Law firms may face severe problems with the renewal of their professional indemnity insurance (PII) going forward as nearly 40 per cent of insurers have been considering pulling out of the market.
According to a new survey by law firm Browne Jacobson along with the International Underwriting Association (IUA), after a recent legal decision, 38 per cent of the insurers considered pulling out of the solicitors PI market entirely.
The case in question was Discovery Land v Axis, which concerned the ability of a solicitors’ insurer to decline cover for a claim on grounds of dishonesty. In addition, to how the aggregation clause operates in a solicitors’ professional indemnity insurance policy.
The survey noted that this case has caused concern in the insurance market for solicitors, due to its very restrictive approach to the aggregation of claims for the purposes of the limit of indemnity under the legal regulator’s minimum terms and conditions (MTC).
In order to be a regulated law firm or a practising solicitor, there must be PII coverage in place as set out in the rule book by the legal regulator, the Solicitors Regulations Authority (SRA).
The price is not cheap either. According to a recent report by the SRA, PII premiums paid by law firms were typically between three per cent and nine per cent of annual turnover, with a median value of 5 per cent.
However, as Browne Jacobson and IUA survey noted that chartered accountants typically pay a median premium that is two per cent or less of their annual turnover and that for licensed conveyancers the figure is closer to 3 per cent.
Ed Anderson, a PII partner at Browne Jacobson noted: “The results of the survey are very concerning for the profession and for clients”
He explained that “solicitors already pay far too much for their PII compared to other professionals – more than double in most cases – and ultimately it is the clients who bear the cost of that.”
Accountancy firm Hazlewoods found that 65 firms had to close down in 2019/202 as a result of difficulties in obtaining PII cover. However, that number has since dropped to 34 for 2022/23 as premiums fell last October.
Despite that, 69 per cent of the respondents to the survey said that they would ‘definitely change’ their underwriting strategy this year, with more than half of them saying their pricing would increase and a third stating they would write less primary layer business.
Anderson explained that “the dominant reason for the additional cost is that the MTC are unnecessarily restrictive for insurers and when compared to the minimum requirements, if any, of other comparable professions.”
“We also asked the market what difference it would make if the MTC had an ‘originating cause’ type aggregation wording and 75 per cent confirmed they would have a greater appetite for writing solicitors’ business if it did.”
He suggested that “just that one small change to the MTC would therefore have a marked effect on pricing and with little impact on client protection, given that many firms of course buy excess layer insurance cover in any event.”
“There is no doubt that amending the MTC is the single most effective change the SRA and the Legal Services Board could introduce to reduce the cost of legal services to consumers,” he added.