Preparing a defence
15 July 2002
Professional indemnity has never been far from the news. With soaring premiums and reported shrinking capacity, we are all in for an interesting 12 months ahead.
In September 2000, the solicitors professional indemnity market opened up. The Solicitors' Indemnity Fund (SIF) closed to new business, went into run-off and the field was thrown open to 35 qualifying commercial insurers. Only a relatively small number of these actually wrote business. In the first 12 months a significant number of law firms saw their premiums fall. Since then, there has been a significant shake-out of the new insurers and the main players have emerged as The St Paul, Zurich, QBE, Norwich Union and Royal & SunAlliance.
The message for this year's renewal is that premiums will rise. Since 1 September last year, the insurance industry has had to contend with the effects of 11 September and there is also a perception in the market that the profession got its cover cheap in September 2000.
Commercial insurers now have a clearer understanding of the legal market and will look carefully at the risks they are being asked to underwrite. Firms that produce a disproportionate number of claims will find it harder to find the insurance cover which is essential for their survival.
Risk management has always been a feature of professional indemnity insurance and the new market has been quick to appreciate the importance of this and continue to build on the legacy left by SIF. Firms which do not address risk management and which are unable to demonstrate a systematic approach to it will see their premiums rise more rapidly, or will find their business difficult to place.
The legal profession has seen significant changes in the past few years. The introduction of the Civil Procedure Rules and some significant decisions from the courtroom have kept everyone on their toes.
The profession breathed a collective sigh of relief when the House of Lords gave its decision in Cave v Robinson Jarvis and Rolfe. This decision saw the fear of a flood of time-barred claims recede and, to an extent, the profession's concerns about run-off cover. The 'cradle to the grave' cover provided by SIF was no longer provided, and practitioners were faced with the daunting prospect of having to continue to obtain run-off cover for the rest of their lives.
Another landmark case is the House of Lords' decision in Royal Bank of Scotland v Etridge. This case laid down guidelines on how solicitors should act when advising a wife giving security over her share of the matrimonial home to secure her husband's business debts. This situation is fraught with conflicts and has long been a fertile area for negligence claims against solicitors. Some firms will not act, or will ensure that only specified people within the firm give advice to clients in this situation. These are elements of risk management that should be addressed.
The vast majority of solicitors continue to do a good job. Unfortunately, when something goes wrong, the culture we live in encourages people to try to find someone to blame. The 'where there's blame, there's a claim' approach, is showing no sign of abating and lawyers cannot afford to be complacent.
The Enron debacle has thrown the failings of professionals sharply into focus. The collapse of Enron, and subsequently Andersen, will have a dramatic impact on the professional sector. The speed with which such a powerful professional global brand unravelled is quite frightening. All professionals have been tarnished by the scandal. In recent years there has been an increasing awareness that professionals do not always live up to the standards that are expected of them.
Whenever there is a significant company failure, the liquidators and creditors will generally look to the professional advisers, including lawyers, for possible recompense. More than ever, professional advisers will need to be able to demonstrate that they are beyond reproach. All firms must look to their risk management, which is no longer an optional extra, but a necessity.
The financial press has been speculating about a recession and/or a crash in the property market for some time, neither of which has materialised as yet. The property crash of the late 1980s spawned a huge number of claims against lawyers involved in domestic conveyancing. The claims were driven by lending institutions faced with a shortfall of many millions of pounds, in many cases as a result of negative equity.
As is the situation now, the value of property rose at a phenomenal rate for a substantial period. It seemed that by investing in property you could not lose. First-time buyers and homeowners felt that if they did not move onto or up the housing ladder, they would be left behind. There was tremendous pressure to buy. Parallels can be drawn with the current frenetic housing market. The current loss of confidence in the stock market has caused those with money to invest in the buy-to-let market.
Whether we will see a repeat of the late 1980s crash remains to be seen. Solicitors have learnt painful lessons and now understand the conflicts that arise from acting for lenders and borrowers. Great efforts have been made to change working practices. Lenders have put their own houses in order and are much more rigorous in their lending procedures. In conjunction with the Law Society, they have produced detailed packages of instructions that were not available before, in which attempts have been made to agree standard terms of engagement for solicitors undertaking joint retainers.
But while lawyers are generally much more 'streetwise' and alert to the small print, the combined effects of pressure of work and reduced fees, which often have the effect of pushing the work down to more junior fee-earners, must create a climate for potential claims. In a buoyant market, people are working under pressure and against deadlines and inevitably mistakes will be made. My prediction is that the mistakes that will be made by solicitors will be of a more conventional nature, such as failure to ensure that all charges are discharged on completion, or failing to pick up inaccuracies in local searches.
Professional negligence is not all about claims payments and increased premiums. Professional negligence claims damage a firm's reputation. While professional indemnity insurance will cover the claims payments, there is no insurance available to cover the loss of reputation to the firm concerned, or the profession as a whole. Professional negligence also has a human price. Most solicitors have high standards and do a good job, but they are all human and mistakes are sometimes made. For a competent, diligent professional, the professional negligence claim will cause worry and distress.
A proactive approach to risk management within every firm will help to protect the firm and its premiums, enhance the valuable brand of the firm and, last but not least, enable more solicitors to sleep peacefully at night.
Sarah Grant is a professional negligence partner at James Chapman & Co, Manchester