Indemnity deadline pushes claim-cutting up the agenda

Risk management is now a full-time job at the UK’s biggest law firms. Joanne Harris reports

Insurers and brokers are gearing up for the busy month before 1 October, the deadline by which all law firms in England and Wales must renew their professional indemnity insurance for 2004-2005.
In the meantime, firms are working to find ways to reduce rates, and their exposure to potential claims.

The profession has never been so alive to the threats facing lawyers on a day-to-day basis.

This will be the fifth year since the Solicitors Indemnity Fund (SIF) went into run-off and the solicitors’ indemnity market was flung open, and although little has officially changed during this time, the environment in which lawyers work has certainly altered.

When SIF was put into run-off on 1 September 2000, the Law Society had approved 35 insurers to provide cover for solicitors. The prospect of the market was tempting, and competition pushed premium rates down by £100m from the £250m raised by SIF in its final year.

Over the following years the market has thinned out substantially, and last year premiums for the primary layer of insurance – the compulsory first £1m of cover – were back at SIF levels.

With many firms waiting until September to renew their cover (the renewal deadline having changed this year from 1 September to 1 October), it is still too early to judge what rates may do. Estimates vary from little or no change to a rise of up to 15 per cent, although the sharp increases of the past two years are unlikely.

Only 15 insurers have been approved by the Law Society under its professional indemnity rules for the forthcoming year, and the bulk of the market will be shared among three: Zurich Professional, The St Paul, and QBE International. Between them, these insurers command nearly 60 per cent of the market for the primary layer of cover.

At the same time, firms are working hard to reduce the number of claims they face. Most claims are extremely small and are covered by the primary layer of insurance. Many occur as a result of administration glitches, such as a mistake in a letter or failure to make a note of a meeting. The other main area where claims originate is conveyancing and property work.

However, just one large commercial claim can be potentially very costly, prompting the largest firms to take out further layers of cover across several underwriters. Claims of this type are generally handled by external law firms specialising in professional indemnity work, such as Barlow Lyde & Gilbert and Reynolds Porter Chamberlain (RPC).

Preventing claims is the objective of every firm and insurers are placing risk management at the top of the agenda.

“It’s the main way the firm can lower its premium,” says Olivia Burren, senior risk management consultant at The St Paul.

Firms that have implemented risk management systems early should experience fewer claims and correspondingly better premiums.
Several are responding to the insurers by employing full-time risk managers, on top of the older and more common partner–led risk management committee, to oversee the many different factors that can cause a professional negligence claim against a firm.

The profile of the managers varies. Lovells’ Nicole Munro, for instance, comes from an accountancy background; Clare Wilson at Herbert Smith used to be a fee-earning partner but for the past 18 months has devoted all her time to risk management; and Eversheds’ Robert Chapman combines fee-earning with managing risk.

One thing all the top firms have in common is their awareness of the importance of making sure everyone – from the newest secretary to the senior partner – knows about the pitfalls that can occur in the course of their work.

Training is vital, with inductions for newcomers and courses on money laundering the most common subjects. But the real key area is management of the client relationship.

“We see risk management as being part and parcel of the overall package of client care,” explains Fraser Ashman, CMS Cameron McKenna’s risk manager. Regular and open communication with clients can save a firm headaches further down the line.

The message from the professional indemnity industry is clear. Risk management is no longer an option. It is and will continue to be a necessity.

Firm Responsibility for managing risk Risk committee? Current system established
Clifford Chance Chris Andrews (risk manager) No 1 January 2000
Freshfields Full-time director Yes 2000
Linklaters Raymond Cohen (partner; no longer fee-earning) No November 2003
Allen & Overy Heather McCallum (partner, no longer fee-earning) Yes May 2003
Lovells Nicole Munro (risk manager) Yes 2003
Eversheds Robert Chapman (partner) Yes 2002; adjusted February 2004
DLA Julia Graham (risk manager) No 2000
Slaughter and May Anthony Newhouse (partner) No “Many years”
Herbert Smith Clare Wilson (partner; no longer fee-earning) Yes January 2003
Norton Rose Paul Giles (chairman) Yes Over a year
Ashurst Charmian May (partnership secretary) Yes July 2004; risk management committee has been in place for years
Simmons Miles Alexander (partner) Yes In place for many years
DWS Partners Yes 2000
Camerons Fraser Ashman (risk manager) No 1999
Hammonds Claire Wheat (risk manager) No January 2000
Addleshaws Shared among a number of senior partners and directors Yes 2001
BLP Charlotte Balfry (finance director) Yes 2004
SJ Berwin Senior partner and finance director Mike Giles Yes In place for many years
Pinsents Andrew Paton (partner) Yes June 2001
Source: The Lawyer