By Gary Horswell, Managing Director, Ntegrity Insurance Solutions Ltd
For professional firms, risk is an exposure they either:
- decide to accept, consciously or unconsciously, as part of business such as trading risk, or
- transfer to another party typically an Insurance company.
Insurance underwriters assess the risks facing professionals, and then aim to set appropriate cover, terms and premiums at a level allowing them to collect more than they pay out in claims.
This underwriting objective has been a challenge when insuring the legal profession since the return to the open insurance market in 2000 and numerous Insurers have failed as a result of getting it seriously wrong.
The ability to demonstrate to an Insurer that your law firm controls risk effectively is essential in obtaining the best possible premium and terms for Professional Indemnity insurance.
When insuring most types of business against professional liabilities, the focus for underwriters is the risk inherent in the type of work undertaken. This will include taking a view on the past record of such work in generating claims, as well as the approach the individual business takes to controlling and mitigating exposures.
For law firms in England & Wales Insurers are interested in two main risk areas:
Insurers consider carefully:
Whether the business is run as a single corporate entity or as a group of sole proprietors? The lack of oversight and a collective approach that features with the latter raises the risk that individuals will not conform with compliance and processes, making risk management very difficult.
‘Dabbling’ – The risk increases where firms have some main specialisms but then perhaps undertake the odd conveyancing transaction when the business is not really set up with the necessary processes. Some Insurers will refuse to offer cover where there they consider that expertise is spread too thinly by being involved in too many disciplines and claims have arisen due to firms lack of in depth knowledge.
Fraud. Examples have been widely reported and many large-scale losses have been reimbursed by Insurers. A lot of Insurers have provided helpful guidance on how to minimise fraud risk based on claims case studies. Insurers may seek to recover claims payments made from partners found to be colluding in fraud, and avoiding this personal liability for innocent partners in the firm may depend on the strength of oversight structures in place.
Compliance. Legal regulators are taking ever increasing interest in how firms ensure the risk to consumers is minimised, resulting in more disciplinary hearings. Insurers consider the disciplinary record of firms carefully as well as looking for reassurance that the practice is paying appropriate attention in adopting compliant procedures.
Cyber risk and GDPR. As holders of much confidential and sensitive data on clients, law firms are one of the most targeted by cyber and other criminals, with losses being reported weekly. GDPR, when it arrives in May 2018, will ramp up the responsibilities for securing and processing data for all businesses and will create a much tougher regime for fines and compensation claims. As Professional Indemnity insurance for Law Firms includes cover for third party claims that may arise from data breaches, expect Insurers to look for more information in the future on your IT infrastructure and other data compliance. All professional firms should also consider arranging cyber insurance to protect against the other unplanned costs that can arise when a cyber issue hits.
Financial risk. Insurers now typically ask for copies of recently filed accounts when submitting the proposal at renewal. They use these to assess cash flow, reinvestment and profitability, all with a view to considering the risk of failure of the business in the year ahead, as this triggers run-off cover. Insurers must provide this automatically for 6 years after closure even if they cannot collect the premium (often an eye watering 300% of the last annual premium).
Keep your Insurer informed.
Having appropriate processes in place to manage risk is the aim, but firms still need to make their Insurers aware of the approach taken and, from our experience, this isn’t always presented to best effect. This is so important and could make the difference between obtaining a quotation or not, and in securing terms that are affordable.
The limitations of proposal forms are sometimes to blame but firms can easily produce a supplementary commentary and forward this to Insurers with the application.
Insurers take notice of the presentation of your application form and draw conclusions. Answers to proposal questions left blank, percentages not adding up, responses stating ‘see attached’ with no follow up information can all raise questions about attention to detail which might influence Insurers views either way.
If time permits, get to know your Insurer better. They would prefer you not to have claims of course, but taking the opportunity to meet Insurers where possible helps to improve understanding on both sides and can make a difference in resolving difficulties.
Gary.horswell@ntegrity.co.uk
NTEGRITY Insurance Solutions Ltd
The Stone Barn
Hambrook Business Park
The Stream
Hambrook
Bristol
BS16 1RQ
Telephone: 01454 800800
Fax: 01454 650808
Enquiries@ntegrity.co.uk