Solicitors' PII - looking ahead to 1st October 2020
It is difficult to know how long the Covid-19 restrictions will continue and we are conscious that this will be having a significant impact on the profession. For those firms that renew their Professional Indemnity Insurance (PII) on 1st October 2020 it will be even more important to start early.
The forecast set out below is what we anticipate for 1st October 2020 at the date of publishing. However, we are in an uncertain and challenging world, which is changing quickly. We encourage firms to stay in contact with their advisers, so that you know what you should expect and plan for.
Premiums and Rating
Prior to Covid-19 we were already anticipating additional rate increases in October 2020. Firms are now asking whether Covid-19 is going to harden the market even further. It is still early days and the answer will depend upon the view that insurers take regarding a potentially increased level of risk.
There is currently a lot of commentary from solicitors’ Professional Indemnity Insurance (PII) defence lawyers highlighting the risk of increased claims activity. Remote working does bring challenges with regard to issues such as supervision, confidentiality and execution of documents, and as deals fall apart clients who have suffered loss will look for someone to blame. We know that solicitors are always a target. To the extent that there is any increase in claims activity as a consequence of Covid-19, then that will inevitably filter through insurers’ rating models and impact premiums.
For most firms, the current crisis is also going to lead to a drop in gross fees, at least for a period. We have been asked whether this will translate into a corresponding reduction in premium. Given insurers apply their rating to the last complete financial year, firms should not plan for any premium relief in the short term. While the hard market continues premiums are unlikely to decrease in any significant way, even if there is a projected decline in fees.
Insurer capacity and appetite
We are not on notice of any pending insurer departures from the solicitors’ PII market, but again we are watching this closely. Insurers are concerned about the potential for significant unpaid run-off premiums if firms are forced to close due to solvency issues in the wake of the current crisis. At the time of publishing we are aware that a number of insurers have approached the SRA about possible changes to the rules so that they are only required to provide cover if the run-off premium is paid. We doubt there is time to make the required changes in advance of 1st October but if any significant players do withdraw as a result, then this could drive rates even higher.
Likewise we are not aware of any new insurance capacity coming into the market. While some insurers might have considered entering the market with higher premiums making the business more viable, the uncertainties created by Covid-19 are likely to cause them to delay until the situation becomes clearer.
In terms of appetite, we expect that insurers will continue to have concerns about conveyancing. Both residential and commercial conveyancing continue to attract a high incidence of claims and insurers are suffering significant losses following the failure of buyer-funded developments and other property investment schemes. Failure to apply for Multiple Dwelling Relief from Stamp Duty is another issue that is generating claims activity and while claims arising from onerous ground rent clauses have been slow, their potential still remains a concern.
Insurers will also be nervous about the impact of Covid-19 on the property market and the potential claims fall-out that will follow. A spike in claims against solicitors generally follows any significant fall in property values. If repossessions rise then lenders will once again pick over the work undertaken by solicitors in the hope of finding shortcomings that will justify a claim. Where a party has walked away from a transaction, the disappointed party will likewise be focused on whether this could have been prevented.
Wills, probate and estate administration are other areas where insurers have been reporting an increase in claims in recent years. There has been a great deal of commentary regarding difficulties with both the taking of instructions for wills and their execution in circumstances where the testator has the Covid-19 virus or is shielding or self-isolating. Regrettably this could lead to later claims by disappointed beneficiaries and it will be an issue that could impact insurers’ appetite for any new business that undertakes a significant amount of private client work.
What insurers will want to know at renewal in terms of Covid-19
As we approach the October renewal, PII insurers will undoubtedly focus on risks associated with the response to Covid-19. While some are revising proposal forms to include specific questions, we always encourage firms to include a covering letter or summary to highlight or expand on any issues that are not otherwise covered. For firms that renew on 1st October 2020 this is going to be more important than ever.
Typical questions insurers are posing are as follows:
- Provide details of your COVID-19 Business Continuity Plan including the content, execution, communication and effectiveness of key strategies. Homeworking and return to office (or a blend of homeworking and office return) risk assessments should be included, where applicable.
- Has the business enacted and/or availed of the following? (please reference scale/number where appropriate):
(i) furloughing staff
(ii) reducing contracted hours
(iv) reduced/delayed partner drawings and/or bonuses
- Please confirm whether and for how long your current remote working arrangements can be maintained with minimal disruption to expected service or quality?
- Are there any business functions (internal, external or client facing) that have been materially impacted or are not fully operational under the current conditions?
- How effective is the supervision process and monitoring of staff whilst remote working? This may include but is not limited to areas such as; reviewing the content of advice (both peer review and supervisory), key dates visibility, scope of contract(s) and/or retainer(s), record keeping, effectiveness of client and stakeholder communication, data security, staff behaviours and mental health
- As a result of COVID-19, what impact are you expecting to future income levels/turnover, profit forecasts and future trading capability?
- Are you expecting any major changes to the split of work/work type/territories?
- Are there sufficient cash/liquid asset reserves within the business? Please provide details.
- Please provide details of your current borrowing capabilities. Please confirm if you have any intention to extend any current or avail of any additional credit facilities?
- Do you anticipate any challenges to new or existing lease obligations where you are not the owner occupier of office premises?
Insurers recognise that current circumstances makes financial forecasting challenging, however, a firm’s financial outlook is important for insurers to consider and will be a vital part of considerations when underwriting renewal.
5-Point Action Plan for 1st October 2020 renewals
If your firm renews their PII on (or before) 1st October, then we urge you to start working on this now. This is not the year to leave it until the last minute. Drawing on the discussion above we offer the following 5-point Action Plan:
- Talk to your broker early to understand what you can expect from your insurer with reference to the profile of your particular firm. Equally, ensure they are the right broker for you. Make sure they are able to give you the attention you deserve and have the relevant experience of working with firms like yours.
- Agree a timeline with your broker for submission of your proposal form. Ensure that you then give appropriate deadlines to those in the firm who need to provide you with the information that is required. If people are working remotely it will take longer this year.
- Take time and care with your proposal form and accompanying documentation. Ensure it provides the best possible presentation of your firm. Your PII premium represents a significant spend in your budget and justifies the investment of time to complete your submission. As outlined above, it will also be important to tell your insurer how your firm has responded to Covid-19.
- Review your budget for PII and make adjustments based on advice from your broker.
- Consider all available finance options. Given the financial pressure created by Covid-19 on the cash position for firms, we expect that more will need to look to finance their premiums for the 1st October 2020 renewal. If your firm is under financial pressure this might not be as straightforward as it has been historically. Allow yourself plenty of time to source available options and find the best deal.
Despite the fact that many firms will no doubt see an increase in the PII premiums it is important that we give each firm the best opportunity to explain the good work they do and mitigate these increases. We need to prepare, plan, strategise and communicate as effectively as possible. Professional Indemnity insurers are actively seeking to select the best quality law firms and each firm must actively work to differentiate the quality of its risk profile and control frameworks in order to secure favourable terms from insurers.