Law firms are facing steep price increases for their professional indemnity insurance with rates for some types of coverage more than doubling, as well as many of them experiencing a drop in profitability due to Covid-19.
On October 1, when law firms renewed their insurance coverage to protect them from professional malpractice claims, about three-quarters of them found that prices for even the most basic level of insurance had risen by about 20 on average. %.
The increase increases the pressure on businesses at a time when the pandemic has eaten up profits and revenues. They instigated temporary pay cuts in order to save money as a decline in trading across the city put their customers to the test.
The fault lies largely with a growing volume of compensation claims against hauliers working on controversial property developments, as well as attorneys working on increasingly complex succession and family matters. There has also been an exodus of insurers from what was previously an unprofitable line of business over the past two years.
Howden, an insurance broker, said in a report earlier this year that an increase in compensation claims due to mistakes made when working from home could also drive prices up.
Professional indemnity coverage can be a significant expense, often costing around 5% of a company’s turnover, according to the Law Society, a commercial entity. All law firms have to pay £ 2m- £ 3m of mandatory coverage, but most firms take out supplementary insurance depending on their size and likely exposure to risk.
Brokers said that the price for the basic level of insurance has increased between 20 and 50%. Andy Harris, a partner at Hazlewoods accounting firm who advises law firms, said he has also seen “higher coverage increases often of more than 100%.”
Brian Boehmer, professional indemnity specialist at insurance broker Lockton, said, “The single biggest catalyst for changing conditions in the insurance market is claims,” adding “the severity of claims has risen to unprecedented levels.”
Ownership has been the main source of these rising claims, with lawyers increasingly facing legal action for their work on controversial developments. As a result, law firms involved in transportation have experienced particularly high price increases over the past two years.
Successes are also a growing source of lawsuits and complaints against lawyers. “As families become more and more complex, sadly when someone dies it’s a much more demanding job for the legal profession,” Boehmer said. Some properties can run into several millions of pounds. “If they get it wrong, it’s a huge cost to insurers,” he added.
Meanwhile, two years ago, Lloyd’s of London asked insurers to improve the profitability of their professional indemnity businesses, leading many to re-evaluate their risk appetite and withdraw from the market. Insurers are also wary of a recession, because economic downturns often coincide with an increase in claims.
A dispute has also developed with the solicitor’s regulator over how much insurers should have to cover previous lawsuits against companies that are no longer operational.
John Kunzler, head of risk management for professional services firms at insurance broker Marsh, said the insurance buying process has become much more complex as underwriters are asking more questions.
“They asked for a bit more accounting material quite often and asked what changes people have made to planning and resources,” he said. “The underwriting process has become much longer and more complex.”