Professional indemnity insurance report: Under pressure

Q: What changes in the market are likely to affect solicitors’ professional indemnity insurance (PII) in the next year?

Sarah Clover, head of global PI, Clyde & Co: The PI market landscape is likely to remain well populated with insurers competing for business. Changes to market dynamics caused by unrated insurers coming into the market will be less of an issue than in previous years. The FCA’s recent censure of managing agents involved in issuing binding authorities for a number of PII schemes, whose actions the FCA found to have played a part in triggering the collapse of unrated insurer Balva, is likely to sound a warning note to other unrated insurers considering entering the market.

The terms on which qualifying insurers offer cover to law firms remain the subject of discussion. There is currently an SRA consultation on the interplay between the minimum terms and conditions (MTC), on which the compulsory PI cover must be written, and the Insurance Act 2015.

However, there has been no repeat in this recent consultation of the more controversial proposals mooted in the SRA’s July 2015 discussion paper, such as removing or reducing the minimum level of cover, the removal of compulsory cover in relation to sophisticated clients, and allowing insurers to avoid the policy or deny liability in certain circumstances. That paper was widely criticised and it remains to be seen whether, following an analysis of responses received, the suggestions it raised will be taken forward.

John Eastlake, partner, Kennedys: It is anticipated that the appeal decision in AIG Europe Ltd v OC320301 LLP will be handed down at the end of March 2016.

Last year AIG (the PII insurer of OC320301 LLP, formerly known as The International Law Partnership LLP (TILP)) sought a declaration that various claims made against TILP should be aggregated as one claim under clause 2.5 of the MTC as the claims arose from “similar acts or omissions in a series of related matters or transactions”.

The court held they didn’t aggregate because the transactions were not dependent or conditional on each other. Insurers were disappointed by the decision because it confirmed that the MTC permits only a very narrow search for a unifying factor for aggregation purposes. Insurers will be hoping that AIG’s appeal is successful. If not, it is difficult to envisage circumstances in which aggregation will apply where insurers face claims by multiple claimants.

Duncan Crine, head of dispute resolution, Henmans Freeth: I was particularly struck by one of the reasons given by Elite for its withdrawal from the solicitors’ PII market this year, namely the risk of cybercrime targeting its insured firms. Although there’s been much talk in recent years of the new risks presented to businesses in the wider economy by computer fraud in all its guises, the Elite announcement brings the issue into sharper focus for the solicitors’ PII market.

“Insurers are considering ever more closely the type and size of practices they are willing to underwrite”

It would be easy to discount the significance of this announcement on the basis that cybercrime is already a well-known risk and that Elite was a relatively recent entrant with a modest 2.6 per cent share of the market that also had other reasons for its decision. However, I do wonder if this will mark something of a turning point.

I expect underwriters will take an increasingly keen interest in the systems used and measures taken by law firms to secure their clients’ information and money from the criminals. Those who fall short will see premiums rise (or struggle to find cover).

Q: Has there been an increase in the volume of claims against solicitors in any particular sector? If so, what has caused this increase?

Clover: There isn’t enough reliable data to provide a precise answer to this question. However, I don’t think that there can be any doubt that claim and settlement values have continued on an upward trajectory, although court statistics have shown that claims volumes have remained reasonably steady.

We’ve been seeing other pockets of claims, such as those arising out of litigation work. In addition, legislative and regulatory changes continue to influence claims volumes. For example, the Government’s and media’s focus on tax planning will likely lead to finger-pointing at advisers (even though some of the volume seen in this area to date is largely a run-off issue). Pensions are another area where the sheer rate of legislative change continues to give rise to the potential for claims.

Ross Risby, partner, DAC Beachcroft: The raiding of solicitors’ client accounts by so-called ‘Friday afternoon’ scams and other internet-based frauds has been widely publicised and we’ve seen a number of these, several of which are likely to cause substantial losses for lawyers and their insurers. The recent and substantial increase in court fees has led to a practice by a number of firms specialising in claimant litigation of paying a deliberately low court fee in order to preserve limitation. It remains to be seen to what extent those firms’ clients will bring negligence claims as a result of their claims being struck out as an abuse of process – but we expect there to be a flurry of these in the coming months.

Gary Oldroyd, partner, Bond Dickinson: There’s been a notable increase in claims arising out of the alleged under-settlement of personal injury claims. These so called ‘cannibal’ claims see claimant law firms sue claimant law firms often for just a few thousand pounds. This increase in claims is almost certainly down to the power of the internet. Claimant law firms are relentlessly using web advertising to target the disgruntled clients of their competitors to make contact with them with a view to pursuing a fresh claim.

Eastlake: Lender claims arising from the last financial crisis are abating. However, the past year has seen a marked increase in claims against family solicitors arising from allegedly under-settled ancillary relief claims, with those claims often having taken place and been concluded more than six years before the issuing of proceedings. Aside from the matrimonial home, the pension provision of one or both spouses is often the largest capital asset of the marriage.

In many cases it is now alleged that the actuarial assumptions used to calculate the cash equivalent transfer value (CETV) of the pension scheme understates its true value. The solicitors are often blamed for failing to question the accuracy of the CETV or advising their client to obtain a report from an expert actuary, with the effect that the client is said to have under-settled the ancillary relief proceedings.

The sudden increase in these claims has seemingly been caused by an increasing awareness of the potential for CETVs to understate the true value of the pension, which in turn leads to another contributing factor: companies advertising free telephone consultations for those who have concluded ancillary relief proceedings within the last 15 years and who did not secure a pension sharing order.

Q: A recent report by the SRA has suggested that pressure from clients has resulted in law firms taking on increased risks. How has this trend impacted the cover insurance firms provide to those in the legal industry?

Oldroyd: The SRA has certainly noted that some law firms have been incited by their clients to breach their ethical obligations. As a result, some of these firms unwittingly allow their client accounts to be used as a personal banking facility. This is a very clear breach of the Solicitor Accounts’ Rules. To the extent that this form of behaviour leads to a regulatory investigation or indeed a civil claim by the client, then insurers are increasingly and understandably taking the line that no insurance cover is available.

Ultimately, the scope of cover provided for by MTC is limited to claims arising out of ‘private legal practice’ or else the ordinary business of a solicitor but not the ordinary business of a banker.

“Firms need to take great care over how they draft disclaimers of liability”

Risby: The MTCs that solicitors benefit from means that primary layer insurers are unable to make unilateral and material changes to law firm policy wordings. This means that insurers are considering ever more closely the type and size of practices they are willing to underwrite, as well as requiring greater proof of strong risk management procedures and robust IT systems being in place.

Law firms that continue to practise in areas of deteriorating claims experience without showing that they are careful to delineate the scope of their retainers and ensure they are paid an amount for their work that reflects the risk they take on will find it increasingly difficult to obtain keenly priced PII.

Crine: Some of the most significant increased risks taken on by law firms recently as a result of client pressure are commercial ones for their own business – for example, taking on speculative CFA cases, agreeing unsustainable fixed fees or rates, or engaging in hasty expansion. While consequent losses would not be directly covered by their professional indemnity insurance, insurers will still be concerned because of the indirect effect those factors may have. Commercial pressures can lead to corner-cutting, lack of oversight, cash-flow problems and, ultimately, business failure – which in turn often triggers substantial exposure on their PII policies.

Q: What other ways can law firms minimise the risk they take on from clients?

Clover: Where commercially possible, firms should be seeking to include liability caps and disclaimers of liability to third parties – and where clients will not agree to this, firms need to consider carefully whether they wish to take the work on. The 2015 decision in Barclays Bank Plc v Grant Thornton UK LLP is helpful because it establishes that if a clear disclaimer of liability to a third party is set out, there is a very good chance that it will bite.

However, it continues to be the case that firms need to take great care over how they draft such disclaimers and draw them to the attention of the client and any third party.

“Claimant law firms are relentlessly using web advertising to target the disgruntled clients of their competitors”

Oldroyd: A properly formulated retainer letter that documents what a solicitor has agreed to do and not agreed to do is the surest way of controlling risk. Certainly, regulatory changes mean that retainer letters are more common than they were 20 years ago, but all too often they are precedent letters that have not been amended to reflect the unique nature of any given retainer. It goes without saying that any ambiguity or lacuna in the retainer letter is more often than not construed against the solicitor.

I think much of the old advice still holds good: know your own business and know your client. In terms of your business, don’t lose sight of the long-term view while chasing after a short-term fix – consider the practicalities, economics and risks of the steps you are contemplating to attract and retain clients and work.

In terms of your clients, ensure that you understand what they want, why they have come to you and be realistic about what you can do for them.

Q: How will the Insurance Act 2015 impact the professional indemnity market and what effect will this have on solicitors?

Eastlake: The Insurance Act 2015 (the Insurance Act) will come into force on 12 August 2016 and will make changes to the law on non-disclosure and misrepresentation in relation to commercial insurance contracts.

From that date different tests of what constitutes ‘non-disclosure’ will apply to consumer and non-consumer contracts. The SRA has chosen to adopt the non-consumer standard of disclosure for the MTC, which requires that insureds make a “fair presentation of the risk” to insurers, and where an insured has deliberately or recklessly failed to do so, the insurer will be entitled to avoid the policy and must return premiums paid. In all other circumstances, remedies proportionate to the effect of the failure to present the risk fairly will be applied.

However, the act will in practice have little impact on professional indemnity insurance for solicitors, given that the MTC specifically prohibits insurers from avoiding or repudiating cover on any grounds whatsoever.

Risby: An SRA consultation is under way as to the changes that should be made to the MTC as  a result of the Insurance Act. It seems improbable that material changes to the MTC will result. Insurers will no doubt hope that law firms will feel obligated to disclose information in relation to their practices and risk profiles that is clearer and more easily accessible than has often been the case in the past.

It is unlikely that insurers see the act as an opportunity to tip the commercial balance away from solicitors and back in their favour, but any that do are likely to be severely disappointed.

Crine: The recently launched SRA consultation identifies a number of potential impacts on the MTCs. In practice, I suspect that the new duty of ‘fair presentation’ of risk will not have a great impact on what is a mature and well-developed professional indemnity market. Most insurers, brokers and firms already have well-established and sophisticated procedures to ensure disclosure of information to underwriters.