It’s that time of year again – the solicitors’ professional indemnity renewal season, when managing partners and finance directors start recognising the difference between managing their third-highest overhead throughout the year, or leaving it to chance.
Several firms, including some substantial ones, are already finding that they have problems. With the number of active insurers having halved since the open market started in 2000, there is less choice than expected – generally only about four for most firms.
It is not just large claims that can make it hard to find cover. Several firms have discovered the problems of the ‘successor practice’ provisions in the policies, which can mean that another firm that has ceased practising is covered under your policy.
Once you have become a successor practice, you cannot undo it simply by parting company.
Some of the shrewder firms are now seeking advice before taking on acquisitions from other firms, realising that sometimes it may only take a relatively small number of incoming partners or just one office from a multi-office firm to make the firm a successor practice.
There are many practical steps that can be taken to mitigate the problem.
One firm acquired the practice of a retiring sole practitioner who agreed to pay any excesses, not realising that this meant his new firm’s £50,000 excess on every claim – and if he failed to pay, the partners in the acquiring firm would be liable. In another, a firm acquired a ‘rogue partner’, then parted company but was still almost uninsurable. Worse still, you may end up with two or more successor practices, with two insurers competing for control of the claim and two full excesses to pay. Even one stray email can do irreparable damage by holding you out as successor.
Care is needed in structuring cover to ensure that you have successor practice cover only to the extent that you need it, otherwise your claims record may be unnecessarily tarnished.
Only a handful of firms are doing all the requisite due diligence on lateral hires of partners and teams from other practices. Firms must also undertake due diligence on the new clients that come with them – not only for money laundering compliance, but because new clients are a frequent source of claims.
The consequences of failing to find insurance are severe – basic £1m cover in the Assigned Risks Pool (ARP) ‘sin bin’ costing nearly £3m for a £30m turnover firm, for example, with even higher percentage rates being imposed on smaller firms. Add to that the inevitable follow-on problem of obtaining any top-up cover, which may be a client requirement, and the practice could be badly damaged.
Other problems can arise when a firm enters a new market which its existing insurers may be unwilling to cover because it does not suit their preferred risk profile.
More often than not, decisions on new practice areas, team acquisitions and the lateral hire of partners are made without any reference to the firm’s brokers and insurers until after the deal is done. But the message is clear: you need to understand the impact on your insurance of changes in your practice before you do them.
Those filling in the proposal forms will have noticed the increasing focus on risk management issues. It is not just insurers’ requirements they need to think about, however, because new professional conduct rules proposed by the Law Society will require all firms to put risk management procedures in place. Those wondering what that entails should look at the Lexcel 2004 standard, even if they are not intent on seeking Lexcel certification, and the Law Society’s ‘Practical Guide to Minimising Risk’, both of which are available from the Law Society’s Lexcel office.
Last year many firms left renewal too late, with two top 100 firms even leaving it until September. This year the renewal is due on 1 October, but that is no reason to be complacent. Start now, as there are unwelcome surprises around the corner for some firms already, and avoiding relegation to the ARP takes time to sort out.