With the spectre of claims emanating from The Accident Group now hanging over law firms, and the renewal deadline for professional indemnity insurance upon us, Veronica Cowan reports on the final countdown
The contestants in the annual beauty parade of professional indemnity insurers are lined up on the catwalk, trying to score points with law firms - for which PI premiums are a major cost. As the 1 October renewal deadline looms, Zurich Professional could be wearing the winners crown, if its claim to insure more than one-third of law firms in England and Wales is ruled official.
However, solicitors are still playing hard to get and by mid-September only 30% had renewed. Jeremy Alwyn, Zurich Professional's sales and operations director, speculates the reason for this may be that last year, firms that waited received a discount due to a softening market. "It is a risky tactic," he warns, claiming solicitors seem to relish a nail-biting finish, because "every year, 30% of business is done in the last week".
Frank Maher, partner at Legal Risk, comments: "Firms appear to be leaving renewal really late. They will save money if they are 'clean' risks but problem cases could find themselves in the Assigned Risks Pool."
The ARP caters for those unable to secure cover on the commercial market and could, this year, see more personal injury lawyers, given that such claims accounted for the highest number of notifications during the past 12 months, according to a report from Alexander Forbes Professions. This says that The Accident Group and other claims farmers have had a huge impact on claims during the past few months and, as renewal gets closer, more firms are expected to notify potential claims.
A test case against 600 law firms is being taken by after-the-event insurer Winterthur, alleging negligent vetting of personal injury claims by solicitors.
However, quantifying the likely number of claims - in order to properly underwrite this year's risk - is problematic, notes Steve Holland, a director of AFP, because "other claims farmers may join the fray, and some law firms have 'blanket notified'".
This is echoed by Mike Perry, a director of Aon Professional Risks: "The biggest problem for underwriters will be estimating what the losses will be against individual firms, and relating it - in terms of premium - to those firms. Insurers are still seeking information, and there have been precautionary notifications, so underwriters don't know what value to put on them."
With this uncertainty, it seems inevitable premiums will rise, but will this year's renewal season prove to be the toughest since the Solicitors' Indemnity Fund handed its mantle over to the commercial market?
Trevor Moss, executive director at Willis, comments: "For firms with major exposure to TAG negligence actions it will be the toughest." However, a recent survey by AFP found that 77% of solicitors affected by the fallout of TAG were confident their premiums would not rise. Many commentators see this as a triumph of hope over experience, although Paul Byrne, director of professions at Towry Law, says: "Rates are unlikely to go through the roof and insurers are looking at TAG in a fair way."
Predictions generally are that those with significant exposure should expect an increase. Philip Foley, head of PI for Liberty International Mutual in Europe, predicts a 5% average increases, with some firms looking at 10% to 15%.
Mr Perry claims: "Premium increases are not dramatic - less than 10% is the expectation. The fears before the season started have not yet materialised."
While it remains too soon to know what the full impact of TAG will be, Mark Carver, manager of the professional liability account at insurer AIG, reports: "It will be a tough year because that exposure has created uncertainty in the market."
Mr Maher remarks that the optimistic expectations of the 77% of law firms in the AFP survey are misplaced: "If they have TAG claims, they must expect to pay more. This is highly expensive group litigation, and it carries a cost that must be recovered." He also notes that premiums are still below the levels paid to SIF in 2000, "despite firms' gross fees increasing substantially in that time".
"Law firms cannot expect cover on the cheap for ever. A few firms are managing their renewal effectively and making comprehensive block notifications of all claims farmer cases to their insurers to help mitigate premium increases."
While some personal injury lawyers may be hurt by TAG, not all commentators agree negligence claims will overtake conveyancing as the main cause of PI claims against solicitors. Mr Maher points out that, even with fluctuations in market conditions, year-on-year property claims have come top of the list.
Angus Turner, insurance partner at Mills and Reeve, doubts that personal injury claims will overtake conveyancing, noting that an area of concern for future years is the potential re-emergence of claims from lending institutions, last seen in the mid-1990s.
Mr Carver agrees personal injury will not overtake conveyancing: "It can be underwritten effectively, if one looks at case management and uses deductibles to control it, and a high percentage of personal injury solicitors are not involved in TAG."
Few commentators think the TAG label will condemn firms to the ARP. Indeed, Mr Carver does not see the ARP altering materially in numbers this year, although he predicts most solicitors involved with TAG will get an uncapped excess. Mr Perry remarks: "Few insurers, if behaving ethically, would walk away from TAG firms. They will stick with them but may put premiums up."
Francis Dingwall, partner and joint head of the professional negligence department at law firm Henmans, agrees that insurers will not desert personal injury firms in light of the new TAG-type claims. "The profession's duties to ATE insurers are likely to be clarified by the courts, and practitioners will gain a better understanding of their obligations. It should, therefore, become easier to manage the risk in the future. Accordingly, personal injury practices should remain insurable. It is only one of many risks personal injury solicitors face; arguably, the exposure to claims for under-settlement is potentially more significant in the longer term."
However, he cautions that such claims will not have a one-off impact: "There is potentially a large volume of TAG-type claims waiting in the wings from other ATE insurers. There is, therefore, a significant area of exposure to historical claims waiting to materialise."
The reality is that insurers are in the business of underwriting risk, and are not slow to spot a premium opportunity. Mr Holland observes that, even if a current insurer declines cover, there is enough capacity to get it elsewhere, albeit at a greater premium. "One or two TAG panel member firms have been refused cover, or offered it for more money or with a bigger excess," he says.
Mr Moss points out that each year the prediction by brokers that more firms will end up in the ARP are not borne out because insurers come forward willing to write 'distress' business. Not wanting to be a hostage to fortune, he adds cautiously: "This could be the year that more do fall into the ARP because of TAG".
It is not just TAG that will affect premiums. Philip Murrin, a partner at Davies Arnold Cooper, points to the increase in the required indemnity limit this year, along with "an emotive impact" from Hurricane Katrina if underwriters fear exposure: "It might put lead in their pencils." Some counter-pressures to rates going up, he adds, include the fact that TAG is not new, and recent insurer entrants should bring rates down.
As to whether new entrants such as Liberty International would be pricing aggressively to raise market share, Mr Foley responds: "We will be going in at sensible rates, targeting two to 20 partner firms with a typical high-street balance of business. We are not interested in specialist personal injury firms."
One firm reported to have been interested in them was Zurich but Mr Alwyn's response is pragmatic when asked about the impact from TAG. "As part of the entire market we have got TAG exposure," he concedes. "We had recognised that this was a significant matter and had already asked law firms about their exposure. Our share of TAG group firms is significantly lower than one in three."
Noting there is often the assumption that insurers, which received much new business, had acquired it without exercising appropriate underwriting discretion, Mr Alwyn says: "This was not so in Zurich's case. Solicitors go for service and, while price is important, there is a huge difference in what the price buys." Even with minimum terms and conditions imposed on insurers, he insists there is scope for being better, pointing out that dealing with 90% of claims in-house makes a big difference to defence costs.
As for Liberty, while it may be a new qualifying insurer, in terms of writing the compulsory level for the first time, it is certainly not a new kid on the block. Mr Foley points out that Liberty has been writing excess layer cover for several years, and - behind the scenes - reinsured the SIF, which gave access to a lot of useful underwriting data.
While TAG litigation may not turn out to be the market's Waterloo, uncertainty surrounding it, coupled with the downturn in the housing market, will fuel fears that the market is under-capitalised. Mr Maher told Post Magazine recently: "If there is more than £100m of exposure it will be damaging, as there is only £240m of premium in this sector," (PM, 11 August, p48).
Mr Alwyn says the market is not "undercapitalised" but is fundamentally under-priced, and rates need to be put up to sustain a profitable sector and meet the legitimate expectations of solicitors.
"If one insurer was going to write the whole risk, as did the SIF, one could argue the sector is under-geared," comments Mr Foley. "However, we are not looking to write the whole of the profession, only segments within it. We can be profitable within our selection of firms, although certain insurers may be getting their sums wrong."
The increase in the compulsory sum insured for any one claim from £1m to £2m has prompted 'two for the price of one' offers, because some firms were already buying additional cover anyway. However, this is perceived as gimmicky marketing spiel by others. "The number that voluntarily bought £2m is less than commentators are saying," according to Mr Alwyn, who adds: "Too many people have assumed they could get two million for the price of one. It is not the same - there is a cost differential. While the risk is not doubled, it is greater and this is factored into the price."
Mr Foley says Liberty has "a sophisticated web-based rating model looking at 25 individual factors. 'Two for one' is an oversimplified marketing comment".
The quid pro quo for insurers offering higher levels of compulsory cover, was a change in the aggregation clause to put them back in the position they believed they were in before the House of Lords' decision in Lloyds TSB Insurance Holdings v Lloyds Bank Group Insurance (2003), which defined the effect of the aggregation clause in a way insurers believed was unacceptably narrow. They have now received an amendment of the minimum terms and conditions, and will be able to limit cover for any number of negligence claims arising from similar mistakes to a total of £2m.
Mr Byrne says: "Law firms are trying to compensate by buying additional cover, and are reviewing the work they do to see whether it gives them more exposure."
According to Mr Moss, the clause does make a difference and the profession is right to be concerned about it. Mr Maher remarks that the aggregation clause means solicitors are getting less for their money, "and it more than cancels out insurers' cost in providing the extra cover".
Mr Turner concludes: "The alteration of the aggregation clause has got to be right, now indemnity is dealt with in the open market - particularly given the Lloyds TSB decision. Like any change, there will be a bedding down period, during which insurers will no doubt have to resolve difference of opinions with their insureds."
Exciting and interesting times seem to lay ahead - solicitors' PI is certainly not a dull uneventful class to be writing.
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