It is that time of year again, when solicitors are inundated with calls from hungry insurance brokers, baying for blood from firms already in need of a transfusion themselves, and this year more than most.
In times of financial instability property investors, building societies and lending institutions look to recoup their own property losses from those deemed ‘responsible’, and solicitors are among those looking likely to stand accused. Investors will blame all those who could potentially have misadvised them, maintaining that improper practices have taken place.
Such accusations will lead to the demise of the bargaining power firms once held over insurers. Many solicitors experienced a ‘golden era’ in the wake of the competitive professional indemnity market, but now, solicitors – especially those specialising in conveyancing – are gritting their teeth in anticipation of higher premiums.
Looking back
Looking back, it seems incredible that before 1974 solicitors were not even obliged to have indemnity insurance. Nevertheless, many sensible solicitors voluntarily nominated insurers to cover them against the possibility of being sued for professional negligence.
The Law Society however then brought in new rules that only they could supply professional indemnity insurance through the Solicitors’ Indemnity Fund (SIF), which caused a huge stir among the profession and massive changes for the fates of many.
The SIF monopoly was challenged on several occasions as, not only being illegal, but threatening to bankrupt many small to medium practices. In 1999 however, when SIF finally relinquished its stronghold, firms were allowed to purchase cover on the open market and it was hoped that greater competition would give firms bargaining power to negotiate lower premiums. One firm now reports that its annual indemnity premium is now just 1/10 of what was being charged 10 years ago by SIF. But is all this now set to change?
Firms specialising in conveyancing are therefore likely to be the hardest hit. Not only has the market downturn affecting firms’ billing – with some firms worrying this will affect their premiums, but potentially more claims, means cover could be set to rocket.
When it comes to assessing a firm in relation to cover required; the previous year’s billing has always been a consideration. However brokers at HSBC do not forecast any potential decrease in turnover to have a knock effect on a firm’s premium just yet. Janine Parker at HSBC comments, “Underwriters are not looking at a snapshot view of the firm’s turnover. They are liable for risk spanning 6 years and any decline in a firm’s billing will not have an impact just yet”.
Furthermore, depending on when a firm finalises its end of year accounts, the turnover may not reflect a marked decrease yet anyway. For example if a firm runs its accounting period from April-April, then 8 months of 2007 and only 3 months of 2008 will be taken into consideration. Bearing in mind it was only towards the end of 2007 that concerns over market stability began, any wavers in a firm’s profitability will not yet have an impact on the firm’s premium.
History repeating itself?
The market has been buoyant for almost ten years now, with solicitors and insurers alike reaping the benefits. However judging by market indications the so-called ‘golden era’ does not look set to continue, and when the going does get tough it will be interesting to see how fickle our friends the insurance brokers are.
Similarities between the recession of the early 90’s and the economic downturn we are experiencing today cannot be fully aligned as the outlook is by no means as bleak, but lessons can (and certainly should) be learned.
Many conveyancing claims levied against solicitors, and also against surveyors, alleged that lending institutions were not warned of the dangers of being under-secured, where properties had been overvalued and where various financial incentives had been made to inflate the purchase price. As a result, claims were made and some firms faced considerable financial losses - at worst, bankruptcy.
This situation may once again arise if some in the property sector may have failed to learn their lesson, and if, as in the wake of the last recession, firms are found to have been in effect overvaluing properties by using various incentives as a means to inflate the purchase price.
Be warned
Investors are wise to such scams and in tough times will look to recoup losses and place blame. Common scams, such as making allowances for the stamp duty to be paid by the seller, or for various cash incentives to be offered, result in the price of the property being shown as artificially high, and will not go un-investigated.
As soon as these kinds of transactions are looked into, a new raft of claims against conveyancing solicitors will see indemnity premiums rise once more.
Residential conveyancing firms are already being heavily scrutinised this year, with a lot more detailed information being required. Questionnaires will aim to get a better overview of how the practice operates as a whole as well as the firms’ history of property deals (and claims), risk assessment, training and operational procedures in order to get all the skeletons out of the closets.
The good, the bad and the ugly
Firms which exemplify good practice (and can prove it) should, in theory not be effected by a huge hike in their premiums.
Having measures in place to prevent and assess risk is imperative, and along with well-drafted client care letters and outlining thorough operational procedures, many firms present no danger.
At my firm, Preuveneers LLP, we have seen the highs and lows of the property market over it’s 30-year span and do not anticipate current market fluctuations to affect our insurance cover. As managing partner Kelly Cirillo explains, “We have been Lexcel accredited for the last five years, which has led to a considerable ongoing reduction in our premium because we tick every risk assessment box going”.
“We use Osprey, which is a very comprehensive online case-management system and helps us provide a meticulously high level of client care and risk assessment at every stage of the matter. A good case management system means you’ll never miss key dates or make serious omissions because it’s built into the functionality”, Cirillo adds.
Kevin Beach, senior solicitor & notary at the firm also believes that prevention is better than cure. He comments, “Often, claims are made because the solicitors have not operated best practice, even though they were not legally negligent”.
“Even if the claims fail, they are highly disruptive. They could be avoided by adopting a culture of best practice so that in effect the solicitors go the extra mile for the client and don’t just do the minimum the law requires”, he adds.
Zurich Professional recognises Lexcel as a framework for good management practices. One representative comments, “It includes excellent requirements and recommendations for systems and procedures which if complied with consistently and conscientiously throughout the practice should significantly reduce the risk of complaints and claims”.
One broker at HSBC however believes that although best practice procedures are the safest way to hedge against risk, Lexcel is not the “be all and end all” for firms. “Lexcel is a good model to go by, but it’s just as important to have other good structures and controls in place, and to make sure there isn’t scope for errors or omission. I think, most importantly, it’s about history. The relationship and understanding you have with your insurers, as well as a good claims record, offers the best underpinning evidence of good practice.”
So what can firms that may not have always exercised best practice over the years do?
Law Society Council Member, Basil Preuveneers advises, “I personally don’t think now is the time to shop around for cover. Wherever possible, firms should stay with their current insurers. It doesn’t reflect well on a firm to be continually switching between insurers and (perhaps I’m being optimistic) but insurers should do their best to help ride out bad times, in lieu of previous fees”.
“Furthermore, brokers will go to great lengths to frighten firms to believe that if they do not meet stringent deadlines they will end up with the bad boys in the bottomless pit that is the assigned risk pool”, Mr Preuveneers adds.
Those firms that end up in assigned risk pools are insured as ‘high risk’ and are unable to get cover from the other 22 qualifying insurers. Such firms with atrocious claims records are usually liable for negligence claims any way but in the current climate more so than ever. The outrageously high premiums, more often than not, bankrupt struggling firms and those that survive must otherwise prove their worth for many years to come.
Top 10 Tips for Renewing & Negotiating Professional Indemnity Insurance in 2008:
- Consider your firm’s position in relation to risk management. Even though indemnity insurance is designed to offer protection, it is not a solution, and prevention is better than cure.
- Liaise with your current insurer to ascertain what changes they envisage making to premiums before you decide whether or not to begin the ‘shopping around’ process.
- Complete submissions early, and if putting it out to tender, get it out extra early in order to avoid the added stress from brokers’ scare-mongering calls.
- You do not need to inundate the market with submissions. Carefully select two brokers who will be able to negotiate a good premium across the market.
- Make sure that you are aware of all relevant claim information that may have been made on your claim history over the past five years; if you are changing insurers, knowledge is power when it comes to initial negotiations.
- Do not feel forced to accept early renewal offers. Scare tactics telling you of the assigned risk pool fate that awaits you are not realistic. In reality an insurer will be as keen to secure your business in September as they would in June, if the business is worth having.
- Review your case management system and client care procedures. Tighten up loose ends and engage all staff in a thorough risk analysis as well as updated training in the new regulations. If the firm does come under scrutiny then adequate procedures will be in place.
- Assess whether spreading premium payment by instalments is a more cost-effective method. There are some very competitive options available and these may come from providers other than your insurers.
- It is important to check the adequacy of the indemnity limit on offer. You cannot afford to scrimp and save too much but on the other hand it is advisable not to over-compensate at the cost of higher premium.
- When negotiating a premium it ultimately comes down to the type of work your firm does as to how difficult negotiations will be. As outlined, conveyancing will look to take the hardest hit but by being wise to the tricks of the trade you can make sure you fight your corner.
Rionne Preuveneers is practice manager at Preuveneers LLP – www.preuveneers.net
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