Professional Indemnity Insurance - One for the top 3 expenses for a firm of solicitors. More than that – if you can’t get PII cover the consequences are catastrophic – you will either have a fire sale of the firm or you are looking at closing with run off. Given the importance of getting PII cover I’ve put down some practical tips.
I help new solicitors firms get PII cover and then SRA approval. I been talking to brokers to get a view from the insurers side for firms that are already up and running but are renewing their PII cover. Whilst in practice I worked with insures and feel that I have a reasonable idea of what they are looking for.
Insurers are a business like any other. They need to make a profit. They make their money by backing more winners than losers. They will want to have as much information as they can to allow them to set the premium at the right level so that they do not make a loss. At the same time, they must be careful not to set it so high that they lose the business to a competitor. For them the largest risk is that they get this balance wrong. Generally, they look at the pool of risk across the book they have written.
From the solicitor’s perspective, most law firms are not experts in the PII market; they are experts in the law. However, there are some things you can do to make yourself a more educated purchaser. It is such an important and expensive decision for you. I hope what is written below will give you tools to be able to do so better.
The market is much more difficult than it used to be, with many firms actually failing to get cover. Insurers say that they have been under-charging premiums over the last few years and so have been making a loss. The market has ‘hardened’ in their terminology. A 30% increase in premium was not uncommon in the October round. If renewing in April 2021, there is a good chance you were on an 18 month contract. The market now is very different from how it was in October 2019. You are also now very unlikely to be able to get anything more than a 12 month contract. In some circumstances insurers are asking partners to give personal guarantees that Law Firm Owners/Partners/Directors will honour their obligations in relation to run-off cover (some firms have been going bust without such cover, leaving the PII insurers to pick up the tab).
Number of Partners/Directors – each insurer tends to favour different size practices, so the broker should get the right fit. There’s no point in applying to an insurer that doesn’t really deal with firms of your size.
Fee Income - be as accurate as possible in declaring fee income. If there have been significant changes in fee income (either up or down), provide the reasons for this. The better they can understand, the more comfortable they will be that you are transparent and have a handle on your business.
Practice Area - Areas such as Conveyancing, Personal Injury and Private Client are classed as high-risk areas by insurers whereas areas such as criminal and family are considered low risk. (Personal Injury used to be classed as very high risk, but as the market has largely consolidated into specialists the risk is perceived as less.) Therefore, it’s important to accurately reflect your areas of practice as this will have an effect on your premium. Split of matter types, fees by matter type, profit by matter type and anything else that affects risk. If you do work in a high-risk area, you’re not without choice of insurer. It’s all about the detail of how you run your business.
Claims History - Prior to quotation insurers will want to see at least five years claims information. An insurer is not necessarily going to be turned off by the fact that you have had claims. They are interested in the circumstances of the claim and procedural changes you have made since to prevent a recurrence.
Risk Management - It‘s important to demonstrate that Risk Management is embedded within the culture of the firm. It’s a myth that having accreditations such as Lexcel, CQS, IIP etc automatically means lower PII premiums, but what it does demonstrate to insurers is that the firm is working towards a best practice standard. What they will want to see is that you walk the walk instead of just giving the talk.
Covid Crisis – its worth writing a bit just on this subject. This has been a challenge for all businesses. It raises risk questions - data management and security, staff health and business resilience to name just a few. It is common for insurers to be sending out an additional Covid questionnaire when quoting. Indeed, I’ve helped some of our client firms fill them in during tis autumn.
Brexit – I’ve not seen this yet, but insurers should be asking questions relating to how you have adapted to Brexit if any of your trade is with the EU.
Prepare well and early – well ahead of the renewal date your broker should advise you on what you should expect. If not, ask them. Agree deadlines with them around timeframes for matters such as proposal issue and production of renewal terms and ensure that where possible, these are met. I’d suggest start this at least 3 months before the renewal date. Insurers require a lot more information than at previous renewals. Many have introduced a COVID-19 questionnaire or at least COVID related questions (mentioned above). Requests for reports and accounts covering 2 years are common as Insurers check business resilience through the pandemic. Firms that carry out property related work are likely to be asked questions around any property development work that they may be involved with.
Proposal Form - prepare it well. It may have a big impact on your firm. Try to allocate the necessary time to complete the proposal and don’t rush it. Answer all questions fully, supplying as much information as possible and don’t attempt to conceal anything. Put into it the care you would do on one of your most complex matters. It is likely to have far more impact on profit and drawings for the partners than even your biggest case.
Should you obtain alternative PII quotes? It’s a common practice in most other areas of spend. If your broker approaches more than one insurer, will you have to complete more than 1 proposal form. Normally not, as the insurers will normally accept the brokers proposal form.
Choosing a broker – should be done with care. The broker should be your friend and guide in this market. Ask yourself how much your broker seems to care about you as a customer/client. The PII is such a significant spend. How much contact do they have with you outside of the PII quoting time? Are they interested in your business success? Whether you can get a quote and what the premium size will be will largely be determined by the nature and quality of your business. Are they helping you improve it? Some brokers are tied to certain insurers. Do you know if and to whom your current broker is tied? Going to too many brokers can be counter-productive, as they may/will approach the same insurers, who then wonder if you’re desperate and if there’s a problem. It might scare them off. If using more than one broker, you could allocate the market between them to avoid duplicated approaches to insurers.
We may be able to help you with the prep and indeed put you in touch with a PII broker who could give you a 2nd view. We regularly help solicitors with setting up a New Law Firm. Here’s a link to those services: https://hunningsconsultancy.co.uk/starting-a-new-law-firm-help-support/
Feel free to get in touch. 07887 524507 or [email protected]
