Corporate scandals leave insurance at a premium

Insurers reluctant to provide multi-year cover; US law firms face premium hikes of up to 75 per cent

US law firms are facing increasing difficulties in gaining insurance cover for more than a year at a time, as premiums are threatening to sky-rocket in the wake of recent corporate scandals.

Insurers are predicting that large US firms could face rate increases of between 35 and 75 per cent as a result of increased demand for coverage from professionals. It is understood that firms currently pay between $4,000 (£2,500) and $10,000 (£6,400) for cover for one lawyer.

The rates for smaller US law firms will be less – 25-35 per cent – as they are perceived as a lower risk.

Arnold & Porter's London managing partner Lee Narrow said: “Rates are going up and as insurers are more concerned it is difficult to get multi-year cover.”

He added that even firms which do not have long histories of claims behind them report having to shop around to get affordable deals which best suit their needs. “Arnold & Porter has had no significant claims or payouts for years yet we all get tainted by insurers with the same brush,” he said.

“However, I guess some firms will have a more difficult time,” he added, “particularly those with diverse practices which may force up liabilities. Public securities in particular have higher liabilities as a result of what is going on in the regulatory climate.”

One insurance partner, who acts for a number of Lloyd's syndicates providing insurance for US professionals, attributed increases in premiums to bigger supply and demand. He said: “Rates are hardening everywhere for professionals as there is more demand among them for insurance. We're on a hard cycle at the moment – the effect of Enron has made people focus more on these issues.”

While corporate scandals have had an adverse effect on insurance rates, other practice areas have also begun to be viewed as high risk. Patent prosecution, because of the enormous damages that can be claimed against lawyers for errors such as missed document filings, has also become a focus for cautious insurers.