Posted by Todd Davison, managing director of Legal Futures Associate Purbeck Personal Guarantee Insurance [1]
Davison: Cost of claims making insurers wary
Research suggests rising solicitors’ insurance premiums this April could prove to be a fatal blow for some beleaguered small and medium-sized practices that have managed to get through all the pandemic-related challenges of the past two years.
If it’s not the size of the premium, it’s the increasing requirement for a personal guarantee that could prove to be the final straw.
The directors and partners of these law firms shouldn’t feel completely powerless, however. Insurance, ironically enough, could make a big difference to the personal guarantee risk many leaders of solicitors’ firms now face.
An article in The Times at the end of 2021 made grim reading for the legal sector. According to research by audit firm Mazars, closures of law firms over failures to obtain insurance have increased sixfold in five years amid concerns that the pandemic has hardened the market.
It has underlined the importance of allowing adequate time to search for insurance cover and being ready for the likelihood that you will need to sign a personal guarantee as a condition of cover.
The article claimed that 65 legal practices in England and Wales closed their doors in the year to 30 September 2020, compared with 11 in 2016-17. Furthermore, 63 firms had shut in 2020-21 at the time of the research.
Mazars predicted that the actual figure by the end of 2021 could quite possibly surpass the number from the previous year.
As solicitors’ firms are all too aware, premiums for professional indemnity insurance (PII) have risen sharply over the past couple of years and it’s been the small and medium-sized practices who have been disproportionately impacted, facing average increases in premiums in the region of 27%.
The reason is the cost of claims insurers have faced in this market. This has driven down profitability, leading to some insurers exiting the market altogether. The result is less choice, higher premiums and fewer opportunities to shop around for cover.
One of the key challenges with PII is that cover applies at the date the claim is made, rather than at the time an error or omission causing the claim occurred. As such it may be several years after the work was completed that a claim may arise.
As a consequence, the minimum terms and conditions (MTC) for participating PII insurers state that they must provide six years’ run-off cover, whether or not the run-off premiums are funded by the firm. The premium is typically 300% of the latest annual premium.
Naturally, insurers want to protect themselves in the event that the firm closes due to insolvency.
This means insurers are increasingly requesting personal guarantees as a means of recovery if the firm fails and enters an insolvency procedure.
The good news is that professional risks personal guarantee insurance can help protect the personal assets of the directors of law firms acting as personal guarantors to secure insurance cover.
This insurance does a lot more than pay out on a claim. It can offer advice and mentoring support if a solicitors’ firm finds itself in financial distress.
This level of support not only sets this type of insurance apart from other insurance covers, but also proved invaluable to many directors and owners of SMEs during the pandemic, who had the foresight to secure personal guarantee insurance for a personal guarantee-backed business loan.