What can go wrong with claims?
Published: Monday, 20 February 2023
Claims against solicitors can be costly, time consuming and have far reaching effects
Your choice of broker can affect the outcome
How does solicitors' insurance cover different from other professions?
When it comes to Professional Indemnity insurance solicitors enjoy the widest wording of all the professions, for example;
- Insurers cannot refuse to pay claims,
- Cover cannot be cancelled mid-term,
- Insurers must pay claims in full even where the excess cannot be afforded by the firm,
- Insurers must provide 6 years run off cover if the firm closes down during the policy period – even if the premium is not paid.
None of these features are granted by Insurers to any other profession in the UK. This is not because the legal professions is seen as the best “risk” but because 'the public must be protected'. The onus is on solicitor firms to report circumstances and claims promptly and completely as Insurers can, and do, seek recovery of some payments they make from the firm’s principals. This could apply to claims payments, excesses, and premiums.
Below we take you through some examples of claims and circumstances that, although they are relatively rare in occurrence, demonstrate some issues that we have encountered in recent years that have caused significant impact, and in one case complete closure of the Firm involved.
Poor claims record and lack of insurer choice led to firm closure
A firm insured for several years with the same prominent Participating Insurer (PI) discovered a fraud internally involving a junior accounts clerk. The matter was notified promptly. The insurer’s own claims record had reportedly deteriorated generally resulting in closer scrutiny, by underwriters, of claims notified to them.
The firm submitted their renewal proposal in the early part of the summer. The broker at the time initially advised that renewal terms would be offered, but that the premium was likely to increase sharply due to the fraud. A string of excuses were then made by the broker as to why terms were delayed.
Despite assurances that a quotation would be provided, on the Tuesday morning before renewal (1st October fell at the end of the same week), the broker finally confirmed that Insurers would not be offering terms after all.
We were approached in the last week of the policy but other Insurers were unwilling to offer terms - many Insurers close their books and do not invite new business after mid-September. As the firm could not afford to pay the run-off premium, they had to close by the Friday with some 20 job losses.
The clerk was convicted of the theft of several hundred thousand pounds although a significant recovery was made from their assets.
The current market for Solicitors’ PII is tough and if you are aware that you have a significant issue that could cause problems at renewal don’t wait for it to blow up but pro-actively manage the situation. Care is required when you approach insurers. To rely on a broker that only has access a limited part of the market could be a costly mistake.
Inaccurate claims estimate led to unaffordable premiums
A two principal firm specialising in personal injury claims had an allegation of partner fraud flowing from substantial losses incurred by Insurers who had compensated claimants.
Their current insurer would not offer a renewal quotation, forcing the firm to look elsewhere. The insurer set a maximum possible loss for the fraud and resulting claims at £28m. Despite challenge at very high level, they refused to move from this position even though it was difficult to see how the claim would ever reach this magnitude, resulting in other insurers being presented with an alarming claims summary.
Unsurprisingly, no other Insurers were prepared to quote and the firm fell into the ARP* and faced an annual premium of £2.8m (they had previously paid a premium of just over £100k). We secured them alternative cover and were able to extract them from the ARP saving them over £2.1m.
The criminal case involving the principal collapsed due to lack of evidence. Key points to note include the importance of the certified claims experience (provided by the holding insurer to any other insurers approached for quotations); the importance of accurate claim data being reported and how vital it is to use a broker that acts for you on claims, rather than leaving firms to deal direct at the mercy of insurers.
*The Assigned Risk Pool (ARP) is no longer the vehicle for providing cover when a current insurers does not wish to renew, it is now down to the current insurer to provide run-off cover if no other insurer will quote. So instead of two years’ worth of cover provided by the ARP before you closed, that period has reduced to a maximum of 90 days under the current rules.
Blanket notifications cause issues
A two partner firm became involved some years back in a council house 'Right To Buy' scheme working with an IFA in another part of the country. The IFA had gone out of business in 2008 and they did not arrange run-off cover.
A number of claims were received by the practice involving various allegations, many of which related to work that the firm did not undertake. 12 specific claims were notified to the Insurers concerned and were accepted.
The firm decided as a prudent measure to review their records relating to other ‘Right To Buy’ transactions and submitted a detailed list of some 2,000 further transactions from the IFA relationship, which Insurers rejected on the grounds that no claims had been made arising from these.
The firm were insured by one of the major Participating Insurers, under an ‘exclusive’ scheme managed by one of the national brokers.
Their current insurer would not offer renewal terms, forcing the firm to insure elsewhere at much higher cost, partly due to having to disclose an insurer renewal declinature to others.
The broker operating the facility acted on behalf of the insurer in rejecting the blanket notification (protecting a profit share perhaps?) leaving the firm to fend for themselves.
Insuring with any of the ‘exclusive’ facilities available only through a dedicated broker, brings the possibility of conflicts of interest as the broker may want to protect the insurer's account, perhaps to enjoy enhanced income through profit shares. This could leave the client firms exposed with no effective independent help.
The approach taken in submitting ‘blanket’ notifications to insurers needs great care too. Whilst it would require consideration of the nature of allegations made by each of the further 2,000 potential claimants, 2,000 further claims if unconnected could attract 2,000 excess payments, potentially putting the Firm out of business. However, treating all 2,000 as a single claim could bring the adequacy of their limit of indemnity into question.