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Solicitors’ Professional Indemnity: Whipping up a storm

whipping-up-a-storm

With the Jackson reforms and the ‘Plebgate’ debacle presenting solicitors with a host of new challenges, what impact has this all had on the solicitor’s professional indemnity market?

Former Chief Whip Andrew Mitchell’s action against The Sun over its ‘Plebgate’ coverage has whipped up a storm, becoming a cause célèbre for litigation lawyers. The reason for this acclaim? Mitchell’s law firm, Atkins Thomson, failed to submit a costs budget for £506 425 on time, had its costs capped at court fees and relief from the decision was refused.

The Court of Appeal, with Lord Dyson, Master of the Rolls, presiding, said although it seemed harsh in this particular case, to overturn the decision would be a major setback in the attempt to achieve a change in culture, set in motion by last April’s Jackson Reforms. This shot across the bows enhanced the status of costs lawyers in one flourish of the judicial quill.

“Costs are now front and centre in multi-track litigation, in particular, through the new system of costs management. With this comes the realisation that we are legal professionals rather than simply bean counters – and that our expertise is very much needed in the post-Jackson landscape,” comments Sue Nash, managing director of Litigation Costs Services.

This has resulted in some fairly draconian court orders – insufficient time is no excuse for missing deadlines. “Law firms have to provide a proper service, and if they fail to comply with court orders they risk their client’s action or defence being dismissed. Relief from sanction is the exception, not the rule,” warns Christopher Stanton, a partner in the professional and financial risks team at Hill Dickinson.

A clear message
Negligence actions against solicitors who miss deadlines – and incur costs – can certainly be expected. “There is a clear message from the senior judiciary that we must expect the courts to be less tolerant than pre-Jackson. A solicitor who needs to tell their client of a sanction for procedural default should generally be speaking with their risk partner too,” says Phil Murrin, a partner with the professional and financial lines group at DAC Beachcroft.

But all this could have the opposite of the reforms’ intended impact. David Johnson, president of the Forum of Insurance Lawyers, says: “The short-term effect of Mitchell may be to increase pressure on court resources and inflate litigation costs, in direct contravention of the aims behind the Jackson reforms.”

While the discipline the judgment hoped to promote might eventually materialise – and stem the current upward trend in negligence actions – it could also significantly increase litigation costs. Furthermore, it could result in the pursuit of the best possible outcome being compromised for the sake of procedural compliance, according to Johnson – who adds that Mitchell is likely to trigger increased professional indemnity insurance premiums, certainly in the short term, as more cases are struck out or lost due to the  imposition of sanctions.

“With the best intent and systems, every solicitor will periodically have difficulties in relation to deadlines. Mitchell increases the pressure and risks considerably. There will be some expensive disasters – and the PI market will react to that trend [by raising premiums],” he adds.

Premiums are not the only thing set to rise. Deadlines for expert reports – and so the entire litigation process – could increase too. Johnson continues: “Barristers who fail to produce work within deadlines set by their instructing solicitors will be scrutinised with a far more microscopic eye than ever before, although the primary responsibility is likely to remain on solicitors’ shoulders.

Ross Risby, a partner with the professional and financial lines group at DAC Beachcroft, expects a similar impact: “The knock-on effect on experts could also be significant, with solicitors needing to provide more leeway when providing deadlines for provision of draft reports.”

Another hot topic dominating the legal agenda is professional indemnity insurance, after around 136 law firms failed to secure cover and were closed by the Solicitors Regulation Authority in January. The safety net of the assigned risks pool was removed in October, in exchange for the last insurer of a firm being required to provide run-off cover for six years.

The 136 firms failed to obtain new cover during the extended policy period (which replaced the ARP), giving them an extended indemnity for 90 days. However, James Brindley, development executive at Towergate, says it is likely they would have closed anyway, because the period for which a firm could be in the ARP had already been reduced to six months.

top-10-solicitors-pi

Failure to materialise
Abolition of the ARP was good news for the remaining insurers because it meant participating insurers no longer needed to load premiums by up to 20% to cover the ARP and could underwrite on the basis of their own book of business.

However, Steve Holland, senior vice-president of global professional risks at Lockton, says earlier speculation that the ARP’s removal might lead to an influx of new insurers failed to materialise: “Those that exited over the past few years were not lured back, mainly due to the current soft market conditions and poor underwriting loss ratios. In fact, the combined impact of the introduction of an extended indemnity period and the continuing trend of very high claim levels led many existing insurers to further reduce their exposure.”

While it seems unfortunate so many solicitors should lose their livelihoods for want of insurance, some might have only themselves to blame. Weightmans professional indemnity partner Mickaela Fox says some firms leave it to the last minute to provide information to insurers: “This happened last time, even though there was no ARP to fall back on – the penny of its withdrawal hadn’t dropped. Given the contraction in the market, it was not an optimistic picture for solicitors, yet some still missed the deadline. They need to take a more global view, as the financial health of firms is relevant to underwriting. No one wants to take on a new risk and be left with six years run-off if they go bust.”

In future things will be more flexible – solicitors will not be tied to a 1 October renewal date, but can choose one that suits their business.

The situation has fired up the debate about whether participating insurers should include unrated carriers, which are regulated by their home state as part of the single-market rules on passporting within the European Economic Area.

One of the problems with unrated carriers, however, is they tend to undercut rated insurers to get market share, but might then find premiums insufficient to cover losses. There was a lot of churn in the last renewal period, with several insurers leaving or reducing their exposure – XL, for example, reduced its market share from 16.5% to 2.2%.

Louise Dennerstahl, chief underwriting officer for XL’s international professional, explains: “We reviewed our overall PI book of UK solicitors’ business and made some changes to our underwriting appetite in terms of pricing. When we implemented these changes we found we lost a large part of our portfolio to competitors that offered lower pricing.”

Some law firms use unrated insurers to save money, but might wonder if it is worth the risk in light of those that have failed. “In the last renewal period some law firms may not have had a choice and only been offered terms through non-rated insurers”, says Brindley.

But QBE portfolio manager Mark Casady disagrees, saying unrated insurers are not worth the gamble: “Without a financial rating, no opinion can be formed on the ability of an insurer to meet its obligations to policyholders. Since 2010 we have seen some dramatic insurer failures, which have resulted in solicitors’ firms being passed from one unrated insurer to another, leaving many high and dry either at renewal or when making a claim.”

The lure of significantly lower premiums has been hard to resist for many firms, but “insuring with an unrated insurer means playing a game of Russian roulette”, says Holland, adding that the long-tail nature of PII makes the level of security rating more important than in most other classes of insurance: “The profession can no longer assume another unrated market will simply take on the book of business where one has left the market.”

Solvency concerns
Solvency concerns around some unrated insurers have raised questions about the SRA’s controls over participating insurers. Mark Carver, spokesman for Miller, says the SRA is not in a position to look at insurers’ financial positions, adding that it is a matter for the Financial Conduct Authority. However, the SRA can say whether carriers should be rated or unrated – and it is about to do just that. Following a study by Marsh on the impact unrated insurers have on the market, the SRA is now consulting on whether it should introduce a rating requirement in the ‘Bs’ from one of the recognised agencies, for insurers authorised to write business in the 2014 to 2015 indemnity period.

The eight-week consultation ends on 24 March. “The minimum rating appropriate for solicitors is ‘BBB’, in line with market standard minimum requirements,” Carver explains.

As to whether banning unrated insurers would reduce competition, Legal Risk partner Frank Maher points out the consultation paper states that just two of the three unrated insurers intend to seek ratings. “Assuming they are successful, there may only be one fewer insurer (Enterprise), and it only wrote insurance for 134 firms. So there may not be any great reduction in competition,” he says.

The winners of the move from the Solicitors’ Indemnity Fund to the commercial market have primarily been large law firms doing low-risk work or with a sustained claims-free record. “It has tended to be smaller, higher-risk practices that have ended up insuring with unrated carriers – leading to a toxic cocktail in which the insurers least able to sustain heavy losses have insured the highest risks, and at unsustainable rates,” says Holland.

But the comprehensive cover the SRA requires makes it a huge overhead for law firms. Maher observes that no other UK profession has such dependence on unrated insurers, and claims experience is poor. “If rated cover is to become compulsory, there should be some relaxation of the minimum terms and conditions,” he says.

Another way of attracting rated insurers into this market could be to allow them to underwrite individual firms with more flexibility of cover. “Rather than have the same gold-plated cover for all, insurers should be allowed to tailor the cover so the firm remains insurable and at a price that can be afforded,” Holland suggests.

To this end, the Law Society tried to assist one to four-partner firms in the last indemnity period via Chancery Pii, with Miller as the managing general agent and three rated insurers as co-writers. Chancery Pii’s Tim Norman says: “Things have been very challenging for small firms, and this joint venture aims to bring stability to that market segment. It started trading last year and is on track with what was expected.”

But Maher remarks this covers only about the same number of firms as Enterprise, and while any additional rated cover is welcome, it has not had a significant impact yet. He adds: “For the small firms that fit its risk profile, it is a credible option, but that proved to be so for only a small number of firms this time. In part, that was due to its late arrival, but there were many tales of solicitors spending hours filling in the form online only to get a rejection straightaway because they did not fulfil some unpublished criteria.”

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