Solicitors’ professional indemnity insurance – Irish market update
After years of relative calm and stability in the professional indemnity market and ahead of the traditional 1 December renewal, we look at whether recent developments suggest changes may be afoot in the solicitors' professional indemnity insurance (PII) market.
Nobody working in the PII market at the time needs reminding of the post-2008 climate for professionals and the tsunami of claims against solicitors in particular. It took the best part of a decade for the solicitors’ PII market to stabilise and now the ill-winds of COVID-19 and the resultant recession may be heading towards solicitors once again, just as the vast majority of firms prepare for their 1 December 2020 renewal.
The solicitors’ PII market, in line with other PII markets, has undoubtedly hardened since 2018 when a renewed focus on profitability, led by Lloyd’s of London, resulted in many underwriters exiting the market and the remaining insurers increasing their premiums. Unlike the UK, there has been no significant increase in claims against solicitors in Ireland in recent years. However, with no new entrants to the market, solicitors, through no fault of their own, are now faced with the classic hard market conditions of reduced capacity and higher premiums.
The COVID-19 crisis had negatively impacted the income of most firms, yet increased premiums are expected as we head towards the annual renewal. For a number firms, their ability to sustain significant PII premium increases at a time of reduced income may be tested.
The Law Society of Ireland’s Common Proposal Form for 2020/2021 (the 2020/2021 CPF) appears to be cognisant of these concerns, evidenced by additional questions regarding the financial plans implemented and actions taken by firms to ensure trading during the COVID-19 crisis.
All stakeholders are acutely aware of the implications of firms ceasing practice in a disorderly manner – past experience has taught us that the vast majority of Run-off Fund (ROF) claims, both in terms of frequency and severity, arose from a small number of non-compliant firms (i.e. firms who failed to comply with the rules of the ROF) entering the ROF after a sudden closure – mainly following strike off by the High Court, suspension or abandonment.
Solicitors’ PII Regulations 2020
The latest Solicitors’ PII Regulations, effective from 1 December 2020, recognise this issue and introduce a premium for ROF cover for the first time for these so-called ‘polluter’ firms. The 2020 Regulations also re-introduce the requirement for a risk assessment audit for firms applying to enter the ROF – this welcomed development is designed to promote proper wind-down procedures and reduce the number of claims. Indeed, it is hoped that the audit may increase the likelihood that a firm may obtain a succeeding practice rather than entering the ROF.
In another significant development arising from the 2020 Regulations, the ROF will only be required to provide cover for a period of six years for firms ceasing on or after 1 December 2020 (subject to criteria being met). The six-year period shall run from the expiry of the coverage period during which the cessation of the practice occurs. Previously the ROF provided run-off cover to ceased practices for an indefinite period of time.
The 2020/2021 CPF also recognises the ever increasing risks surrounding cybersecurity, with new specific questions relating to “fake president”, “social engineering” and “phishing” frauds. With increasing number of solicitors and staff working remotely as a result of the crisis, the risk of cyber, IT and GDPR breaches increases, as do general claims arising from reduced supervision of staff, limited IT services and the general constraints of remote working.
What is clear is that risks to solicitors are constantly evolving, and are potentially accelerated and magnified by COVID-19. This, coupled with insurers’ concerns in relation to economic downturns previously coinciding with a rise in claims against professionals, as seen after the last financial crisis in 2008/09, may create an unfavourable climate for this year’s solicitors’ PII renewal.
For the upcoming solicitors' PII renewal in Ireland, it appears that significant hikes in premium may be inevitable and the subsequent impacts will be examined intently. Undoubtedly the type of risks for solicitors and claims against the profession are ever evolving and at a greater pace than before. History would suggest that an increase in claims against professionals generally may be on the horizon and that solicitors will not be immune in this regard, even if better prepared than after the last recession. The coming months may provide some increased turbulence for professionals and insurers alike and will be monitored closely as the country hopefully emerges from the COVID-19 related restrictions.