Small firms suffer as legal insurers refuse to underwrite in current climate

Small firms suffer as legal insurers refuse to underwrite in current climateFollowing five consecutive years of falling rates, lawyers have been shocked to find that professional indemnity (PI) insurance rates have doubled for the 2009 renewal season. ­Hardest hit are those already facing a myriad of economic challenges: small firms, sole practitioners and conveyancing practices.

For the past month firms have been scrabbling to get cover ahead of the 1 October renewal deadline and avoid the pitfalls of resorting to the Assigned Risk Pool (ARP) for coverage.

According to Sandra Neilson-Moore, European practice leader for law firm PI at insurer Marsh, at the top end of the profession rates have remained flat or been reduced.

She says: “We saw rating reductions of an average 15 per cent and, for some ­specific firms with strong underwriting arguments, even greater reductions.”

This contrasts starkly with the bottom end of the sector, where in some instances rates have increased by 100 per cent.

“For the small end of the profession the tide’s turned,” says Steve Holland, professions director at insurer Lockton International. “The larger mid-tier firms have weathered the storm quite well, but at the bottom end firms have suffered from a lack of choice.”

Traditionally solicitors’ PI was seen as a solid book of business for insurers because of its low claims ­frequency and high level of capacity flowing into the sector. However, an upsurge in claims against conveyancing practices, along with tightening economic conditions, has forced some underwriters to reconsider which risks they will cover.

Insurer RSA (formerly Royal & SunAlliance) has stopped ;writing ;new ­business for one and two-person firms, while Norwich Union has stopped writing business for firms with fewer than 10 partners that carry out conveyancing work.

Although a lot of attention has been put on conveyancing firms, there is anecdotal evidence that the rating hikes are also beginning to impact on firms without this book of business.

One South London sole practitioner who has a focus on corporate work tells The Lawyer she was “appalled” when informed by insurer Ace that her premium had doubled.

“My business is under pressure,” she says. “The most annoying thing is that the increase appears to be entirely ;random. ;My ­business hasn’t changed and I haven’t had any claims, but they’ve still raised my quote.”

The lawyer says she shopped around for a better quote, but in the end decided to stay with Ace because she had a long-term relationship with the insurer.

Such stories have sparked fears about a rush on the ARP, which could mean ­further ;increases ;are ­implemented in 2009. The publicly available ARP was established to ensure that all UK firms had adequate cover in place. The pool is seen as a last-resort insurer for many firms because it immediately puts the firm on the radar of the Solicitors Regulation Authority (SRA) and rates are well above the market average.

There are 26 qualifying insurers contributing to the ARP, all of which contribute cash to cover firms unable to get adequate insurance. If these underwriters are forced to contribute more funds in 2008, they will look to recoup their losses in 2009, and that could mean further rate increases.

The same insurers that refuse to write cover will end up providing insurance through the ARP at an increased rate. It is a circle that some believe will only be broken by staggering the renewal deadline.

“The 1 October renewal date isn’t good for anyone,” says an observer. “Solicitors leave it to the last minute and some people take advantage of that, which drives rates downwards on an elastic band which is about to snap.”
Since the beginning there have been calls for the single renewal date to be reviewed, and those calls are likely to get louder.

“In a soft market it counts in ;your ;favour,” ;says Jonathan Davis, assistant general ;manager ;of ­Travelers’ solicitors’ PI ­division. “In a hard market it goes against the grain.”

However, The Lawyer can reveal that reports of the SRA receiving hundreds of queries about the ARP have been exaggerated.

SRA director of client protection Rob Adams reveals: “To date the ARP has received 261 requests for application forms and just 155 completed applications. Many of these are precautionary applications while firms continue to seek cover backdated to 1 October.

“The figure will change on a daily basis, as some firms will be able to secure cover and will come out of the ARP and others will emerge that will fall into the ARP. The final picture will not be known for several weeks.”

Andrew Jackson, managing director of Marsh’s UK PI practice, reveals that the broker has witnessed a ­significant ;number ;of lawyers leaving renewal until the last minute and then being left without insurer options. In these instances he advised firms to get information about participating in the ARP.

“Even if you do end up in the ARP, you can still try and get cover elsewhere,” he insists. “There are various rules around that. Also, you have to apply to the ARP in advance, so if you haven’t done it by 30 September you’re effectively a firm in default, so we’ve been ­advising firms to put in a query.”

Neilson-Moore adds: “It’s not the fault of the process, it’s the fault of the people leaving it too late and ­thinking this is an easy commodity to buy, like car insurance.”

Insurers, too, are having blame put on their doorstep. And the SRA is promising to look again at how it works with the insurance market.

Adams says: “We’re aware of a small number of insurance companies and brokers who’ve left it to the last minute to notify firms that they’re not willing to offer terms. This isn’t acceptable and we’ll be looking at the wording of the qualifying insurer’s agreement and steps we can take in consultation with the insurers to avoid a similar situation arising in the future.”