seen as an easy target for questionable claims, which are made merely on the basis of a loss having been made by a party to a transaction and not as a result of actual negligence.
Ratios of premium outgoing compared to fee income will only increase and commercial firms are finding it difficult to obtain alternative work, which still falls broadly within their main areas of expertise. As solicitors’ professional indemnity policies are written on a claims made basis, even firms whose fees have already reduced considerably are likely to see an increase and even those whose fees continue to reduce are unlikely to see a premium reduction for the next few years.
Get the best from your broker
The key to success this year will be to approach brokers earlier rather than later. More than half of the top 100 firms completed their 2007-08 professional indemnity arrangements in the last two weeks of September. It is vital to give your broker time to obtain the best possible terms on your behalf and with underwriters asking more and more questions — and requiring supplementary questionnaires — additional time will be needed.
When considering how early to deal with your 2008-09 renewal, it should be borne in mind that a lack of information and detail on your proposal form is likely to lead to a higher premium, even if your firm is a good, solid risk. The more time and information your broker has available, the more likely it is that you will receive a suitable premium. If an underwriter is in doubt, or missing something that might influence his decision, he will err on the side of caution, and quote a higher premium.
While underwriters are still keen and competitive on what they perceive to be the ‘right risks’, gone are the days of them chasing business, and desperately undercutting each other in order to bring in money.
Overall, law firms are getting a raw deal in both the professional indemnity market, and the wider arena. With fees falling — in some cases considerably — and debtors premiums and claims all set to rise, it is clear that there are difficult times ahead.
Simon Lovat is the director of the
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