When your firm renews its Professional Indemnity (PI) insurance, the challenge for you and your broker is to successfully ‘sell’ your risk to insurers. To achieve the lowest premium for the optimum level of cover, you need to understand how insurers price risk.
1. The form itself
It may seem obvious, but any firm that submits a properly completed proposal form is instantly regarded in a more positive light.
More often than firms realise, the proposal is weak and even sloppy, perhaps because someone was rushing to complete it by a particular deadline. Some forms are completed by hand and can be hard to read, or may contain figures that are inconsistent or are wildly wrong. A zero becomes a nine and 4.5% becomes 45%.
70% of law firms still renew their PI insurance on the 1st of October. This means that the underwriters are short of time during this busy period.
A form that raises questions of fact and then has to be reviewed and adjusted is bad news all round. It slows down the process and puts pressure on everyone involved. Put simply, a badly completed form can lead to a delay on receiving terms and a potentially higher premium.
Claims are a fact of life for law firms in the UK. The desire for consumer protection, reflected in the wide coverage afforded by the Minimum Terms and Conditions of the Solicitors Regulation Authority, means that solicitors can be an easy target for claims.
It is not only clients that make claims. Suppliers, notably banks, may claim that they suffered financial loss as a direct consequence of the professional negligence of a law firm.
What frustrates insurers is those firms that have a series of losses that could easily have been avoided. For example:
- Firms that miss limitation dates, despite the availability of software that makes it easy to plan for such deadlines.
- Specialist conveyancers who miss key information in leases.
- Repeated errors from the same department or fee earner.
- Documents that are allowed to be sent out by juniors without first being checked by a supervisor.
Underwriters understand that even the most careful firms will have claims and notifications.
What the firm needs to do in the event of a claim is:
- Identify the root cause of a claim or issue (for example a fee-earner who was under too much pressure or poorly supervised).
- Demonstrate how you have rectified this failing.
- Prove that there are no lingering further issues.
A firm that has gone through a challenging experience can develop its risk management as a consequence, making it a better insurance risk for the future. So take the time to give a full explanation, going beyond merely explaining the circumstances. Convince the underwriter of the actions you have taken such that your firm will not repeat those past errors.
3. Areas of practice
Certain work types remain high risk from an underwriting perspective.
For example, it is a simple fact that in an economic downturn firms undertaking a high level of conveyancing face more claims. The insurance premiums have to reflect this level of risk.
Work with your broker to understand the rates that attach to each area of practice. For example, conveyancing can start with a base rate of over 10% whereas Landlord & Tenant work would be around 3%. Are you inadvertently increasing your premium by mis-allocating work to a higher premium area of law?
Having a clear understanding of the insurance cost of different activities may influence your strategy of growing one area of work and not another.
There is nothing wrong with choosing to do legal work that is well known to be potentially contentious. The point is simply that you need to work with your broker to explain how the firm mitigates, controls and avoids unnecessary risk. Show the underwriter that you understand risk and have an active approach to risk management, so the underwriter can reflect your better than average risk profile in their pricing.
4. Risk management
The SRA continues to emphasise the importance of risk management, both for the protection of clients and for the success of the firms themselves.
However, some firms have failed to understand the true value of what is being recommended to them.
Treating risk management as a ‘tick box’ exercise is a waste of time and effort. For it to work, it is something that must be embedded in a firm’s culture from the top down.
It is increasingly common for ‘A’ rated insurers to ask firms to complete a Risk Management Questionnaire (RMQ) before offering terms. These can be lengthy, but take full advantage of the opportunity that a RMQ presents:
- Give the questionnaire the time it requires, going into detail about your firm and making the strongest case possible for a lower premium.
- Identify potential risk issues and address them before they become claims.
- Use the RMQ to set targets that your firm can then benchmark its actual performance against. This will help ensure that risk management is not simply something that is spoken about but not acted upon.
The vast majority of firms now have excellent risk management procedures – the key is that all staff, from managing partner to front-of-house, adhere to those procedures.
5. Disclosure of material information
Insurance is based on the duty of disclosure and the concept of ‘fair representation’, as set out in the Insurance Act 2015. The fastest way to invalidate a paid-up insurance policy is to withhold material information, either at the time of insuring or in relation to something that occurs subsequently.
Insurers aspire to create long-term relationships with their clients. Remaining open and honest with them and your broker is vital.
Communicate openly about changes in your firm. Helping your insurer understand what the firm is doing, how it is changing, and what this will mean for the future, will rarely have negative consequences. For example, a change in partner numbers, while material, does not automatically mean an increase in premium.
Focus on the five elements above and your firm can enjoy a healthy relationship with both its broker and its insurer — and potentially lower premiums. Make full use of your broker and remain engaged with both your broker and insurer throughout the year. Remember, they are there to support you year-round, not just in the months or weeks prior to the firm’s renewal date.