Law firms are facing steep price rises for their professional indemnity insurance with rates for some types of cover more than doubling, just as many of them suffer declining profitability in the fallout from Covid-19.
On October 1 when law firms renewed insurance cover to protect them against professional negligence claims, around three-quarters of them found that prices for even the most basic level of insurance had risen by around 20 per cent on average.
The increase heaps pressure on firms at a time when the pandemic has eaten into profits and revenues. They have instigated temporary pay cuts in order to conserve cash as a Citywide decline in dealmaking has taken its toll on their clients.
A rising volume of claims against conveyancers who work on contentious property developments is largely to blame, as well as lawyers working on increasingly complex probate and family matters. There has also been an exodus of insurers from what was previously an unprofitable business line over the past two years.
Howden, an insurance broker, said in a report earlier this year that a rise in claims because of mistakes made when working from home was also likely to push up prices.
Professional indemnity cover can be a significant expense, often costing around 5 per cent of a company’s turnover, according to the Law Society, a trade body. All law firms must pay £2m-£3m in compulsory cover, but most firms take out top-up insurance depending on their size and likely exposure to risk.
Brokers said the price for the basic layer of insurance has risen by between 20 and 50 per cent. Andy Harris, a partner at accountancy firm Hazlewoods who advises law firms, said he was also seeing “top-up cover increases often of more than 100 per cent”.
Brian Boehmer, a professional indemnity specialist at insurance broker Lockton said: “The single biggest catalyst for the change in insurance market conditions is claims,” adding “the severity of claims has risen to unprecedented levels.”
Property has been the biggest source of these rising claims, with solicitors increasingly facing legal action for their work on contentious developments. As a result, law firms involved in conveyancing have had particularly steep price rises over the past two years.
Probates are also a growing source of legal action and claims against solicitors. “As families are more and more complex, when someone dies unfortunately it is a much more challenging job for the legal profession,” said Mr Boehmer. Some estates can run into many millions of pounds. “If they get it wrong, it’s a huge cost to insurers,” he added.
Meanwhile two years ago, Lloyd’s of London told insurers to improve the profitability of their professional indemnity businesses, leading many to reassess their risk appetite and pull back from the market. Insurers are also wary about a recession, because economic downturns often coincide with a rise in claims.
A dispute has also developed with the solicitors’ regulator over how much insurers should have to cover legacy legal action against firms that are no longer operating.
John Kunzler, head of risk management for professional services firms at insurance broker Marsh, said the process of buying insurance has become a lot more complex as underwriters are asking more questions.
“They’ve asked for a bit more accounting material quite often and asked what changes people have made around planning and resourcing,” he said. “The process of underwriting has got a lot longer and more involved.”