For the majority of solicitors, the renewal of professional indemnity insurance (PII) has become a relatively painless process. Insurance capacity remains high and most law firms have a significant choice of insurers available to them. This competition has led to highly competitive insurance rates at this point in the insurance market cycle. For some firms, however, the renewal can be a testing time and the risk of not being able to obtain renewal terms is a very real threat. Below Lawyer monthly hears from Simon Underwood, a business recovery partner at accountancy firm, Menzies LLP, who discusses the intricacies of the process.
Firms that do not obtain appropriate cover fall into the "Extended Indemnity Period" for up to 30 days where they can continue to try and seek cover. After 30 days they fall into the "Cessation Period" for 60 days when they can only work on existing tasks and have to cease taking on new clients/new work. If they fail to obtain cover within those extra 90 days they have to close. The SRA has to intervene in many disorganised closures and the inability to obtain PII is often cited as one of the factors involved.
Given the devastating impact of intervention and / or formal insolvency on the firm and its partners, advice should be obtained from experienced turnaround professionals who have worked with legal professionals. Raising finance to cover PII costs or assisting with an accelerated sale or merger process provide two obvious lifelines.
The SRA is currently reviewing the mandatory requirements for solicitors' PII. The SRA have made a number of proposals to reduce the level of cover required and elements of narrowing the cover to exclude cover for financial services clients or clients with an annual turnover of over £2m. This has been met by mixed reviews and it is important for firms to engage with this consultation, which closes on 15th June 2018, and have their say.
Historically, law firms had a common renewal date of 1st October but firms now have the freedom to renew their policies at any time of the year. The most common renewal dates are the 1st April and the 1st October, with many firms opting for 18-month policies. As well as giving solicitors a greater degree of flexibility, this situation has created a more attractive market for new insurers. While this has resulted in more competitive insurance premiums for the legal sector, timely preparation is still vital in order to protect cash flow and maintain a valid certificate to practice.
One of the common factors associated with firms that have trouble renewing is a poor claims record. A firm’s claims history is a key element of the risk assessment process and can make a big difference to the outcome of negotiations. As it is difficult to change insurers' minds once the decision not to offer terms has been made, it is vital to seek expert advice at the earliest stage possible.
Demonstrating to insurers that, where claims have been made, appropriate steps have been taken to prevent reoccurrences is important. For this reason, firms must keep accurate records of remedial action. For example, if a partner at the firm becomes bankrupt, internal controls or checks may be needed to better protect the firm’s financial position in the future.
Colin Taylor, Partner at JLT Specialty says: "there are often clear, early indicators that the renewal may be more challenging than the previous year. It is important for solicitors to get good advice from a specialist broker with experience of representing firms of their size, and carefully approach the insurance market. Flooding the market with applications to every broker or insurer is not a good idea and will often do more harm than good. In the end, the better the advice firms receive the less they pay."
When making a judgement about the risk presented by a firm, insurers will also consider any accusations of misconduct made to the SRA. Other factors taken into account may include the firm’s regulatory position and evidence of internal controls put in place to mitigate future risk factors. It is important to make sure this information is presented clearly and in full.
The recent decision in the case of Dreamvar v Mischon De Reya shows how the risks faced by solicitors and their insurers can change. The outcome of this case could make insurers increasingly nervous of conveyancing work, which means firms could face more questions at the point of renewal about clients requiring these higher-risk services.
When the renewal date is approaching, firms should liaise with their broker at an early stage, ensuring they have all the information necessary to support their application. When choosing a broker, they should seek out a specialist in PII for solicitors.
Providing as much detail as possible when completing the renewal form can help to enhance the underwriter’s understanding of the risk a firm presents, improving the likelihood of the process going smoothly. Seeking estimates for insurance premiums at the earliest opportunity also allows firms to plan ahead.
Should firms anticipate challenges in financing high premiums, turnaround specialists can help. Other approaches, such as consolidating sole practitioners so they operate under an umbrella could reduce overheads and drive cost savings. Emergency grants may also be available for firms facing significant financial challenges.
Ultimately, an effective PII renewal strategy will involve solicitors investing time in understanding their risk profile and demonstrating to brokers that they are taking proactive steps to reduce this. By liaising with specialist brokers and gathering relevant information in plenty of time, solicitors can navigate the PII renewal process smoothly and protect themselves against future claims.
