25 January 2010 | By Tom Phillips
December’s massive hike in professional indemnity premiums led to panic in the market, with some firms being forced out of the profession altogether.
As far as significant dates go, 1 December 2009 will be remembered by Irish lawyers as a watershed moment for the profession.
This was the date of the annual professional indemnity (PI) insurance renewal round, which comes off the back of some sole practitioners and lawyers at high street firms seeing premiums quadruple over the past three years.
“The insurers were holding a gun to the profession’s head,” states Ken Murphy, director of the Law Society of Ireland (LSI), who last year had to make some critical decisions to save many of the society’s members from dropping out of the industry.
It is too early to say how many lawyers have been forced to quit the profession after last December’s extraordinary insurance hike. But according to the LSI, most firms outside Ireland’s big five have seen their premiums per lawyer increase from around e4,000 (£3,520) in 2007 to e8,000 in 2008, then to e16,000 in 2009 - although some say the last renewal round saw them served with insurance premiums of e24,000.
“A lot of the problems we’ve experienced are common to the English and Welsh markets,” says Murphy. “The larger firms seem to be in the large part free of these problems, but for the small and medium-sized firms it’s been very traumatic.”
Despite operating different schemes with PI insurers, some of Ireland’s larger firms say they were also affected by the industry-wide increase. But why were Ireland’s law firms affected so severely? And why is the LSI, normally a unifying force for the profession, coming under fire from its own members?
A number of issues have come together to adversely affect the profession, most driven by the economy.
Insurers claim they have been hit hard by an increasing number of professional negligence claims, and the legal professionis not alone in this respect. The professional negligence market has been difficult across the board, with much of the insurers’ reserves wiped out following the stock market crash.
Dudley Solan, head of litigation and a partner in the Dublin office of Maples and Calder, says engineers and architects are suffering a similar problem. He has seen a “major spike” in claims as stakeholders in building projects try to ensure that any latent defects in developments are identified before payment obligations are met.
This has led to an increase in premiums at a time when income is going in the opposite direction.
“Many architects and surveyors affected by the slump in property values and rising premiums face difficult decisions and possibly closure if they cannot meet rising insurance costs,” predicts Solan.
Ireland was struck particularly hard by the property crash and many commercial real estate deals have fallen into litigation.
“At the frenzy of the property boom,” explains Murphy, “solicitors were under immense pressure to give undertakings on deals that, after the crash, they couldn’t fulfil.
“Issues that may have been cured by the next transaction are becoming a problem, because there is no next transaction.”
Mason Hayes & Curran managing partner Emer Gilvarry says that she personally secured Masons’ 2009-10 PI insurance.
Despite Masons, which is one of the larger firms in the country, getting a ”competitive” quote, Gilvarry says its premium was still up substantially on the previous year’s.
Even firms with excellent claims histories experienced increases of up to 100 per cent.
“In the professional negligence cycle, claims come 18 months to two years after a recession hits,” says Gilvarry. “Insurers are aware of this and it’s been much harder and much more expensive to renew insurance this year.
“A lot of small firms and single practitioners are no doubt considering what to do, which could include considering a merger or shared expenses arrangement with others with a view to cutting costs.
“Insurers are understandably very cautious about this business at the moment because of the increase in PI claims, many of which are as a result of the collapse in the property market here in Ireland.”
Lawyers such as fugitive Michael Lynn have not helped boost confidence on the insurer side. Lynn is wanted by the Garda Bureau of Fraud Investigation in connection with an e80m property fraud. He is accused of taking out multiple mortgages on the same properties, abusing the slow process of mortgage registration.
In Ireland, after the buyer borrows money from the bank, the bank seeks an undertaking from the client’s solicitor to register the mortgage.
Traditionally, the time between the money being lent and the mortgage being registered has gone on for months, with no urgency to complete the paperwork on either side. After all, the money has already been loaned.
According to one senior partner at a top-seven firm, Lynn was partaking in a fairly common practice.
“A number of people were trying to invest cash in more exotic ventures that the bank wouldn’t lend them money for,” says the source. “It looks like the country got carried away with itself. What we’re seeing is that people who made the most cash are now in the biggest trouble.”
But 2009 was a bad year for lawyers - and there was more serious news to come, this time from the Solicitors Mutual Defence Fund (SMDF). Fed by an annual subscription fee from its 3,500 lawyer members, the SMDF aims to keep PI costs down, and more than 60 per cent of Ireland’s lawyers are covered by the fund.
But in July last year the SMDF’s annual accounts revealed the shocking news that a ‘Saturn bond’, into which it had invested e8.4m of its reserves, was worth almost nothing.
The fund had lost 97 per cent of its value. It subsequently sought to recover the money and is currently involved in litigation with its stockbroker Bloxham. Bloxham is in turn suing Morgan Stanley in the UK for breach of contract.
Meanwhile, from September onwards, the SMDF held a series of meetings with the LSI, during which it established that it would not be able to write indemnity business for the new insurance year unless the society could guarantee repayment of a loan that the SMDF needed to plug the gap left by the failed bond.
Fearing a complete market failure, with more than half the country’s lawyers potentially unable to find insurance and a lack of competition in the market (the SMDF has been insuring the majority of lawyers for more than 20 years), the LSI agreed to guarantee the loan.
In a letter to members, LSI president Gerard Doherty said the decision was correct. “Without it,” he wrote, “there would probably have been an enormous number of solicitors’ firms unable to obtain PI insurance, with disastrous consequences both for the firms themselves and for their clients.”
But some of the LSI’s members who are not insured by the SMDF were critical of the decision, claiming that there should have been a consultation with the society’s members.
“There wasn’t time to consult [the other members]. If the SMDF withdrew, the other insurers might not have been prepared to take up the slack,” insists Murphy. “We had to make the decision that day - a week would have been too late. It was a decision for the [society’s] council, under its statute, in order to protect both the public and the profession.”
Murphy outlines the extent of the pressure that was put on the society by insurers simply to get through December’s renewal round. Insurers forced the society to make concessions or face insurers pulling out, worsening the competitive insurance market that keeps prices down.
Insurers also insisted that the LSI change the minimum terms of every first policy of insurance and suspend the assigned risk pool - the safety net for lawyers who are unable to get insurance.
The insurance companies also assessed individual lawyers more carefully, slowing down the process and causing ”considerable” anxiety among lawyers, says Murphy, as some firms did not receive their insurance until after the official mid-December renewal date.
Murphy says it is not yet clear how many lawyers failed to get insurance and so dropped out of the profession.
“Until the smoke clears on the battlefield, it’s unclear how many bodies are left on the battlefield,” he laments.
The society now has a taskforce looking at all the available options, which could mean a change to the PI insurance system forever.
“There’s a determination in the profession and the society,” says Murphy, “that the situation surrounding the last renewal process should never happen again.”