Smithers: firms should shop around for indemnity insurance
More than one in five law firms (22%) have been targeted by scammers in the past year, research for the Law Society has revealed. Money was successfully stolen from client account in 8% of these cases.
The figures on scams were included in the society’s annual professional indemnity insurance survey, published yesterday. The survey, of 560 law firms with up to 25 partners, painted a generally positive picture of the market, with falling average premiums and easier renewal processes.
The society said that evidence from the nine law firms that fell victim to the scammers showed that partners had to make up the deficit in a couple of cases. Banks and insurers made up the loss, at least to some extent, in others.
“In the worst-case scenario, a scam can result in a firm having to close and partner bankruptcy, if the firm cannot meet its regulatory obligation to make good the client account within a short period of time,” the society warned.
The society said there were “isolated incidences” following a scam, where an insurer raised a firm’s premium on renewal and raised the cost of its run-off cover.
“There are also indications that some insurers, when setting premiums at renewal, will now ask firms what preventative measures they have taken to protect against criminals targeting client accounts, including what security and IT systems they have in place.”
In general, the survey found that the average premium for law firms was 8% lower in the current indemnity year than last at £27,809, while 76% of firms found renewal processes easier – up from 62% last year.
However, the median cost of run-off cover for all firms increased from 250% to 300% of annual premium, increasing the “barrier to retirement” for some partners.
Firms where at least half of their partners came from BAME backgrounds had “much the same experience of renewal” as non-BAME firms. Despite this, the average indemnity premium paid by BAME firms as a percentage of turnover was almost 2% more than non-BAME firms – 6.6% compared to 4.8%.
Half of law firms with 11-25 partners had dealt with insurers on claims within the last 12 months, as had 39% of firms with 5-10 partners, 17% of firms with 2-4 partners and 7% of sole practitioners.
Jonathan Smithers, president of the Law Society, said firms should take advantage of “favourable conditions” and shop around for indemnity cover.
“It is vital firms keep their risk management up-to-date, in particular in relation to scams, if they wish to continue to benefit from lower PII premiums.
“Run-off cover is a necessary protection for clients, employees and for retiring solicitors. The hike in run-off cover and the closure of the Solicitors Indemnity Fund (SIF) in 2020 create challenges for partners in small firms wishing to retire.
“For the same reasons, closing down a firm will require careful forward planning. The Law Society is considering whether there are any viable options to replace the SIF beyond 2020.”
Meanwhile, the Solicitors Regulation Authority is consulting on whether to remove the requirement on law firms switching regulators to have to take out run-off cover as if they are closing, following a request by the Society for Licensed Conveyancers to review the situation.
Crispin Passmore, SRA executive director for policy, said: “Firms should be able to switch to the regulator they feel is right for their business more easily than is currently the case.
“Legal businesses are increasingly owned by, and employ, a range of lawyers and non-lawyers, so choosing a regulator is an important business decision. Facilitating choice is a good way to encourage a modern, competitive market that provides affordable and accessible services.
“The Legal Services Board ensures minimum standards of client protection are maintained by all legal services regulators. Nonetheless, we have to be careful that removing unnecessary bureaucratic obstacles for firms does not create potential risks for the clients of firms wanting to switch. We want to get the right balance between encouraging a competitive market and ensuring the interests of those using legal services continue to be protected, so we are keen to hear views on how best to do this.”
Stephen Ward, director of external relations at the Council for Licensed Conveyancers, said the council welcome the move. “The barrier put in place by aspects of professional indemnity requirements for firms leaving SRA regulation but continuing to trade under a different regulatory regime have had an anti-competitive effect and hindered the ability of specialist law firms to innovate.
“We hope that this issue will be settled quickly following the end of the consultation period.’
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