How to keep your PI insurance costs down

1. Why is PI so expensive?
2. What are the main aspects of my firm that affect the premium?
3. What types of legal work increase premiums the most (and least)?
4. Is Covid-19 still affecting PI insurance premiums?
5. What is an appropriate level of coverage?
6. PI insurance works on a claims made basis. How does this affect me?
7. What is the ‘Armageddon scenario’ of aggregated insurance claims?
8. In light of the cost, should I consider lowering my limit of indemnity?
9. How do I show insurers that my law firm is good at managing risk?
10. How can I present our financial position and viability as a business accurately and fairly?
11. My firm has a government bounce back loan. Will this be viewed negatively by insurers?
12. Will having Lexcel, CQS or other relevant qualifications reduce my PII cost?
13. I am thinking of diversifying into a new area of legal practice. What impact will this have on my PII?
14. I am going to stop doing conveyancing, will my PII premium reduce immediately?
15. If a partner or a team moves to another firm, will my PII premium reduce?
16. Why is the size of my fee income important to insurers?
17. My fees are dropping, will my premiums fall?
18. I have had another year of no claims, will my PII premium drop?
19. Why does the number of partners/directors/members matter?
20. Are sole practitioners seen as an unattractive risk by insurers?
21. How can I benchmark my premium?
22. What other insurers can I consider?
23. What should I consider when switching insurers?
24. What premium payment options are available?
25. How much of my premium is retained by the broker?

 

The PI insurance application process

25. Why am I being asked to complete a ‘long’ proposal form this year?
26. Do I have to complete a different proposal form for each insurer?
27. How long will it take to provide me with insurance quotations?
28. When should I submit my insurance renewal presentation?
29. What should I do if my insurer is not offering renewal terms?
30. This year, why are some insurers delaying their quotations?
31. Why do I have to complete a proposal form each year?
32. Can I buy a policy for a longer period to move away from bottleneck renewal dates and fix the cost for longer?
33. Why do insurers want to see my Report and Accounts?
34. Why do I need to provide up-to-date claim summaries every year?
35. If I have a claim, what do insurers look for?
36. If I notify a potential claim, will my insurer increase the premium at next renewal?
37. How far back do I need to report claims history as part of my presentation of risk?
38. Why do I need to provide a narrative about a past claim if that fee-earner has left so it won’t happen again?
39. Why am I being asked for information including claims for a business I acquired nearly five years previously?
40. Do I need to tell insurers that I am hiring a new fee-earner?
41. If I have a data breach, should I report it to my PI insurer?
42. What is a ‘circumstance’ and why do I need to notify it?
43. When should I notify a potential claim?
44. Do I need to notify complaints?
45. Can I arrange a face-to-face meeting with you as a broker to allow our wider team to discuss renewal?
46. Are face-to-face meetings with insurers possible via Zoom or Teams, to explain more about our firm to them?
47. My PI insurance is arranged with several insurers in layers – how do you ensure that any claim is handled satisfactorily?
48. Will I prejudice my firm if we go into the Extended Policy Period (EPP) briefly?
49. What are benefits of a broker having ‘direct insurer access’?
50. When might we be asked to provide personal guarantees?

 

The three experts

Law Firm Ambition is grateful to the three specialist legal sector insurance brokers who collaborated with us to come up with this long list of FAQs and answers. (Updated 17 July 2024)

 

Brian Boehmer is a partner at Lockton.

 

Gary Horswell is the managing director of Ntegrity.

 

Piers Winton is a partner at Paragon.

 

How to keep your PI insurance costs down

1. Why is PI so expensive?

While the cost of professional indemnity insurance (PII) may seem high relative to the fee income of firms, the premiums in recent years have not been sufficient to pay for all the claims that the insurers have settled. The number of claims has been high, and so too has the average value of claims.

The SRA continues to set the Minimum Terms and Conditions (MTC) for insurance. Underwriters cannot alter the wording, so insurers are unable to protect themselves by limiting the policy terms as they can do with other professions.

Trading losses have resulted in several insurers withdrawing from the market. Reduced competition, particularly in the small firm sector, has driven increased premiums and led to the general ‘hardening’ of the insurance market that law firms have experienced. However, the rate of increase in the annual premium has started to reduce.

The PII market has not experienced the anticipated losses from the challenging economic position and fallout from COVID, so we are starting to see the market soften. However, it should be noted that there are still significant claims in the market and many claims in litigation that have not been resolved yet due to the backlog in the courts.

Piers Winton, partner, Paragon

2. What are the main aspects of my firm that affect the premium?

Broadly speaking there are four main factors that will influence an insurance underwriter’s pricing model:

1. Number of partners
2. Amount of revenue
3. Types of legal work undertaken (see 3)
4. Claims history

Other factors include the number of offices and the ratio of managers to staff. For example, if a partner has to supervise a large number of fee-earners in more than one office, it may be more difficult to prevent mistakes being made and claims arising. Your clientele and the values of your firm could also play a part.

Well-run firms (with lower PII premiums) tend to have corporate identity, rather than acting as a group of individual lawyers, and have a culture of continual improvement.

Additional factors could now influence insurers such as online presence including reviews.

The pandemic brought about an increase in hybrid working practices. Underwriters want to understand how firms continue to have effective supervision in place if they adopt these models.

Brian Boehmer, partner, Lockton

3. What types of legal work increase premiums the most (and least)?

The table below shows a general view of how insurers perceive the risk of providing different types of legal services. High risk (either due to the volume of claims, or value of claims, or both) leads to high professional indemnity premiums.

However, the pricing of insurance varies. The underwriters have developed their own models of risk, influenced by their own personal professional experiences as well as by the data. And some insurers specialise in particular types and size of firm, too.

Source: Lockton Companies LLP

Brian Boehmer, partner, Lockton

4. Is Covid-19 still affecting PI insurance premiums?

PI insurance premiums were steadily rising (see 1) before Covid-19 arrived on the scene. Rather than the pandemic directly affecting the pricing of premiums, it has reduced the appetites of insurers to underwrite a large volume of legal sector business – which affects premiums indirectly.

Given the widespread fear of a major and long-lasting economic difficulties, and the historical fact that claims activity in the legal sector tends to increase in recessionary times (and for a little while after), insurers can be expected to be careful to limit their exposure. These harder market conditions may last for a longer period than the legal sector has been used to in the past.

The impact has not turned out to be as severe as first thought, however, we still do not have a fully developed claims position following the impact of COVID. Therefore, although the market is softening, we should remain cautious. Losses may appear later than when they would usually be expected.

The most obvious impact of Covid-19 was the marked increase in the amount of information requested by the insurers. On a positive note, forms including Business Resilience Questionnaires and Excess of Loss are largely being replaced with a limited number of specific questions in the proposal form, often based around hybrid working.

Piers Winton, partner, Paragon

"We need to understand what has changed from a risk perspective. So, with the switch to hybrid working, a firm could elaborate on how they are maintaining supervision and embracing cyber security in this new situation."
James Graham, director of professional indemnity, Travelers

5. What is an appropriate level of coverage?

SRA regulations make your firm responsible for assessing its exposure to risk and purchasing the appropriate level of professional indemnity insurance (PII) cover in general, for both current and past work.

Factors to consider include:

1. The nature of activities undertaken that could expose your practice to risk, including any contractual obligations.
2. Your claims history.
3. The maximum and average amount of money in the client account.
4. The insurance cover of firms similar to yours, as shown by any benchmarking.
5. Any risk of aggregation (see 7), or another worst-case scenario.

Depending on your firm’s structure, you will be required by the SRA to buy a primary policy providing at least £2m or £3m limit of indemnity (LOI). (See 8)

Many firms purchase limits above the mandated level. This is normally where the transaction values are above £2m or £3m, or where aggregation might result in a group of claims being treated under the policy as one single claim (and therefore one single limit, see 7). In many cases clients require firms to hold certain LOI to be eligible for instruction. If this is for a one-off piece of work, consider doing a cost-benefit analysis of it.

Your liability does not end when the instruction does. So, if you buy an increased LOI for a project, you may need to continue this increased limit for a number of years to protect against any later claims.

Brian Boehmer, partner, Lockton

6. PI insurance works on a claims made basis. How does this affect me?

Professional indemnity insurance is provided on a claims made basis. This means that the insurance provides protection against a claim when it is notified, not when the work was undertaken. A claim could be in respect of a will written negligently 30 years ago, which has only now resulted in an IHT liability that the will was intended to avoid. Or the claim could be in respect of a flawed property transaction completed ten years ago, but the error by the law firm has just come to light.

When considering what level of insurance you need, consider your historic exposures as well as exposures you face from current types of work undertaken, the risk of multiple claims arising from a single cause and being treated as one by insurers (see 7), and any development plans you have.

(Different rules apply to financial institutions. Generally speaking, they can make a claim in respect of negligence during the last six years. For example, if a law firm provided an architect’s certificate that did not comply with the UK Finance Mortgage Lenders’ Handbook, potentially reducing the value of the lender’s security.)

Piers Winton, partner, Paragon

7. What is the ‘Armageddon scenario’ of aggregated insurance claims?

There is an aggregation clause contained within the SRA’s Minimum Terms and Conditions that applies to all legal sector PI insurance.

This clause potentially allows for two or more claims to be treated as a single claim, if they are linked by a unifying factor of some kind.

For example, take a firm with a limit of £3m. In theory it would be covered for three separate claims of £3m each, adding up to £9m. But if a single item of negligent advice, repeated many times to different clients led to 10 claims of £1m each, the insurer would only have to cover the first £3m if the 10 claims could be shown to be aggregated. The remaining £7m would have to be paid by the law firm.

The risk of aggregated claims underlines the importance of conducting a proper risk assessment of your firm’s activities. Otherwise, simply relying on the SRA’s minimum level of cover can leave you under insured.

Brian Boehmer, partner, Lockton

8. In light of the cost, should I consider lowering my limit of indemnity?

Some firms may consider reducing the limit of indemnity (LOI) to save money. But with market conditions improving and rates becoming more competitive, there is less pressure on law firms to do so.

The SRA dictates the minimum LOI a firm is required to buy. For a partnership it is £2m; whereas it is £3m for a Limited Liability Partnership (LLP), or a limited company, or an Alternative Business Structure (ABS). But many firms choose to purchase an LOI that is far greater than this, to reflect the risks that they are exposed to.

Some clients may contractually commit your firm to have a particular LOI. If you fall below this limit you may be in breach of contract.

All PII policies are written on a claims made basis. This means a claim can arise from work the firm undertook the past. An insurer’s obligation to pay a claim is set by the cover in place when the claim is made, not the cover you bought when the work was undertaken.

Without the correct LOI in place, you could be exposing the partners/directors of the firm to a significant amount of personal liability.

One alternative is to reduce the level of high risk work the firm undertakes, as this will impact the premium over time (see 3).

Piers Winton, partner, Paragon

9. How do I show insurers that my law firm is good at managing risk?

Bearing in mind the four main factors that insurers focus on when reviewing a firm (see 2), you should explain:

1. Your awareness of the risks inherent in the types of work performed.
2. Named individuals who manage risk within the firm.
3. Any helpful investment, eg an improved case management system.
4. Management processes that red-flag any danger signs that an issue has arisen.
5. Any external review processes, such as a quality standard that has been achieved.
6. Other steps taken by the firm to limit the chances of a claim (‘risk mitigation’), such as periodic reviews of risk management.
7. Continual practice improvement, learning from any claims activity to avoid recurrence.

Insurers tend to quote lower premiums where firms evidence that risks are managed well and consequently there is less chance of a claim.

If the questions asked in the insurance proposal form do not allow you to explain these key points, use your covering letter to explain them more fully (and refer to the covering letter in your form).

Gary Horswell, managing director, Ntegrity

"What we like to see is a document outlining the firm’s approach to risk and what initiatives they have implemented to mitigate risk. And, where there have been claims, what lessons have been learnt and what changes have been implemented to prevent a reoccurrence."
Donna Hurst, senior underwriter, Travelers

10. How can I present our financial position and viability as a business accurately and fairly?

Insurers’ proposal forms ask for copies of the latest year-end accounts, and some will also request management accounts including budgets for the future.

It is helpful to also provide an overview of your financial position in your own words. For example, if you took advantage of one of the government loan schemes or a permitted VAT deferment, say so and explain why you decided to do so – rather than waiting for an insurer to ask about it.

The better the information provided, the more confident the insurer will be in your ability to control the finances of the firm. If you fail to disclose relevant information, your insurance may even be invalidated.

If your financial position is precarious or complicated, seek advice from your accountant.

Brian Boehmer, partner, Lockton

11. Will having Lexcel, CQS or other relevant qualifications reduce my PII cost?

These accreditations are all part of showing that you are a well-run firm, but nowadays they may be seen as the norm rather than anything special. Instead, firms without accreditations may be viewed as more risky.

Having said that, some insurers will actively look for accredited firms, with CQS accredited conveyancers being an example. Historically some accreditations were seen as a ‘tick box’ exercise and there is no proven correlation between quality marks and reduced claims; but The Law Society is overhauling the CQS qualification, so it may become increasingly valid in the eyes of some insurers.

A few insurers have given minor reductions on premiums for Lexcel/CQS accredited firms in the past, although perhaps mainly as a sales tactic.

Gary Horswell, managing director, Ntegrity

12. I am thinking of diversifying into a new area of legal practice. What impact will this have on my PII?

If you are moving into a new area of practice, or planning to add a new team to your firm, you should inform your broker as soon as possible. A new department or area of work is deemed ‘material to a risk’ from an insurer’s perspective, so the insurer should be made aware of the planned change. Keep a record of the notification to the insurer.

Moving into a new area of work does not automatically mean additional premium. Even if you do diversify into a new area of work mid policy, it may not affect premiums if no revenue will be realised during that period. Nevertheless, always inform your broker to ensure you do not prejudice your position with the insurer.

If a new area of work is undertaken which you expect to generate significant additional revenue (+10%), then it is likely that the firm can expect some change in premium. The area of work will have a large influence on this (see 3).

Piers Winton, partner, Paragon

"Involving an insurer early in the planning of particular changes within a firm can minimise risk and build trust. For example, closing a conveyancing department, securing run-off cover in preparation for a merger or acquisition, or expanding into a new practice area."
James Graham, director of professional indemnity, Travelers

13. I am going to stop doing conveyancing, will my PII premium reduce immediately?

No, because your premium is covering your firm for claims arising for work undertaken previously (unless run-off cover was purchased to insure this past work).

Professional indemnity insurance is provided on a claims made basis, and a client loss that leads to a claim may not be realised for some time.

It is perfectly normal for an insurer to pay a conveyance claim from work undertaken four or more years ago, even if that firm stopped doing conveyancing three years ago.

However, in this scenario, the likelihood of a claim arising, and therefore the insurer’s exposure, reduces each year the firm is not undertaking conveyancing. So over time the premium should reflect this change.

Gary Horswell, managing director, Ntegrity

14. If a partner or a team moves to another firm, will my PII premium reduce?

This depends on whether the departing partner or team takes the past liability of their work with them (so the entity they are moving to becomes the ‘successor practice’), or not.

If not, your practice remains liable for any claims arising from work undertaken before they left your practice. As professional indemnity insurance is on a claims made basis, including any new claims made for work undertaken in the past, your premium is unlikely to reduce until significant time has passed with no claims arising.

If the past liability moves to the successor practice, there is potential to reduce your premium in respect of this reduction in risk to the insurer.

The successor practice rules are complex and often misunderstood. Seek guidance from the SRA and professional advice, then put a contractual agreement in place to provide clarity on this point between the parties involved.

Brian Boehmer, partner, Lockton

15. Why is the size of my fee income important to insurers?

The size of your firm’s revenue, broadly speaking, will allow an underwriter to predict the potential claims your firm might have made against it. The level of fees acts as the baseline for calculating premiums, along with the scale of the firm and the potential value of claims.

For example, if you are supervising on a M&A deal for a PLC and an error in the legal work results in a deal collapsing, or if you are advising on a commercial property transaction with escalating ground rent issues, the risk of a sizeable claim is significant.

Gary Horswell, managing director, Ntegrity

16. My fees are dropping, will my premiums fall?

As explained in 14 above, most claims come from past work rather than current work, so an immediate drop in the premium is unlikely. But, over time, lower fees do equate to lower premiums.

However, the average pricing of PI insurance in the legal sector goes up and down depending on the level of competition between the insurance companies (see 1). This may be a more important pricing factor than your firm’s own level of fees.

Gary Horswell, managing director, Ntegrity

17. I have had another year of no claims, will my PII premium drop?

Not necessarily. Insurers may expect you not to experience any claims, given the practice areas undertaken. So they may have priced this in already. It may, however, provide you with more pricing stability.

Your claims history is just one of many factors affecting the pricing of your PI insurance (see 1 and 2).

Gary Horswell, managing director, Ntegrity

18. Why does the number of partners/directors/members matter?

Insurers use partner numbers (salary and equity partners) as a key metric for segmenting the legal market. The segments are sole practitioners, 2-3 partners, 4-10 partners, and 11+ partners. Some insurers will only insure firms of a particular size.

The ratio of partners to staff is also a factor in understanding the level of supervision of staff, and therefore the risk level.

Piers Winton, partner, Paragon

19. Are sole practitioners seen as an unattractive risk by insurers?

In terms of avoiding claims, sole practitioners actually perform well. In this sense, they are an attractive risk for insurers. So some insurers favour sole practitioners over firms with 2-10 partners.

On the other hand, sole practitioners tend to have modest revenues and therefore pay lower premiums for the same Level of Indemnity (see 8) as firms with multiple partners. This, combined with the relatively high admin cost of processing sole practitioners, means that some insurers prefer larger firms and the larger premiums.

Piers Winton, partner, Paragon

20. How can I benchmark my premium?

It is normal and reasonable to seek an evaluation of the market, especially in a period when there is significant change happening in the PI insurance marketplace.

A specialist broker may have suitable benchmarking data, depending on their client portfolio. Or you can ask you broker to get quotes from different insurers, to compare.

Some firms are part of a network of law firms and use these contacts to benchmark their insurance.

You could do the benchmarking yourself, by speaking to multiple brokers and explaining that you are conducting a benchmarking exercise.

But be wary of ‘broker duplication’ (the same insurer seeing your proposal form from two different sources), as this can damage your firm’s reputation with both brokers and insurers. Give clear instructions about who the broker is permitted to speak with on your behalf.

Brian Boehmer, partner, Lockton

21. What other insurers can I consider?

Your broker will be able to suggest which insurers are suitable for your firm.

Different insurers tend to specialise in insuring particular sizes of firms. Likewise, one insurer may have particular expertise in, say, personal injury and will focus on PI firms, while another insurer limits the percentage of PI revenues to 20% and yet another insurer may choose to avoid PI firms altogether.

Some insurers can only be accessed via a particular insurance broker or limited number of brokers.

If you are shopping around, avoid being tied into any relationships until you are satisfied that you have found the right insurance solution for your firm. Whilst price is an important factor, how they handle claims and what their run off rate is could also be important considerations.

Most insurers operating are now rated. The higher the credit rating, the more financially stable those insurers are – which can turn out to be critically important (see 22). No broker can guarantee the financial solvency of any insurer.

Brian Boehmer, partner, Lockton

22. What should I consider when switching insurers?

While it makes sense to look for ‘the best deal’, the last couple of years have shown that focusing on price alone can turn out to be a disaster. Several unrated insurers had to withdraw from the insurance market after under-pricing led to heavy losses. This left numerous law firms with no renewing insurer. If your premium seems too low to be true, it probably is.

So, above all else, ensure your policy is placed with a stable, solvent insurer that remains committed to the legal sector. Check their security rating. (The main established insurers have committed themselves to The Solvency II directive, which reduces the risk of insolvency of an insurer.)

Your broker should provide you with an offer in writing that includes details of the insurer that has quoted the premium.

Important questions to ask include:

1. Does the insurer’s portfolio include a lot of firms like yours, so you can expect to remain with that insurer for a long period of time? (See 21)
2. Who does the insurer’s claims handling and does this suit you?
3. Are there any additional risk and business management benefits on offer?
4. How long has the insurer been in the solicitors PII market?

The insurance market is going through a significant period of change, so now is certainly a good time to be testing the market. After all, receiving a quote from another broker or insurer does not commit you to moving. However, moving insurers on a regular basis does not make your firm an attractive insurance proposition. Continuity with one insurer, and building a premium pot over a longer period, protects the practice from volatility on premiums, especially if claims activity has occurred.

Piers Winton, partner, Paragon

23. What premium payment options are available?

Most brokers have a recommended finance provider that can offer terms to their clients. Payments are usually in 10 or 12 instalments for a 12-month policy, or 16 or 18 instalments for an 18-month policy (when the latter is available).

Some insurers offer these facilities too. Alternatively, ask your bank what options they can offer.

Interest charges (APR) vary widely, so check the costs involved.

Gary Horswell, managing director, Ntegrity

24. How much of my premium is retained by the broker?

This is typically around 15% of the premium but it can be much higher, especially for brokers that process a high volume of low premium applications.

If your firm uses a local general insurance broker who then arranges cover via a wholesale broker, this adds a layer of cost and may well result in higher premiums.

Brokers are typically paid by commission from the insurer.

Other brokers are independent of the insurers and agree a fee with the law firm.

The fees can include sourcing the market (in the case of an independent broker), setting up the policy, supplying accurate documentation, advising the policyholder at renewal and throughout the year, and providing claims support.

Of course, not all brokers have the same experience of the legal market, or the same trusted relationships with insurers, or offer the same level of service to their clients. Be clear on the level of specialist expertise that you are paying the broker for.

Gary Horswell, managing director, Ntegrity

 

The PI insurance application process

25. Why am I being asked to complete a ‘long’ proposal form this year?

Despite improving insurance market conditions, prudent insurers continue to be cautious, reflecting the current economic environment along with the high level of claims and the risks that the legal sector faces. Their underwriters are seeking a deeper understanding of each law firm before agreeing to insure it.

Some firms may have gone many years without completing a ‘long’ proposal form; for example, low-risk niche practices that have benefited from an early, short renewal declaration. Many of these firms are now being asked for full information, partly because of market conditions but also because it is now required from a regulatory perspective.

Brian Boehmer, partner, Lockton

"By submitting a separate summary of the firm’s risk management approach and culture, you can make it easy for the underwriter to understand this key factor."
James Graham, director of professional indemnity, Travelers

26. Do I have to complete a different proposal form for each insurer?

It depends. Your broker may use a proposal form that satisfies a range of insurers and can at least be used to obtain an indicative quotation.

Additional detail requested can then be dealt with via additional questionnaires.

Gary Horswell, managing director, Ntegrity

27. How long will it take to provide me with insurance quotations?

It depends on the timing of the submission of the proposal.

The common renewal dates are October 1^st and April 1^st. Leading up to the busy October renewal in particular, different insurers will begin to provide quotes at different times (once they have decided their strategy). Until that moment, any proposals submitted are in limbo.

The whole insurance process is taking longer than it did previously, as insurers are seeking more information on which to base their decisions. Examples include Building Safety Act work, the use of AI, verification of overseas entities and work for politically exposed or sanctioned individuals. The depth of enquiries depends on the type of firms being insured and varies from insurer to insurer.

Terms can sometimes be received as quickly as 24-48 hours, or it could take a couple of weeks or longer. Ask your broker about the likely timing.

If you avoid the traditional October renewal and switch to a different date (see 32), you should have less risk of delayed quotations.

Gary Horswell, managing director, Ntegrity

28. When should I submit my insurance renewal presentation?

It is advisable to have your proposal form submitted to your broker, along with any additional information, at least two months before the renewal date. The broker will then check that all the necessary information is there.

This leaves plenty of time to provide any further information the broker, or the insurer, may request.

It also leaves time for your broker (or other brokers you speak to) to get alternative quotes.

Generally speaking, the closer it gets to the common renewal dates of October 1^st and April 1^st, the busier underwriters become.

Certain insurers are offering some firms in their portfolios an early renewal rate reduction, usually around 5 - 7.5%.

Piers Winton, partner, Paragon

"While submitting an early proposal doesn’t guarantee a lower premium, it allows more time for negotiation with the underwriter, presents the firm as a more attractive risk, and will help the firm find more insurers willing to quote."
Donna Hurst, senior underwriter, Travelers

29. What should I do if my insurer is not offering renewal terms?

As explained in 1 above, insurers sometimes decide to abandon particular market segments, and this has certainly happened many times in the legal sector professional indemnity insurance market. Alternatively, insurers may restrict the insurance they offer, limiting it to particular types of firms that they believe will provide an acceptable balance of risk and reward.

If your current insurer is not offering renewal terms when you come to renew, your broker should already have told you and presented their strategy. If they have not, consider appointing or at least engaging a specialist broker that understands the vagaries of legal sector insurance. Such an expert will know the options for your particular circumstances.

If there is little chance of a quotation from any insurer, you may need to prepare for a merger with a firm that does have insurance, or perhaps even closure. Under SRA rules the Extended Policy Period provides a 90-day extension – within the first 30 days you can continue to look for affordable cover, but if this proves impossible the final 60 days must be spent on orderly closure with no new instructions being accepted.

Gary Horswell, managing director, Ntegrity

30. Why are some insurers delaying their quotations?

It can be normal for some insurers to delay giving quotations during the busy run-up to the October 1st and April 1st renewal dates, until they have assessed the current market conditions, established their own underwriting strategy and made sure they have adequate staffing levels.

Some insurers may not even open for new business until August, while they first manage the workload of their non-solicitor business.

Meanwhile, other insurers may choose to quote early on, to renew low risk business on favourable terms.

Some insurers and brokers may also delay releasing terms as a tactic, in order to retain business, while others will quote early with a short time-limit. This helps the insurer to avoid being used as a stalking horse.

In a softening market a delayed renewal offer is less likely. Challenge your broker on the reasons for this, should it occur.

Lastly, following lockdown, working patterns in the office are more flexible and the employees of the insurers typically work remotely at least two days a week. As a result, the internal process of agreeing rates can take longer than in the pre-Covid era.

Piers Winton, partner, Paragon

31. Why do I have to complete a proposal form each year?

Risk levels have risen in recent years and insurer's pricing strategies have changed. So insurers need clear, detailed, up-to-date information on the level of risk in each firm. This allows them to price the risk correctly and to justify that pricing to the brokers and law firms.

It contrasts with recent years in which many insurers had asked a renewing law firm for a simplified declaration, to confirm there has been no significant change to last year’s application form (ie less than a 10% increase or decrease in revenue or work type, and no expected claims).

(Brokers have searched in vain for years for a better way to profile a law firm and its risk features, but the proposal form remains the standard solution. The annual task of renewing insurance should in any case firstly be an internal review of all risk – to prevent mistakes happening and claims arising – and secondly a fair presentation of the firm and its risks to the insurer.)

Gary Horswell, managing director, Ntegrity

32. Can I buy a policy for a longer period to move away from bottleneck renewal dates and fix the cost for longer?

In the past, insurers may have incentivised firms to take longer term polices (typically 18-month policies). More recently, insurers have been charging a premium for longer policies, if they offer them at all. This reflects the economic uncertainty that the UK faces in these extraordinary times and the view that market conditions may continue to deteriorate for some time.

If you want to move your renewal date to be outside the common renewal period, ask your broker to have conversations with insurers about buying 13 or 14-month policies. Insurers are certainly more willing to consider an extended policy now than they have been over the last two years, with 18-month options very much back in the offing.

Piers Winton, partner, Paragon

33. Why do insurers want to see my Report and Accounts?

Viewing your accounts gives an insurer insight into the solvency of your firm. This is particularly important for insurers of law firms due to the SRA’s Minimum Terms and Conditions, which contractually binds the insurer to provide six years’ run-off cover, regardless of whether the premium is paid or not. So, if a firm goes out of business, the insurer still has to pay out on any successful claims made during that six years.

A firm’s accounts can also give insurers an idea of how well the finances of a firm are managed, which in turn are an indication of how well the firm in general is managed. Well managed firms are less risky to insure.

Brian Boehmer, partner, Lockton

34. Why do I need to provide up-to-date claim summaries every year?

Insurers use historic claims information to calculate what is called the ‘claims loss ratio’. This helps them to calculate the premium in line with the likelihood of costs in the future.

For example, if a ‘circumstance’ (potential claim) was notified to your insurer in 2018, a case will have been opened and a ‘likely quantum’ (expected cost) estimated. In 2019 £8,000 may have been incurred (but not paid) by the insurers in dealing with the case and in 2020 a decision might finally be made with payment of £30,000 to the claimant plus additional defence fees of £8,000.

Each year will show a different ‘incurred’ figure for the same claim:

2018: 1 notification, £0 incurred

2019: £8,000 incurred.

2020: £46,000 incurred.

It is important that this information is provided each year because a closed notification in a previous year could be reopened and start incurring costs again, affecting the claims loss ratio calculation.

Piers Winton, partner, Paragon

35. If I have a claim, what do insurers look for?

In the event of a claim, insurers take two actions.

Firstly, they ascertain liability and the potential lines of defence. Insurers know that many notifications made under a policy are spurious and/or robustly defendable.

Secondly, if a genuine error has been made that has led to the claim, they will want to look at how that happened and will seek reassurance that the error isn’t an inherent issue that will result in multiple claims originating from the same error.

Your law firm should explain in a few sentences the background to how the claim came about. Importantly, explain what risk management procedures or additional supervisory processes have been introduced to mitigate a similar problem occurring in the future.

From an insurer’s point of view, a firm that has had a claim can be a better risk than a firm that hasn’t, if the former now understands the exposure and has taken measures to control it.

If your firm has a more active claims history with numerous notifications and claims stemming from one department you will need to show what you have done to control this. For example, a 100% case review, or a partner supervising the work more closely, or even letting a mistake-prone fee-earner find other employment.

Brian Boehmer, partner, Lockton

"Get to the heart of a claim by asking yourself five “W” questions. Why did the claim arise? Why did that problem occur in the first place? What has happened since? What else could be affected? And what can we do to ensure it doesn’t happen again?"
James Graham, director of professional indemnity, Travelers

36. If I notify a potential claim, will my insurer increase the premium at next renewal?

The mere notification of a ‘circumstance’ (potential claim) or claim is, in itself, unlikely to have any impact at renewal. The issue is the nature of the claim. Is there a likelihood of a large claim payment? Only once reserves for a potential claim payment have been set by the insurer, or the claim has actually been paid, will a claim usually affect the premium at next renewal.

Explain the circumstances of the notification; in particular, why it was a one-off occurrence (if that is the case). Give details of what the firm has done to mitigate re-occurrence (see 35).

Failing to declare potential claims can lead to the insurer either voiding the policy or reducing potential claim payments. Every law firm has a duty to be open and honest with their insurer and to make the insurer aware of any ‘material circumstances’ relevant to the insurance cover (Insurance Act 2015). If you are ever unsure about this issue, speak with your broker.

Brian Boehmer, partner, Lockton

37. How far back do I need to report claims history as part of my presentation of risk?

Insurers will require at least six years of historic claims reports. Some insurers may request up to ten years, depending on the underwriting model being used.

A claim will usually remain on a firm’s record with that insurer, but a claim will stop being used in the insurer’s premium calculations (see 34) after a certain period (eg six years).

However, you have a legal duty of 'fair presentation of risk'. So you must disclose all material information that is known to you or which ought to be known to you. Information is material if it would influence the judgment of a prudent insurer when deciding whether to insure you and on what terms. As a result, you should disclose information about any large losses incurred even if they happened more than six years previously.

Brian Boehmer, partner, Lockton

38. Why do I need to provide a narrative about a past claim if that fee-earner has left so it won’t happen again?

Done well, this explanation will give the insurer confidence that the law firm has made changes to stop a similar occurrence happening again – regardless of which fee-earner will be doing the work.

Such changes could include greater due diligence when hiring fee-earners, or increased checking of work, or new systems being put in place to stop deadlines being missed.

Gary Horswell, managing director, Ntegrity

39. Why am I being asked for information including claims for a business I acquired nearly five years previously?

Depending on the nature of the acquisition, your firm may be the ‘successor practice’ and therefore responsible for insuring the acquired team’s/firm’s run-off (previous work) for the previous six years. (See 14)

Professional indemnity insurance is on a claims made basis. So your current policy will pay out for any valid claim made during the policy period, regardless of when the incident leading to the claim actually occurred.

Every law firm has a duty to be open and honest with their insurer and to make the insurer aware of any ‘material circumstances’ relevant to the insurance cover. Not doing so can lead to the insurer either voiding the policy or reducing potential claim payments.

Brian Boehmer, partner, Lockton

40. Do I need to tell insurers that I am hiring a new fee-earner?

Yes, it is prudent to keep your insurers updated with significant personnel changes in the firm.

If a new fee-earner is not bringing a new specialism to the firm and simply replacing someone or providing additional capacity, the insurer may not need to know until the next renewal when the practice profile is updated.

But if you are a criminal law specialist and will be hiring a new fee-earner to enter the property market, this is a significant change of risk that the insurer will need to know about. It could lead to an additional premium if the extension of risk is judged to be material.

As ever, you need to give the insurer a fair presentation of your risk and any significant changes in that risk. If in doubt always contact your broker for guidance.

Some insurers may request a New Solicitor Questionnaire be completed. This asks for details of the individual’s experience and requests confirmation of any regulatory issues in the past, together with the individual’s CV.

Gary Horswell, managing director, Ntegrity

41. If I have a data breach, should I report it to my PI insurer?

Yes, this is a material fact that your PI insurer needs to be made aware of.

Immediately advise both of the relevant regulators: The Information Commissioner’s Office (ICO) and the Solicitors Regulation Authority (SRA). Then contact your PI insurer and liaise with them.

Your insurer’s involvement could well be of help, but you have a duty to disclose this ‘material fact’ to the insurer in any case or your insurance could be voided.

The insurer will review the situation and consider whether the matter is notifiable against your PI policy. Depending on the data involved and number of data subjects affected, the range of potential liabilities is enormous. (Any fines from the ICO are not covered by PI insurance.)

Despite a growing number of attacks on law firms, cyber insurance is relatively inexpensive and it can give your firm instant access to experienced experts who can limit any damage.

Gary Horswell, managing director, Ntegrity

42. What is a ‘circumstance’ and why do I need to notify it?

A circumstance is a matter or a complaint that could give rise to a claim against your professional indemnity policy. For example, if you discover a mistake or oversight that has the potential to cause a client financial loss.

Whether this has been identified by a claimant or the fee-earner, it is notifiable upon the date of discovery. While it may be hard to determine whether it will evolve into a claim, you are obligated to notify the insurer in any event.

Check with your broker on any matters you feel are borderline. They will usually tell you to notify to be safe. There should be no impact on your insurance, unless the amount per year is excessive.

If you do not notify from the outset, it can lead to problems. If could prejudice the insurer’s position, through not being able to deal with the matter early enough (eg an early settlement to keep costs down), or not questioning which year of insurance the claim should fall in. This becomes more of an issue if you have changed insurers, or if you have a different excess structure.

Brian Boehmer, partner, Lockton

43. When should I notify a potential claim?

Insurers should be informed when you first become aware of any complaint or allegation against you, or as soon as you identify any oversight or omission that might result in a financial loss for your client.

Any such issue should be investigated immediately, to establish whether it is a service issue (where the client may only want to be listened to and/or to receive an apology) or a more serious issue that may lead to a claim.

If you are ever unsure whether a potential claim warrants formal notification, call your insurance broker to discuss it with them. Even if remedial action can be taken to prevent a loss from materialising, seek guidance.

Piers Winton, partner, Paragon

44. Do I need to notify complaints?

There is little point in notifying complaints if there is no risk of the client suffering a loss as a result of the matter.

But if there is an assertion of a legal right and/or a request of compensation, there absolutely needs to be notification.

It is always safer to notify a complaint, as you cannot be sure whether it might develop into a formal claim. You will have ensured that any subsequent claim is not invalidated through ‘failure to notify’ (see 43).

If in doubt, call your insurance broker for case-by-case advice. The key factor is usually whether your client is likely to make a financial loss. Even small sums well within the policy excess can later inflate.

Notifying insurers of all matters – regardless of the sums involved – helps them to see that your claims reporting process is effective. But showing your complaints log to your insurer annually (and identifying any trends and explaining what actions have been taken) may be more appropriate in some cases.

Gary Horswell, managing director, Ntegrity

45. Can I arrange a face-to-face meeting with you as a broker to allow our wider team to discuss renewal?

Yes, if your broker does not offer this you should consider whether you are receiving the right level of support, although a meeting may not be appropriate for every firm.

The more people your broker meets and knows at your firm, the better the understanding of your business. This in turn makes it easier to present your firm well to the insurance market and get the best deal possible.

We are now seeing a return to face-to-face appointments, which can give your firm a better opportunity to present its case.

Piers Winton, partner, Paragon

46. Are face-to-face meetings with insurers possible via Zoom or Teams, to explain more about our firm to them?

The short answer is yes; your broker should be able to organise a remote meeting with the underwriter and this is expected to become the norm moving forward. The earlier it is scheduled, the less danger there is of the underwriter’s diary already being fully booked.

It is always advisable for a law firm to offer to meet the underwriter. Your broker can offer this in turn to the underwriter, to deal with any queries quickly and efficiently.

Gary Horswell, managing director, Ntegrity

47. My PI insurance is arranged with several insurers in layers – how do you ensure that any claim is handled satisfactorily?

Having a dedicated claims team to handle claims like this is a key part of the service that a specialist legal sector broker can provide. The outcomes can have a significant impact on policy renewals and premium levels.

Layered insurance works like this: The primary insurer covers claims up to a specified level, then any excess is covered by the next insurer, and so on, all governed in the main by the wording of the primary insurer’s policy with the law firm.

The claim process starts with swiftly notifying all the insurers as soon as you are aware of the issue, regardless of how many layers of insurance may be affected. The top-up insurers may then ask to be kept informed if the cost to them has the potential to exceed 50% of the primary cover. The broker’s claims team will monitor and steer the whole process, keeping the law firm and the insurers informed.

Piers Winton, partner, Paragon

48. Will I prejudice my firm if we go into the Extended Policy Period (EPP) briefly?

Going into the Extended Policy Period (see 29) may well prejudice your firm and should be avoided. Some insurers will not even quote a practice that has fallen into the EPP.

A typical scenario is that a broker promises terms that cannot be delivered, so at the eleventh hour the law firm is then presented with significantly worse terms – with no time to seek alternatives.

So start your renewal process early. Engage with other brokers and tell them the renewal terms you have been promised. Then get the terms in writing, so the offer of insurance cover is certain.

Piers Winton, partner, Paragon

49. What are the benefits of a broker having ‘direct insurer access’?

As the name suggests, direct insurer access simply means that your broker deals directly with the underwriters at the insurance companies, rather than dealing with an intermediary broker who then deals with the underwriters.

The benefits of direct insurer access are substantial:

1. It saves cost, as there are ‘fewer mouths to feed’.
2. It saves time, as there are fewer links in the chain.
3. It saves misunderstandings, as it reduces the need to repeat information.
4. It makes it easier to deal with any claims or other issues arising in the year.

The whole insurance process is generally more complex and takes longer than it has done previously (see 27). Using a broker that lacks direct access adds to the complexity and the timescales.

Brian Boehmer, partner, Lockton

50. When might we be asked to provide personal guarantees?

Personal guarantees are not a common feature of PI insurance in the legal sector; but in certain circumstances, in order to make the PI insurance commercially viable, insurers may insist on them.

Why is this necessary?

In the event of a successful claim, the insurer has to reimburse the claimant in full whether or not the insured firm is able to pay the insurer any excess contribution as agreed in the insurance policy. Similarly, in the event of a firm closing and run-off being activated, the insurer has to provide the six years’ coverage whether or not the firm is able to make a contribution to the run-off premium.

By obtaining personal guarantees from the equity partners / directors / members of a practice, the insurers are given the necessary comfort that they will receive any excess contribution that is due from the firm, and any run-off premium should the practice fail.

There are now some insurance products available to insure at least part of the exposure to a personal guarantee.

Brian Boehmer, partner, Lockton

 

Why do law firms choose Travelers?

It’s because Travelers has unmatched expertise and longevity in the legal sector, with a dedicated team of experts in underwriting, claims and risk management.
 

See also:

PI insurance for law firms: Part two

• PI insurance policies and cover
• Closing down a legal practice
• Other special situations
• Handling PI insurance claims
• Jargon buster, professional indemnity insurance