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This section covers succession, specialisation, mergers, selling a law firm, becoming a partner, and business structure

How to set up your firm’s systems to provide the information that enables you to improve profitability and cashflow

How to avoid professional negligence claims, with examples of common problems and suggested solutions. Plus FAQs on PII

This is a new section and only covers SRA Accounts Rules and GDPR at the moment. More articles will follow

How to protect your law firm from cyber attacks. What steps to take if your systems are hacked

How to recruit and retain a team that is both happy and highly effective, dealing with the HR issues along the way

In marketing, like anything, you need to get the basics right. Otherwise the time and money you invest in marketing will be wasted

How to win new clients, make the most of existing relationships, encourage referrals and generate new leads

How to approach creating a law firm website that works, from agreeing your objectives to making sure you get the results you want

Why lawyers need to know about social media, how to make the most of the opportunities and how to avoid potential pitfalls

How to use PR to build your firm’s reputation; and how to create cost-effective advertising – traditional and online – that delivers results

Professional indemnity insurance for law firms FAQs: Part one

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. How has Covid-19 affected 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 furloughed staff and taken 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

  1. Why am I being asked to complete a ‘long’ proposal form this year?
  2. Do I have to complete a different proposal form for each insurer?
  3. How long will it take to provide me with insurance quotations?
  4. When should I submit my insurance renewal presentation?
  5. What should I do if my insurer is not offering renewal terms?
  6. This year, why are some insurers delaying their quotations?
  7. Why do I have to complete a proposal form each year?
  8. Can I buy a policy for a longer period to move away from bottleneck renewal dates and fix the cost for longer?
  9. Why do insurers want to see my Report and Accounts?
  10. Why do I need to provide up-to-date claim summaries every year?
  11. If I have a claim, what do insurers look for?
  12. If I notify a potential claim, will my insurer increase the premium at next renewal?
  13. How far back do I need to report claims history as part of my presentation of risk?
  14. Why do I need to provide a narrative about a past claim if that fee-earner has left so it won’t happen again?
  15. Why am I being asked for information including claims for a business I acquired nearly five years previously?
  16. Do I need to tell insurers that I am hiring a new fee-earner?
  17. If I have a data breach, should I report it to my PI insurer?
  18. What is a ‘circumstance’ and why do I need to notify it?
  19. When should I notify a potential claim?
  20. Do I need to notify complaints?
  21. Can I arrange a face-to-face meeting with you as a broker to allow our wider team to discuss renewal?
  22. Are face-to-face meetings with insurers possible via Zoom or Teams, to explain more about our firm to them?
  23. My PI insurance is arranged with several insurers in layers – how do you ensure that any claim is handled satisfactorily?
  24. Will I prejudice my firm if we go into the Extended Policy Period (EPP) briefly?
  25. What are benefits of a broker having ‘direct insurer access’?

 

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.

 

Brian Boehmer is a partner at Lockton.

 

Gary Horswell is the managing director of Ntegrity.

 

Martin MacHale is assistant vice president 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 price is the number one factor to win and retain accounts.

Trading losses have resulted in several insurers withdrawing from the market. Reduced competition has now allowed premiums to increase and led to the general ‘hardening’ of the insurance market that law firms are experiencing this year.

Once PII in the legal sector is more profitable again, other insurers will be attracted to enter the market and a new cycle of stronger competition and lower premiums will begin.

Martin MacHale, assistant vice president, 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.

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.

Covid-19 and the furloughing of staff may create additional risk factors (see 4). Underwriters will want to understand any damage to your firm’s finances and how you have been able to continue effective supervision.

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.

Lockton table of risk by legal service type

Source: Lockton Companies LLP

Brian Boehmer, partner, Lockton

4. How has Covid-19 affected 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 will affect premiums indirectly.

Given the widespread fear of a major and long-lasting recession, 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 most obvious impact of Covid-19 has been the marked increase in the amount of information requested by the insurers, including Business Resilience Questionnaires, Excess of Loss proposal forms, and firms’ Reports and Accounts.

See also:

Law Society warns firms of steep rise in insurance premiums (26 August 2020, Legal Futures)

PII underwriters warn solicitors after failing to change terms (3 September 2020, Legal Futures)

Martin MacHale, assistant vice president, Paragon

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 (see 18).
  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.)

Martin MacHale, assistant vice president, 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?

With cost of insurance increasing, many firms may consider reducing the limit of indemnity (LOI) to save money.

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, invalidating your insurance cover for that work.

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 are exposing the partners/directors of the firm to a significant amount of personal liability.

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

Martin MacHale, assistant vice president, 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 need to 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

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 have taken advantage of one of the government loan schemes or a permitted VAT deferment (see 11), say so and explain why you have 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. My firm has furloughed staff and taken a government bounce back loan. Will this be viewed negatively by insurers?

There is nothing inherently wrong with taking advantage of the government support that is available – it is intended to make firms stronger rather than weaker, after all. Insurers understand that law firms need to deal with the challenges thrown up by Covid-19 and the economic dislocation that has followed.

Insurers wants to understand the risks that your firm faces. So, if you have furloughed staff, explain how this affects risk.

Has the COLP or COFA of the practice been furloughed? Or someone who is responsible for ensuring that fee-earners are aware of critical dates? If so, why was that decision made and how is the firm filling these gaps?

The minimal cost of a Bounce Back Loan Scheme loan or a Coronavirus Business Interruption Loan Scheme loan will be advantageous for some practices. Explain why you have chosen to take the loan out and the measures you are putting in place to pay it back in the long term.

Insurers are asking more questions around the financial robustness of firms. Be prepared to work with your broker to outline your short and long-term plans and to demonstrate that you are financially sound.

Brian Boehmer, partner, Lockton

12. 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

13. 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 of 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).

Martin MacHale, assistant vice president, Paragon

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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.

Martin MacHale, assistant vice president, Paragon

20. 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.

Martin MacHale, assistant vice president, Paragon

21. 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.

Brian Boehmer, partner, Lockton

22. 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.

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.

Here is a table of insurers and their credit ratings. The higher the credit rating, the less likely the insurer is to drop out of the market at a later date (see 23).

Brian Boehmer, partner, Lockton

23. 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 cheap 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.)

In addition, 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 22)
  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?

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.

Martin MacHale, assistant vice president, Paragon

24. 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

25. 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

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

Two things have happened. Claims activity has risen, and the Covid-19 pandemic has increased the risk of law firms getting into financial difficulties (with all of the risk this entails for insurers).

So insurers are more cautious this year. Their underwriters are seeking a deeper understanding about 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 are 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

2. 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. Such requests are to be expected as a result of Covid-19 and the ‘hardening’ of the PI insurance market generally (see 1).

Gary Horswell, managing director, Ntegrity

3. 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 1st and April 1st. 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.

Covid-19 (and the longer proposals resulting) and the switch to underwriters working from home may cause delays this year.

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 8), you should have less risk of delayed quotations.

Gary Horswell, managing director, Ntegrity

4. 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, 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 1st and April 1st, the busier underwriters become.

Also, the capacity of the insurers (ie the total amount of risk that insurers are prepared to undertake in the legal sector that year) gets used up, so you may end up competing against other firms for whatever capacity is left. Some insurers may even not be offering renewal terms at all (see 5).

Martin MacHale, assistant vice president, Paragon

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

As explained in 1 above, insurers sometimes decide to abandon particular markets, 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

6. This year, why are some insurers delaying their quotations?

It is 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 and what competitors are doing. 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, whereas others will quote early with a limited time frame placed on the validity of their quotes. This helps them to avoid being used as a stalking horse.

This year is slightly different, as the employees of the insurers are typically working remotely, so the internal process of agreeing rates may have taken longer than usual. Furthermore, this year a number of insurers were awaiting the outcome from their discussions with the SRA in regard to the Minimum Terms and Conditions (MT&Cs).

(One of the key proposed changes leading insurers wanted the SRA to make was in respect of run-off cover. Currently, if a law firm declares bankruptcy and cannot pay run-off cover, their insurers must still pay claims that might arise for an additional six years. In other words, the insurer receives no premium but continues to carry the risk. Had the proposed change been agreed it could well have led to lower premiums.)

Martin MacHale, assistant vice president, Paragon

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

In recent years, many insurers have 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).

But 2020 is different. Not only have risk levels risen as a result of Covid-19, but the pricing of premiums is increasing in any case (see 1). So insurers need clear and detailed 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.

(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

8. 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. But, given the lack of insurance capacity in the market this year, your broker may advise against making this change at this time – depending on your firm’s risk profile.

Martin MacHale, assistant vice president, Paragon

9. 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

10. 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.

Martin MacHale, assistant vice president, Paragon

11. 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

12. 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 11).

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

13. 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 10) after a certain period (eg six years).

Brian Boehmer, partner, Lockton

14. 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, for example.

Gary Horswell, managing director, Ntegrity

15. 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 15)

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

16. 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.

Many insurers will 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

17. 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.)

Cyber insurance can pay off handsomely in the event of a data breach, not least because it can give your firm instant access to experienced experts who can limit the damage done.

Gary Horswell, managing director, Ntegrity

18. 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

19. When should I notify a potential claim?

Insurers should be informed immediately 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.

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.

Martin MacHale, assistant vice president, Paragon

20. 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 19).

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

21. 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 getting 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.

Covid-19 has led to most such meetings being online, which is far more convenient for most firms.

Martin MacHale, assistant vice president, Paragon

22. 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

23. 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 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.

Martin MacHale, assistant vice president, Paragon

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

Going into the Extended Policy Period (see 5) 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. If these are 30% below the rest of the market, then it is probably too good to be true.

Martin MacHale, assistant vice president, Paragon

25. What are 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 current situation makes this even more important. The whole insurance process is taking longer, because insurers are being extra careful during this time of change. Also, the shift to working from home for the underwriters means that there may be more peer reviews than previously, adding a further potential element of delay.

Brian Boehmer, partner, Lockton

 

James Kerr"When a law firm hires an employee, or a firm of accountants, they consider the cost and the value of each. When choosing an insurer, think about it in the same way. Do you want them on your team?"
James Kerr, head of professional indemnity, Travelers

 

Coming soon-ish:

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

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