As we approach the October renewals period for solicitors’ professional indemnity (PI) insurance, smaller law firms face a perfect storm.
Since 2008 rates have risen significantly, primarily due to a sharp rise in claims, particularly in conveyancing. New entrants have been wary, while established players have exited, resulting in reduced capacity and competition. Add to this the recession boosting fraudulent claims, plus the potential double-dip scenario, and it is clear the sector faces turbulent times.
Yet in my opinion the ability of the market to withstand this turbulence is being hindered by the structures in place to support it.
Let me focus on one example. Under the ’Minimum Terms and Conditions for Professional Indemnity Insurance for Solicitors Registered in England and Wales’, where a solicitor has deliberately misrepresented information on their proposal form, or knowingly failed to disclose relevant information, the insurer is obliged to pay out.
This mandatory cover also applies even in cases of non-payment of premiums or if a firm enters run-off. I am not aware of any other industry in which cover remains in place under such circumstances.
This leaves insurers exposed and introduces a degree of uncertainty that can only be managed by reflecting it in the premiums charged. One need only consider the fact that on average, while an accountant pays approximately 0.5-1 per cent of fees on insurance, a small firm of solicitors averages between 5 and 10 per cent. Yes, this is influenced by the factors mentioned above, but uncertainty is also a factor.
Furthermore, there is no incentive for insurers to report evidence of misinformation or non-disclosure as there is no real penalty for such behaviour. Nor is there a disincentive for solicitors committing such practices, as their cover remains in place even if they are caught.
We must acknowledge that the terms played an important role in ensuring coverage for solicitors in the aftermath of the Solicitors Indemnity Fund. However, the market has changed in recent years and these conditions must be amended if the market is to remain viable for the insurance industry.
In May the Association of British Insurers called for the terms to be amended to allow insurers to void policies in cases of misrepresentation or non-disclosure. I would support this move.
In effect this is a quality control issue. By removing this so-called safety net we are promoting an environment based on utmost good faith. If strong regulatory action was taken against guilty firms it would encourage insurers to expose these practices and provide a disincentive.
This would create a more attractive market, stimulate competition and improve the opportunity for firms to obtain premiums more commensurate with their risk profiles. Removing uncertainty should also serve to cut rates.
The ability for insurers to void a policy could also have a positive impact on the assigned risks pool, which is suffering from overcrowding, as it would not be required to pay out on claims where evidence of deliberate misrepresentation or non-disclosure was found.
The Solicitors Regulation Authority should move quickly when evidence of such practices is discovered to shut down offending firms. However, consideration must be given to how clients of such firms are compensated. This compensation fund could be in the form of an industry levy.
In such volatile market conditions, any steps to create greater stability in the PI sector must be taken. I believe that providing insurers with the ability to void policies in the event of non-disclosure or misrepresentation is one such step.