Professional indemnity insurance: claims trends to be aware of

A consistent feature of professional indemnity insurance (PII) is the prevalence of claims where an emerging claims spike is directly associated with a particular type of legal work. High-profile examples include personal injury, farming, and mortgage and banking fraud.

The typical lifecycle for claims trending events is straightforward; insurers experience a claims spike (the root cause is identified) and measures are designed to mitigate past and future losses.

Mitigation implies that a set of risk management processes and procedures are agreed upon between the profession and its insurers, but in a hard PII market, some insurers might elect to decline firms performing certain work types completely.

It’s not just market-defining events that constitute a claims trend. Insurers and, where relevant, their Third-Party Administrators (TPA) continuously monitor PII claims to identify generic losses that might require post-loss mitigation techniques to be deployed.

Rebecca Steward, litigation executive at Reynolds Colman Bradley LLP, Paragon’s TPA service provider, cites examples of claims trends relating to three particular work types that, although not making the headlines, are issues that should be on your risk radar.

Property related claims

Three property-related claim types are particularly noteworthy:

• multiple dwelling relief;
• escalating ground rent on leasehold properties; and
• buyer-funded developments.

In basic terms, multiple dwelling relief claims occur when conveyancers miss out on stamp duty reductions when two or more single dwellings are purchased. There are issues in determining what amounts to a separate dwelling. In these circumstances, solicitors can become liable for any overpaid stamp duty and interest thereon.

Over the last few years, we’ve experienced many claims against conveyancers for failing to advise on onerous escalating ground rent clauses.

Although firms’ exposure for these claims is still up for debate, our view is that doubling ground rent is onerous. Still, given some favourable recent judgements coming out of court, particularly in relation to RPI linked escalation clauses, it’s not looking hopeful for claimants.

The Solicitors Regulation Authority (SRA), reports in its warning notice that investors in buyer-funded developments have lost over £120m and that bonds promoted to protect deposits, which range from 30-80%, have proved worthless. Some developments have resulted in the loss of investors’ deposits entirely due to the developments failing or, in some more extreme cases, fraud.

Having been in the ascendency for a few years, these types of claims appear to be abating. In part, the reduction of active claims is down to matters settling, but also to increased awareness of the problems.

It’s worth reiterating that carefully following claims trends and developing strong commercial awareness can really assist in ensuring good practices are adopted to help prevent or, at least, mitigate losses.

Ancillary relief in divorce

One growth area of claims is that of ancillary relief associated with alleged under-settlement in divorce cases, particularly related to alleged entitlement to spouse’s pensions.

Along with their current prevalence, these types of claims tend to be overvalued by the claimant. While you know the firm might eventually end up with a loss that can be limited pending resolution, it will be challenging to reserve accurately.

Estimating the maximum potential loss recorded on your claims record pending resolution will also be difficult, so maintaining a dialogue with your appointed claims handlers will help. Insurers have data relating to general settlement values across many policyholders, so they can help to calibrate reserving practices.

Preparation and execution of a will

Another area where we see a lot of activity is Larke v Nugus requests. Unlike divorce cases, which tend to be handled by specialist law firms, Larke v Nugus requests are relatively widespread.

In very brief terms, a Larke v Nugus request is where a party seeks information about the circumstances surrounding drafting a will.

Sometimes it’s a case of wanting to understand those circumstances or other innocent reasons, but it can often be the forerunner of a claim for poor drafting or failure to assess the capacity of the instructing testator.

A common question is whether the firm should notify its insurers of the request, particularly as there might be difficulties in terms of confidentiality by disclosing information and underlying documents relating to the estate. You’ll need to satisfy yourself that any documents relating to the matter are suitable to disclose and seek the relevant authority from executors.

In some cases, firms determine that such a request shouldn’t be notified to insurers as it falls under the same category as a simple file request.

Ultimately, any Larke v Nugus requests might be made by a party who questions the circumstances surrounding the drafting and execution of the will, potentially leading to a serious dispute.

On receipt of the request, even without a particularised claim, any Larke v Nugus request might, technically, give rise to a claim, so good practice would be to communicate with the requester for more information and liaise with your broker. It’s better not to assume that the matter is not notifiable.

Returning to the Larke v Nugus request itself, there is no legal or regulatory duty to provide a statement upon request.

However, it is generally recommended that, should you receive a request, a statement is provided to avoid any adverse costs should a claim be made. It can also result in potential disputes being stopped entirely in their tracks, so whatever the circumstances, you should take them seriously.

The Law Society has published practical guidance – it’s worth familiarising yourself with this practice note.

In conclusion

It’s a fundamental feature of insurance that claims happen, so you should ensure that your staff know what is notifiable under your PII policy.

Open channels of communication lead to better results. Timelines are tight, and if key dates are missed, it can lead to additional costs and adverse consequences.

Late notification can, in turn, cause you underwriting or claims handling prejudice which will not serve you well at the next renewal. Insurers expect to receive claims, but they need to be assured that they are aware of the full picture and that operational and risk controls have been put in place to mitigate losses.

An essential component of effective risk control is an appreciation of claims trends and how you can prevent your firm from being adversely affected by them.