Coping with a difficult professional indemnity insurance renewal

There are no ‘hard and fast’ rules to define what a challenging risk looks like when it comes to renewing your professional indemnity insurance (PII). Few firms have an unblemished track record; insurers will seek assurance that they have learned lessons and taken appropriate action.

In our experience at Paragon, one sure thing that can consign a firm to the ‘distressed risk’ category is the failure to implement adequate operational and risk controls in response to losses, or events such as a Solicitors Regulation Authority (SRA) investigation, for example.

It is common for insurers to review claims over a period of five to ten years; if a firm’s losses exceed 50% of the aggregate premium paid during the review period, the renewal will likely come under scrutiny. There are several other factors that insurers may see as a significant risk:

Small, high-volume losses

High volume, attritional losses are challenging when preparing for PII renewal as this type of loss hurts insurers most, both in terms of administration costs and diminishing the premium pot to pay less frequent, larger losses. With concerns that the firm might have a persistent failure in its processes and systems, insurers might initiate a risk management audit which, of course, will take some time to complete, so it’s important to engage with underwriters early.

It’s vital to keep on top of the value of reserves held and claims’ status as PII claims tend to increase in value from notification until finally settled. For example, there could be a build-up of defence costs or delay in establishing the claim’s actual value.

Large, one-off losses

No loss is a good loss, but larger claims are easier to deal with when engaging with underwriters. Larger losses are usually well documented, and the firm’s risk control response will be focussed and easily communicated to the underwriter.

Loss pattern

It should be relatively straightforward to identify a pattern in a firm’s loss history. For example, losses might originate from a particular office, individual fee earner, work type or system. It should be straightforward for the firm to articulate its action in response in each case.

Regulatory investigations

An investigation by the SRA into the firm is one of the most challenging scenarios to deal with. Investigations can last between 3 and 12 months, during which a PII renewal might fall due. Our advice is to notify your broker as soon as you know about the investigation to put an appropriate plan of action in place.

Scenarios

Here are three examples of working with firms to address claims causation issues:

Scenario one: operational issues

In the lead up to its PII renewal, the firm recognised that one of its fee earners was involved in mortgage fraud.

• Files dealt with by the fee-earner were reviewed, issues identified were reported to the insurer and rectification was implemented.
• Insurers were satisfied that the root causes of claims had been adequately identified and remedial action taken to prevent reoccurrence.

Scenario two: large loss

The firm sustained a significant loss following a trust and probate fraud.

• Underwriters accepted the unusual nature of the loss and operational changes the firm implemented following the claim.

Scenario three: consistently poor claims performance

The firm routinely generated claims levels significantly above the premium paid. After examination, we identified the loss pattern as the poor performance of:

• A trust and probate partner.
• The personal injury department.

With documented corrective action, insurers were satisfied that historical claims patterns would not reoccur, namely:

• Retirement of the trust and probate partner with work in progress transferred to a new fee earner.
• The firm elected to cease performing personal injury work as it represented a marginal work activity.

Our experience is that long-term insurers supporting the PII market want to understand the circumstances of claims and work with policyholders to provide continuity of coverage. Where possible, our first instinct is to work with incumbent insurers to find a solution.

If underwriters have a loss-related red flag for the renewal, an option is to perform a claims review to get to the heart of a particular type of activity that has impacted the firm and to ensure that an appropriate culture embracing risk and compliance control has been adopted in response. Some key issues that frequently emerge from the auditing exercise include.

• Management engagement: Good working practices come from the top down, so insurers will want to see evidence that senior managers are actively engaging with employees.
• Keeping proper files: Firms must have an effective system for opening and managing files, including digital files.
• Managing key dates: It’s vital that key dates are recorded and visible to anyone, not just the fee-earner.
• Competency: It is self-evident that personnel are trained and competent to perform the work that is given to them. This must be supported by an effective system for supervising clients’ matters.
• Supervision: Poor supervision could expose the firm to criticism from the regulator and represent a red flag for insurers, particularly in a coronavirus (COVID-19) impacted workplace where employees might be working from home. Firms should develop and implement robust supervision policies and procedures that are documented and evidenced.

Can a recognised quality assurance accreditation help?

The Lexcel quality assurance standard is widely considered to be a highly effective risk and operational control framework. Insurers believe that an accredited quality standard ensures that firms are genuinely and demonstrably engaged in managing risk “from top to bottom”.

Such is the confidence in Lexcel that some professional indemnity insurers have evolved, accredited firms are given an automatic premium discount. The Conveyancing Quality Scheme (CQS) can also attract a discounted premium.

Professional indemnity insurers have a wealth of statistical data at their fingertips, so it’s unlikely that premium concessions will be given unless there are demonstrable claims benefits.

It’s common for firms to seek outside help when addressing risk and operational management issues. Some insurers and brokers offer free or subsidised consultancy services to help clients work towards or achieve a recognised quality assurance standard.

You must take action immediately if you feel your firm might be perceived as a distressed risk. Involve your broker who will be able to advise you on the best course of action given your particular circumstances. Make the most of the resources available from your broker and insurer to help you take positive action to prevent future claims from occurring.

Time is your ally. The more time you have to identify and address issues the better, and the greater the likelihood that your firm is able to present itself to either your incumbent or new insurer making them comfortable to insure your firm.