Solicitors’ Professional Indemnity Insurance · Page 2 Howden Market Report: Solicitors PII Welcome to Howden’s market update for solicitors’ professional indemnity insurance

Howden Market Report: Solicitors PII Page 1

Howden Market ReportSolicitors’ Professional Indemnity Insurance

Page 2 Howden Market Report: Solicitors PII

Welcome to Howden’s market update for solicitors’

professional indemnity insurance (PII). As a specialist

broker in the market we recognise that PII is an important

and costly purchase for the legal profession. We are

keen to ensure that our clients are kept up to date with

developments in both the insurance market itself and

changes in the profession that might cause the market to

react. In this report we:

• Bring you up to date with the current status of the

solicitors’ PII market.

• Put the current position into context with an overview

of historic premiums and claims data.

• Identify changes that could impact upon the market

and your purchase of PII.

• Explain the strength of the Howden PII proposition.


Looking back – October 2017 renewal

RateIt was generally good news for those firms that renewed in October 2017. Insurers were keen to write solicitors’ PII business and there were some new players in the market. All insurers in the solicitors’ PII market at the present time are well-rated, with the majority having a directly held “A” rated status. For now at least, the historic concern about insurers with a poor rating, or no rating at all, is largely behind us. This is good news for the profession.

In the insurance world we describe 2017 as a “soft” market. Many firms achieved a reduction in premium if their profile was broadly the same as it was at the previous renewal. Others managed to contain or avoid an increase in their premium that would normally have been expected. This was partly due to the pricing competition that was generated by the availability of insurance capacity. Another important factor was the broadly-held view that we are now in “safer waters” from a claims perspective. Claims activity has certainly

slowed in recent years as we move further away from the fallout generated by the last recession.

TimingAs usual the renewal season became very pressured during the final two weeks, with some firms submitting proposal forms late and not securing their cover until the last few days. This reflects the relaxed attitude of some PII buyers. This was possibly driven by their understanding that there was plenty of capacity in the market. There was no scare-mongering in the legal press as we have seen in previous years, when there were genuine concerns regarding the appetite of the insurance market for solicitors’ PII. Nonetheless, we caution against leaving it until the last minute to submit your proposal form or to agree terms. There is always a risk that circumstances within your own firm, or the market generally, could change in a way that disadvantages you. You want to avoid falling into the “Extended Indemnity Period” (EIP) on your renewal date. The EIP requires your insurer to extend cover for an additional period of up to 30 days if you have not renewed your policy by its expiry date. We are concerned that some firms see this as an optional policy extension. On the contrary, it should only be used as a matter of last resort. There is a requirement to notify the Solicitors’ Regulation Authority (“SRA”) within 5 working days of entering the EIP – you should avoid gaining their attention in this way. Obtaining cover might also become difficult if you have a claim during this time, and entering the EIP might be held against you by future insurers.


18 month policiesSome firms were keen to secure cover for 18 months on a pro rata basis to lock in what was a very good rate. Many insurers were prepared to offer this, which is, again, a reflection of the soft market conditions.

Additional coverA final point to note relates to defence costs cover for SRA investigations and/or Solicitors’ Disciplinary Tribunal (“SDT”) proceedings.

There had been a considerable level of inquiry about this prior to the October renewal. This was largely generated by the press coverage given to the proceedings before the SDT involving four solicitors practising at Leigh Day.

Historically the compulsory Minimum Terms and Conditions wording required by the SRA (“MTCs”) provided unlimited cover for defence costs relating to disciplinary proceedings arising out a claim or reported circumstance covered under the PII policy. This changed in 2010 when this provision was removed from the MTCs. Since then some insurers have added the cover (or part of the cover) back in, but this has been variable. We also caution that it is often a low limit compared to what the real cost can be – reported as £7.8 million in the case of Leigh Day. There are Directors’ and Officers’ (D&O) policies in the market that offer cover up to their full limit for this exposure at competitive prices. It is no surprise that more firms have since purchased D&O cover and this is an issue that we consider firms should look to address for the future - particularly given that the SRA continues to be robust in terms of its approach to regulation and enforcement.


Looking forward – April 2018 renewal

RateAt the date of completing this report there is no indication that there is likely to be any change to insurers’ appetite, capacity and pricing for the April 2018 renewal. There have, however, been major catastrophes (hurricanes, fires etc) which have caused significant losses to the insurance market in general and positions can change. It is always important to ensure that you remain informed.

A change in market claims activity is certainly an issue to watch. For example, in the last year the media has been full of reports on onerous ground rent clauses in relation to new-build, leasehold homes. Solicitors who advised on the purchase of these properties have been identified as being in the firing line for professional negligence claims for alleged poor advice at the time of purchase.

It was reported that a law firm had been established to bring group litigation against solicitor firms, with a suggestion that the total losses could be as high as £500 million. While many insurers asked additional questions on this issue at the October renewal, they did not react by increasing rate.

To date the claims activity in this area has been very slow and it is being mitigated by remedial action that has been taken by some house-builders. At this stage we are quietly confident that the suggested loss figure has been significantly overstated, but we will need to adopt a “wait and see” position as we move towards April renewals. Any marked increase in this activity could change the landscape.

Issues to watchAnother issue that could influence the April renewal season is the appeal in relation to the rather bizarre decision in Dreamvar v Mishcon De Reya. This was a case where the purchaser’s solicitor was held to be subject to an implied duty to only release funds to a bona fide vendor – despite the fact that the vendor was not their client and they were not responsible for undertaking the relevant identity checks. The appeal hearing for this case, and others based on similar facts, is scheduled for February 2018. While we hope that there will be a “sensible outcome” with the decision being overturned on appeal, we cannot be certain. If the decision is upheld, then insurers will be concerned and we could see some reaction in terms of upward movement in the rate for conveyancing work. It could also impact upon insurers’ appetite for conveyancing work generally.

While the above examples are specific to conveyancing it is important to understand that if solicitor specific losses and/or external factors such as hurricanes or other natural disasters bring about a “hard” market, this will impact all areas of practice and increase the cost of PII for all firms. We will keep in touch with our clients as changes occur. In the meantime we are cautiously optimistic that the current favourable conditions will continue into April.


What are the market numbers?

PremiumLaw firms are often keen to know the total premium the profession pays the insurance market for their primary £2m and £3m cover. When cover was provided by the Solicitors’ Indemnity Fund (SIF) these figures were routinely available. This continued in the early years of the open market as premium data was collected by the SRA to determine the proportions in which insurers were required to share the losses in the Assigned Risks Pool (ARP). With the closure of the ARP in 2013 there was no longer any need for insurers to return their premium details and the last occasion this was done was at the 2014 renewal. The numbers up until that time are set out in the following graph:

The graph demonstrates the significant saving achieved by the profession as a result of the move from SIF to the open market, which saw the total premium paid by the profession drop from over £300m (including shortfall contributions) to £155m. There was an initial peak in 2003 at £251m, but this was the year that the renewal date changed and the policy period was therefore 13 months as opposed to 12. The other interesting year to note is 2005 when the limit doubled - and yet the total premium dropped that year.

We can only take “an educated guess” at what the current annual premium is. In addition to the data no longer being collected, the picture is now distorted due to variable renewal dates and 18-month policies. However if we are estimating the premium on an annual basis as per the above graph, we consider that the figure would be lower than 2014. In our view a reasonable estimate would be £220m.

PI Premiums

1999199819970

100

150

200

250

300

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Open MarketSIF

2012 2013 2014


ClaimsIt is interesting to look at the market claims data against the above figures. Historically insurers have always been reluctant to disclose their claims position. However in 2015 the market did engage in an exercise with the SRA to provide anonymised data for the 10 year period from 2004 to 2014. The information was aggregated by an independent third party and the final total was £1.9 billion for the 10 year period. It is important to note that this figure is understated as it does not include the loss history for some insurers who had left the market – and would have had amongst the worst claims data. The figure also excludes the further development that will inevitably occur in relation to the claims in the latter years of that ten year period. Once these issues are taken into account, together with insurers’ own expenses, it is clear that it has been a challenge for insurers to make a profit in this market – and some will have incurred significant losses. This does explain why more than 40 insurers who have actively written this business have in fact withdrawn from the market since the open market began in 2000.

The report also focused on the value of individual claims and confirmed that 98% of all claims where an indemnity payment was made were settled for less than £580,000. The following graph from the report shows the percentile distribution of all claims. We expect that the SRA will rely on this information to renew their call for the minimum limit of indemnity to be reduced to £500,000. We would urge caution on this. The limit of indemnity applies to both the claim and claimant costs and each year there are number of notifications across the profession where the total exceeds £1 million. Insurers also report that they are seeing an increase in the value of claims generally. In our view the premium saving to be achieved in reducing cover to that level is unlikely to be worth the risk.

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0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

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85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Value - £ millions

Percentile

Insurer claims data 2004-2014Source: SRA presentation: Reflecting on Solicitors’ Professional Indemnity Insurance (PII): market trends and analysis of historic claims data (2016)


Conveyancing - Commercial

9%

Top 10 Loss Types

Employment

3%

Commercial

3%

Non Litigious - Other

4%

Loss Type Not Known

4%

Matrimonial

4%

Conveyancing - residential

35%

Trust, Wills & Probate

16%

Personal Injury - Claimant

13%

Litigious - Other

9%

Clients are also keen to understand the breakdown of claims by area of practice. Below we attach a graph based on the claims experience of our own clients over the last 10 year period. The graph is based on the number of notifications in each practice area.

It will come as no surprise to the profession that conevyancing generates the most claims activity – and that is why insurers focus attention on that area of practice in proposal forms.


Changes to be aware of

We are in a time of change when it comes to the solicitors’ profession

and it is a challenge to keep abreast of developments. There are

changes (recent, future and proposed) that impact quite significantly on

solicitors’ PII. We summarise these as follows:

In 2020 SIF will cease providing cover upon expiry of the 6 year run-off period

Since 2007 the Solicitors Indemnity Fund (SIF) has provided continuing cover to ceased firms following the expiry of their run-off cover. No premium has been payable for this cover and it has provided valuable peace of mind for solicitors who have closed their firm. We all know that it is not unusual for claims to be made beyond the standard six year period. The following graph demonstrates the extent of the issue. It is based on the

number of reported claims as provided by the SRA and sourced from SIF claims data over the period 1987-2016.

This arrangement for cover post run-off has been reviewed given the dwindling reserves held by SIF. It is regrettable that the SRA have decided to proceed with their decision to close SIF in 2020 despite the Law Society strongly advocating against this on behalf of the profession. It is something that solicitors need to keep in mind when closing their practice. We have yet to see if and how the market might respond in terms of offering cover when MTC run-off cover ends – but if cover is offered it is likely that it will not be on the same

basis as the MTCs and premium will be payable.

Years delay to claim, 3 years

£1,579m = 61%

Years delay to claim, 25 plus years

£4m = 0%


£776m = 30%


£217m = 9%


Solicitors can “switch” regulator without purchasing run-off cover

There was a concern that solicitors were limited in their ability to switch regulators (eg from the SRA to the Council for Licensed Conveyancers) due to the requirement that they first purchase run-off cover. Firms found it simply too costly to even contemplate a change. This requirement has now been removed. Under the new arrangement the first requirement is that the SRA has signed a “switching protocol” with the regulator to which a firm wishes to switch. At the time of completing this report a protocol has been signed with the Council for Licensed Conveyancers. Provided the new regulator is prepared to grant the appropriate authorisation to the firm and is satisfied that appropriate insurance arrangements are in place, then the switch can be made without a separate run-off policy being purchased. This change only became effective in October 2017 so it is still early days and it remains to be seen how many firms will take advantage of this option in practice. It is a positive development in terms of giving firms more choice – although it might result in the firm and their clients having less protection.

“Solicitors” will be able to deliver unreserved legal services to the public from a non SRA-regulated entity - and without insurance

The SRA have indicated that they will proceed with their decision to allow solicitors to provide unreserved legal services to the public from an entity that is not subject to SRA regulation. While the solicitors will continue to be subject to SRA regulation as individuals, the entity that they work within may not be. A concerning aspect of this change is that neither the solicitor, nor their employer, will need to carry PII that complies with the MTC – or indeed any insurance at all.

Financial protection for consumers is critical and has been a cornerstone of legal services that solicitors offer to the public. This is a fundamental change that has the potential to severely damage the “solicitor brand”. The SRA believes that any concerns can be addressed by ensuring that the public is properly informed about the difference in the regulatory status and insurance arrangements. They have recently consulted on some proposed changes to achieve this. Their proposals include a regulatory requirement for SRA-regulated firms to take responsibility for educating consumers with compulsory content on their websites. In contrast, the proposed requirements for solicitors practising without insurance in unregulated entities are considerably less onerous, and will be difficult to monitor. Howden has filed submissions in response to the consultation noting our concerns about this arrangement. We await further developments. The SRA anticipate that they will have the relevant changes to the Handbook finalised by autumn 2018, at which point the new practising arrangements can proceed.


Multiple changes proposed in “Look to the Future” consultations

Two SRA consultations regarding future practising arrangements closed in December 2017. Howden responded to both consultations covering a wide variety of issues. We were very concerned at the scope of some of the proposals including:

a) A mandatory requirement for firms to display costing information on their websites regarding certain areas of practice (yet to be selected).

b) A mandatory requirement for firms to publish complaints data on their website.

c) Changes to implement the decision allowing solicitors to provide unreserved legal services to the public without insurance as referred to above.

d) A proposal to allow self-employed solicitors to undertake reserved legal services provided they do not hold client money and have “appropriate” insurance in place. This would not need to be MTC insurance.

e) Removal of the requirement for firms to have an individual who is “authorised to supervise”. This proposal in particular is likely to be of concern to insurers.

If you want more detail on the above proposals then we invite you to contact us and we will forward you a copy of our responses to both consultations.


Why Howden?

Size, scope and insurer relationshipsHowden is a specialist PII broker in the legal sector. We place £45m+ premium on behalf of firms practising in the legal sector. Our client base comprises over 650 legal services firms from sole practitioners to Top 100 firms. We have a strong client retention rate, which we attribute to our focus on customer service. Given our size in the market we also have a strong negotiating position with insurers, which we use to the best advantage of our clients.

We have direct access to the majority of Participating Insurers with either exclusive or enhanced access to 5 “A” rated insurers.

+ many more

Superior market access

LibraSolicitors’ Professional Indemnity Insurance


ClaimsAt Howden we also have a team of over 30 PI claims specialists with over 300 years combined PII experience. Part of this team, comprising 6 full time members, is dedicated to handling solicitor claims. The team provides a valuable interface between our clients and insurers. They have good relationships with panel firms and insurers’ in-house claims handling teams. Our team monitors the development of cases including reserve movements and settlement proposals. They also ”fight the corner” for our clients in the unfortunate event of a policy dispute.

D&O and Cyber SolutionsInsurance protection does not stop with PII. Cyber Insurance is becoming an increasingly important and we have access to a market leading cover. This includes:

• Urgent access to a panel of industry experts to restore systems and business critical data.• Cover for the cost of notifying affected third parties, cyber extortion and fines to the extent insurable at law

We can also provide quotes for D&O cover. As noted in the discussion earlier in this report, we believe that this is becoming an increasingly important purchase for law firms. It is also critical to ensure that the D&O cover you purchase will respond specifically to the needs of a law firm. Issues include:

• Specific cover for COLPS, COFAs and MLROs.• Defence costs for both SRA investigations and SDT proceedings.

We invite you to contact us if you have any queries in relation to this report or would like to discuss PII

and related insurance products for your firm.


Howden is a trading name of Howden UK Group Limited, part of the Hyperion Insurance Group. Howden UK Group Limited is authorised and regulated by the Financial Conduct Authority in respect of general insurance business. Registered in England and Wales under company registration number 725875. Registered Office: 16 Eastcheap, London EC3M 1BD. Calls may be monitored and recorded for quality assurance purposes. Ref: M1583 01/18

Part of the Hyperion Insurance Group

T 0207 133 1570E [email protected]

www.howdengroup.co.uk

@howdenpii

Jenny Screech020 7398 [email protected]

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Solicitors’ Professional Indemnity Insurance · Page 2 Howden Market Report: Solicitors PII Welcome to Howden’s market update for solicitors’ professional indemnity insurance