Changes to insurance regime could mean a PII revolution

SOLICITORS are dealing with a number of challenges that threaten the futures of many within the legal profession. The recession has affected everyone and solicitors are no exception.

Corporate lawyers aren’t seeing the deals that used to see them working into the early hours of the morning and the property lawyers have seen their conveyancing practices grind to a halt as the property market remains stagnant.

On top of these worries, the same solicitors are faced with increases in the number of claims brought against them for professional negligence, much driven by the recession. The latest High Court figures indicate that negligence claims against solicitors reached 210 in 2009, up from 80 in 2008. The banks are leading the charge against solicitors, looking to recoup their losses on defaulting borrowers.

All solicitors in England & Wales must hold professional indemnity insurance (PII) at all times in order to provide their clients with financial protection; however, the system in place to provide this cover is in crisis due to the rising level of claims.

The Solicitors Regulation Authority (SRA) agreed to carry out a thorough review on the future of the PII market for solicitors and released a consultation paper in December inviting interested parties to submit their responses by 28 February 2011.

The SRA paper contains a number of proposals, the most controversial of which is the exclusion of cover for claims made by lenders/financial institutions. The SRA mandates the breadth of cover that insurers must provide solicitors, known as the Minimum Terms and Conditions (MTC). If the proposal to exclude lender claims from the MTC is adopted, insurers will only allow certain practices to buy back this cover.

Where the firm is unable to buy back cover, they are almost certainly going to lose all of their work from the lenders. This will mostly affect smaller conveyancing firms and unless they can show they have a good claims record with robust risk management, insurers will be reluctant to allow those practices to buy back the cover.

Statistics show that claims from conveyancing represent 50 per cent of all claims by value – with half of these made by lenders. The conveyancing process that causes these losses must also be up for a fundamental review and should undergo a thorough investigation. This was the recommendation made by an independent report by Charles Rivers Associates (CRA) which was commissioned by the SRA last year.

CRA estimates that 30-60 per cent of firms in England and Wales may seek to buy back this cover. On the basis that 64 per cent of the profession currently undertake residential work, this could mean that half of firms will no longer have the cover and will consequently have to stop doing conveyancing work.

The cost of buying this cover back may well result in higher costs for the consumer. On the other hand, if the cost is absorbed by the partners this could cause confrontation between different departments which might drive struggling firms to break up.

One of the consequences of this restriction in cover may be a move by some firms of solicitors to change their regulator from the SRA to the Council of Licensed Conveyancers (CLC).

There is no such restriction in cover for licensed conveyancers who arrange their professional indemnity through the CLC scheme. Solicitors looking to retain their work with lenders may well shift their conveyancing business into a separately regulated firm. Only those firms thinking and planning ahead that have their wits about them will survive in this constantly changing environment.

Steve Holland is the executive director for insurance brokers Lockton