Risk management is just one of the tactics firms could use to reduce excess insurance costs, says Leo Schulz. Leo Schulz is a freelance journalist.
Spiralling Solicitors Indemnity Fund (SIF) premiums have helped focus the minds of many lawyers on the pitfalls of professional indemnity insurance (PII).
In May, the Law Society Council was asked to increase compulsory SIF premiums by 80 per cent, to an average of about £12,000 per partner. The council has set up a working group to look at ways of keeping the hike below 50 per cent, which will still mean premiums averaging more than £10,000.
The crisis has highlighted two essential elements of PII. One is the unpredictability of risk. The SIF's difficulties are caused mainly by claims related to conveyancing in the boom-bust property market of 1988-1992. Yet according to SIF statistics, conveyancing is historically a low-risk sector.
“You simply do not know where claims are going to come from,” says Bob Gordon, technical director of Greystoke Legal Services. “This raises the question of the limit of cover. The £1m cover from the SIF sounds reasonable, but that is not necessarily true. We had a recent case where work on a flat went wrong, affecting 20 other flats in a block. Nearly all of those people will have consulted lawyers. Originally it was estimated at a potential of £100,000 – now it is massively over £1m.”
“SIF cover is adequate for the high street firm, but firms doing commercial work and in the City buy a lot of excess cover,” says John Trotter, co-chair of the International Bar Association professional indemnity sub-committee and a partner specialising in insurance claims at Lovell White Durrant.
The other element highlighted by the SIF crisis is the unpredictability of the insurance market. Three-to-four years ago it was “hard”, with a narrow range of insurers collecting premiums well above the level of concurrent payouts. It is presently “soft”, with a multiplicity of insurers offering premiums thought to be well below the level reflected by actuarial risk. Were the SIF not compulsory, a well-managed market-town practice could probably insure itself against negligence claims for about £800 a year for each partner.
The cycle, however, may already be about to enter its next phase, with premiums more likely to rise than to fall further. “The high ratio of premiums to payouts a few years ago attracted a lot of new capacity to the market,” says Trevor Weyland, director of Sedgwick
Professional Indemnity and Financial Institutions. “We are expecting another soft year for renewals. But that will change when enough insurers see that they are not making money.”
“It is a buyers' market,” comments Gordon. “Prices bear no relation to actuarial calculations. But it is changing. A number of agents have already decided not to continue in the market. Insurers are starting to emphasise retention and are less willing to use price as a means of expanding market share.”
But even with a soft market the cost of excess PII can remain appreciable. This is leading an increasing number of practices to consider risk management. Management consultants have seen the potential and are hurrying to create products to meet demand.
“The essential issue for us is to advise firms on how to avoid claims being made,” says David Andrews, chair of the David Andrews Partnership. “The legal profession has been slack in its management of risk. Precautions are not taken. Measures are not properly applied.”
“Risk management is certainly an issue that is coming to the fore,” says William Barnes, head of professional practices at Deloitte & Touche. According to Barnes, specific checks are less important than the right principles – careful assessment of clients' financial soundness and honesty, quality partners and staff, a consultative environment and good routines.
“A lot of claims arise from work done under pressure from clients,” he says. “But that should be resisted and partners should talk things through with their colleagues. Good routines are important because of the number of claims arising from failure to file on time.”
Coopers & Lybrand is taking a different approach with a product called In-Control, a way of looking at all the risks involved in a business.
According to Paul Brakewell, senior manager of Coopers' In-Control Unit, the exercise looks at the business on a process basis, assessing risk on a broad scale, from the possibilities of missing opportunities down to assessments of routines and individual responsibilities.
He says: “It has a direct impact on professional indemnity in that it ensures your fees are paid and you do not get sued.”
“Risk management is something in which we are very interested,” says Sedgwick's Weyland. “Unfortunately, at the moment, while there is plenty of capacity, solicitors with poor practices are not suffering through [higher] premiums.”