COVID-19: Solicitors’ professional indemnity insurance

If the pandemic has taught us anything, it’s that predicting the impact of coronavirus (COVID-19) on the legal profession is a hit and miss affair. According to the latest Monthly Business Survey figures released by the Office of National Statistics (ONS), the UK’s legal sector turnover for May 2020 slumped to £2.3bn, the lowest monthly figure since February 2017. It’s unsurprising that this trend, viewed contemporaneously, prompted predictions that thousands of high street and sole practitioner firms might be forced to close their doors. Less than a year later, legal sector turnover rose to an all-time monthly high of over £4bn, confounding predictions. If forecasting trends for the profession is proving to be so difficult, spare a thought for those whose business relies on getting it right; your professional indemnity insurer.

Underwriting has been likened to driving a car with the windscreen blanked out; the only view available is through the rear-view mirror. Using this analogy, if the rear-view mirror of historical commercial, operational and claims performance is feared to be unrepresentative of the future, underwriting confidence is likely to be eroded , in turn placing emphasis on firms to actively demonstrate they are well-managed and have risk management embedded at the heart of the culture of the firm.

COVID-19 is the most impactful shared experience since the second world war. Every one of us has had to adapt to changes in our personal and professional lives. Insurers now have to navigate an evolving risk and operational landscape for the profession, putting critical issues such as supervision, changing work profiles and fresh opportunities for fraudsters under the microscope.

Changing work type balance

Those responsible for completing PII proposal forms will know that a significant proportion of the information required by insurers relates to the firm’s historical and anticipated work splits. The balance between high and lower risk activities is an important feature of insurers’ risk selection and pricing strategies.

Whether through government intervention or otherwise, there has been a surge in instructions for many firms. Notable examples include:

• Residential conveyancing: To stimulate the residential housing market, in July 2020, the Chancellor introduced a Stamp Duty Land Tax (SDLT) holiday, increasing the nil band for residential properties from £125,000 to £500,000 .
• Will writing: It was inevitable that the pandemic would significantly boost the demand for will writing given the risk for severe illness with COVID-19 increasing with age.

Seen as higher-risk work types by professional indemnity insurers, the risk exposure balance of individual firms – indeed the profession as a whole – has red-shifted sounding alarm bells with underwriters and actuaries alike. Our experience is that our partner insurers, on balance, have taken a pragmatic view on what is probably a brief anomaly, but they will be monitoring the situation carefully to satisfy themselves that what they are witnessing is short-term weather rather than long-term climate change.

Your insurance broker should have tools to help you record your fee income history, projections and map changes in your work-type profile to assist in engaging with insurers.

Risk/premium balance

Higher volumes of work generate larger fee incomes. In turn, premiums increase, restoring the risk/premium balance. Given the pace of fee change over the last twelve months, there is a lag in addressing this balance, and with fee incomes likely to return to pre-COVID-19 levels, there is the question of whether insurers will be able to catch up with premium shortfalls they sustained during the fee spike. If underwriters believe they cannot achieve premiums that fit the risk, they are likely to ensure that exposure fits the premium through enhanced risk selection.

Increased risk and mitigation measures

Although each insurer has its individual underwriting philosophy and interpretation of risk, some enhanced exposures have emerged as common areas of concern, prompting disclosure by firms of the risk mitigation measures they have put in place.

Residential conveyancing

o Increased risks:

• Increased average transaction times due to high workload and operational constraints
• Delays in the issue of searches
• Delays in issuing or extending mortgage offers
• Delays in obtaining leasehold information
• Non-completion before the SDLT holiday end date

o Common risk mitigation measures:

• Managing clients’ expectations, including a warning that the SDLT deadline might not be met
• Keeping clients informed of any delays
• Clients insure against the risk of failure to meet the SDLT deadline
• Will writing

o Increased risks:

• Property price inflation increases estate value
• More ammunition for disgruntled beneficiaries claiming Covid-19 impacted the firm’s performance
• Lack of access to GPs to establish the mental capacity of clients
• Execution of documents (such as physical witnessing)
• Death of testator before the execution of a delayed will

o Common risk mitigation measures:

• The safe signing of documents (such as “window wills”) and adoption of the Law Society’s remote witnessing guidance
• Use video conferencing platforms for face-to-face communications
• Managing clients’ expectations by ensuring they understand any delays and complications that are outside of the firm’s control

Operational issues

o Increased risks:

• Reluctance to hire additional personnel as work spike is likely to be temporary
• High workloads and long hours might lead to errors
• Increased risk of ID fraud and money laundering resulting from remote working and the absence of client face-to-face contact
• Ineffective supervision and training of inexperienced remote working staff
• Confidentiality of client data

o Common risk mitigation measures:

• Managing workloads by refusing to accept instructions that will exceed the firm’s capacity
• Being alert to the mental and physical health of your staff
• Being extra vigilant about CDD and client onboarding (such as implementation of electronic checks, linked to government databases – especially as these can be charged to the client).
• Being extra vigilant about the source of funds/wealth checks
• Careful checking of requests to remit the proceeds of sale
• Keeping complete and accurate file records
• Ensuring open lines of communication with remote workers
• Regular communications between remote workers, supervisors and senior staff
• Determining the suitability of individuals to work remotely with limited supervision
• Centrally monitoring new instructions
• Putting policies and procedures in place regarding the use of the firm’s and personal IT equipment, including the implementation of Multi Factor Authentication

Insurance capacity

Since solicitors’ PII returned to the open market, there have been fairly clearly defined moments in time when insurers entered and exited the ranks of Participating Insurers. With newcomers routinely replacing lost capacity, there has been sufficient availability of insurance to meet the profession’s needs. Returning to our rear-view mirror analogy, if new insurers fear that firms’ fee and loss records supporting their insurance applications are an unreliable gauge of future performance, confidence in the ability to make informed underwriting decisions will be undermined. Couple this with enormous uncertainties surrounding the broader economy, and there are big question marks as to whether any lost PII capacity will be replaced in the short term.

Outlook

With the easing of COVID-19 restrictions and a return to more normal working practices, one might be forgiven for thinking that the pandemic is water under the bridge, but like long COVID, the insurance community is likely to feel the effect for years. PII claims take time to develop fully, so the real cost of the pandemic is liable to take some time to emerge.