The growth in the number and the magnitude of professional indemnity claims made against solicitors in the US has prompted fears that UK law practices will soon be hit by the same trend of ever-increasing litigation.
Law practices that buy only the amount of excess professional indemnity cover they think they can get away with are exposing themselves to the risk of severe financial loss in the event of a successful claim by a client.
Consequently, a carefully designed and structured professional indemnity policy supplementing the compulsory £1 million cover provided by the Solicitors Indemnity Fund is essential for many practices.
Those who buy insurance from the solicitors' excess professional indemnity market can be divided into two sectors: large, well-known firms with 20 to 100 or more partners; and smaller firms, often with only one or two partners.
While the latter may simply be looking for £4 million cover in excess of SIF limits, the larger firms may require anything from £50 million to £200 million. Clearly, the larger the practice, the more potential there is for litigation and need for expert advice.
Although professional indemnity insurance (PII) enables a practice to recover the cost of a claim, the old adage “prevention is better than cure” should not be forgotten. For this reason, risk management is becoming increasingly important for law firms.
The implementation of certain key measures and controls can have a favourable impact on premiums. In particular, firms should consider the management controls they have in place, such as best practice standards, diary systems to store deadlines and procedures to recall data. This last facility is particularly important in the light of new rules introduced by the SIF which will clamp down on missed time limits, resulting in penalty deductibles.
The decision to adopt risk management is often prompted by a claim which exposes a weakness in a legal practice's approach, whether through errors, omissions or negligent acts. While it is difficult to define typical claims, some of the more general examples are detailed in the box below.
Practices can be landed with unnecessarily high premiums if they are badly advised about buying or increasing the level of professional indemnity cover. Partners responsible for insurance decisions should consider the following points:
Begin discussions with your broker at least three months before the renewal date. Last minute advice over renewal terms puts solicitors in the position of having to make an instant decision without being able to consider all options.
The broker's expertise
The cover required by different practices varies, not only according to size but also the nature of their work. Smaller firms are often wary of large brokers dealing with multinational clients for fear of being treated as a commodity. But larger brokers can provide a wider breadth of expert knowledge as well as being in a position to negotiate better rates through the power of bulk buying. However, the important point is to assess the experience of the broker in its particular market and area of business.
A broker should attempt to reflect accurately the circumstances of a client when negotiating terms. The policyholder should not be penalised for problems elsewhere in the market. The power of bulk buying is also important in determining rates, as the broker will be able to negotiate from a position of having a number of major firms requiring large limits of indemnity and therefore a large premium spend.
For larger firms operating on an international basis, the ability of a broker to provide global cover in one policy is a key consideration. This not only requires a presence in international territories but also an understanding of how professional indemnity relates to those markets, the nature of the litigation process and the types of risks the practice could be exposed to. In particular, it is the skill of a broker to structure substantial insurance programmes above the level provided by the SIF which is the key to making optimum use of the insurers available.
Security of cover
Partners should feel confident about the financial security and solvency of the insurers. At the least, the profile of the lead underwriter for the cover should be determined.
Over the past two years, premium rates for the profession have softened mainly as a result of increased competition in the market. Consequently there has been a temptation to shop around for the lowest price available. But the larger the firm, the more important the advice and expertise of the broker becomes.
Informed decisions should be based on a balance of price, the expertise and track record of the insurer and the insurer's ability to look beyond the cover and provide objective risk reduction and management advice.
The following examples show the broad range and amounts of claims covered by PII.
A claim brought by a client when the damages awarded were substantially less than those offered during the proceedings and rejected on the solicitors advice; (£5 million).
A client was unable to claim damages because the solicitor did not issue a writ within the statutory time limits; (£450,000).
Solicitors failed to advise their client adequately in relation to the implications of a clause contained in a conveyance; (£1.5 million).
It was alleged that the solicitor was negligent in dealing with a client's affairs and there was a misapplication of the client's funds; (£1.5 million).