Opinion: PII Insurance Costs Are Changing Legal Sector

These insights are by George Bisnought, founder of Excello Law;

For many law firms, the traditional professional indemnity insurance (PII) renewal date of 1 October rolls around increasingly ominously each year. This year, some firms have even reported that their premiums have doubled. Renewing insurance should be a routine administrative matter, but PII renewal has become an increasingly fraught and expensive process. Law firms which are already badly hit by the coronavirus pandemic and a struggling economy also find themselves facing massive increases in premiums. Some firms have been forced to take radical action. A recent article in the Law Society Gazette has noted that many law firm mergers “are the product of one firm needing a quick exit after the insurance renewal bill tipped them over the edge”.

The skyrocketing costs of PII renewal, along with the growing compliance burden placed on small firms, is certainly prompting many small law firms to consider new ways of operating. In recent years, a number of major PII insurers have exited the market entirely citing concerns about profitability and risk – particularly relating to sole practitioners, smaller firms and particular practice areas, such as conveyancing. Such firms have therefore borne the impact of increased costs most acutely.

Ahead of last year’s renewal date, an article in The Law Society Gazette warned of premium increases approaching 20%, noting that, “When the market in solicitors’ professional indemnity insurance malfunctions it has the power to destabilise swathes of the profession …. with the pool of insurers shrinking and rate increases hitting double digits for many, the 1 October renewal round is set to be the toughest since 2013. It reflects insurance industry worries across the board, from the economic uncertainty surrounding Brexit to fears for the property market and Lloyd’s thematic review.”

The piece went on to say that “Especially hard hit are generic firms at the small end of the legal market, for which insurers are showing a clear lack of appetite.” Firms which cannot renew PII cover must cease practising within 90 days. For many small firms, a merger seems like the obvious solution. Yet while a merger with a likeminded firm may offer a certain economies of scale, a merger of itself does not fundamentally alter the business model being used.

Clearly, many insurers have voted with their feet. Yet there does not appear to be any obvious fundamental reason why the UK market for PII should be perceived as being risky. Fundamentally, we have a very well-regulated profession and our lawyers are well trained. Given the impact that the PII crisis is having on the profession, together with the multifarious pressures now facing law firms, a root and branch review of PII is now required. It would be helpful if the Law Society and the Solicitors’ Regulatory Authority were to consider possible changes to the minimum terms and conditions for solicitors’ PII which might help the market function more effectively, and encourage insurers to re-enter the market.

An already malfunctioning PII market is combined with the extraordinary economic impact of the coronavirus pandemic, and ongoing uncertainty around Brexit in a lethal cocktail. Many now fear that PII is becoming deeply damaging to the profession as a whole. Nor should it be forgotten that the increased costs of PII will ultimately have to be passed on to clients, as with all business costs. Smaller firms, which are disproportionately affected, often take on socially important legal aid work such as family law and criminal defence work. Having enough lawyers to do such work is crucial to the functioning of our justice system, yet these small firms and sole practitioners are being driven out of business by PII costs. It is therefore not only in the interests of the legal profession, but also in the public interest, that the PII should generally be obtainable by law firms at reasonable rates. Unfortunately, there are few signs of any meaningful action that might address the issue.

Nonetheless, there is always opportunity in crisis. Many smaller law firms which are struggling to find reasonable renewal premiums, may well now decide to fundamentally reappraise their business models. In particular, many are considering amalgamating with business structures that provide innovative, support services platforms while enabling them to work as consultants. Such new model law firms are often specifically designed to operate as decentralised networks of dedicated consultant lawyers. Many also operate online, which means that lawyers can join such structures without relocating. Such mutually-supportive structures, where resources are shared, can provide a far preferable alternative to the ongoing financial stresses and administrative strains involved in running a small firm.

Since 2009, I have been involved in developing one of the earliest new-model law firm business structures in the UK. We operate a flexible and supportive structure for our consultant lawyers. Many of our consultants formerly ran their own practices and are delighted to have changed tack. They have discovered that when the administrative, regulatory and cost burdens are lifted from their shoulders, they can really focus on what they do best – which is delivering their legal expertise to clients.

This novel approach to the business of law has proven for many to be a far preferable alternative to the ongoing financial stresses and administrative strains involved in running a small firm. Nor is a merger likely to be a panacea for the ills afflicting small firms, since a merger may simply involve having similar problems but on a larger scale. Our structure means that excellent administrative, compliance and technical support are always available to our lawyers, as is the complementary expertise of fellow professionals. Yet the managerial, administrative and compliance responsibilities are taken care of for them.

As a result of this approach, in just eight years our firm has grown to become a team of over 105 partner-level lawyers, with annual growth averaging 20%. We now have seven UK offices in London (City, Chancery Lane and west London), Leeds, Birmingham, Liverpool and Chester. We have also established partnerships with other new-model firms in the US and Australia. The economies of scale and efficiency inherent in this structure have been clear to us for years. Now others are beginning to understand the benefits of using technology to collaborate closely, to drive down costs, and to improve client service. Law firms structured in such a way are efficient, well organised and compliant. These factors combine to not only reduce costs, but also to reduce risk.

The coronavirus pandemic, combined with ongoing pressures in the insurance market, are accelerating existing paradigm shifts in working culture and practices. These shifts are fundamentally driven by technology, together with an increasingly collaborative workplace culture, which values a healthy work-life balance.

The speed of change in UK working practices has become extraordinary in recent months. For many professionals, the idea of hosting Zoom meetings and working online all week were completely alien just six or seven months ago. Now, these have come to seem as natural as breathing. People can see that they work and that they can improve productivity and efficiency. Polls show that most UK employees now want to continue working flexibly long into the future. Employers also now better understand that flexible working can save businesses money.

As the cost pressures and regulatory burdens placed upon small firms and sole practitioners continue to increase, ever greater numbers of lawyers are likely to seek out new, creative, agile, interdependent and collaborative ways of working.

George Bisnought is founder and managing director of Excello Law.

www.excellolaw.co.uk

About alastair walker 4726 Articles
20 years experience as a journalist and magazine editor. I'm your contact for press releases, events, news and commercial opportunities at Insurance-Edge.Net

Be the first to comment

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.