Solicitors’ professional indemnity – what effect will COVID-19 have on the claims profile against solicitors?

As this is a fast moving topic, please note that this article is current as at 23/04/20. For further information, please contact Paul Castellani or Lorna Flynn.

This article arises out of a webinar we delivered to over 300 clients earlier this month concerning the effect of COVID-19 on the professional indemnity market.

We address the possible ramifications the market may suffer both in the immediate short term before October 2020 renewals and through a longer lens, by a possible economic recession into 2021 and onwards.

Immediate implications

Solicitors, like other professionals, have worked from home for many years, and most firms will have in place secure and robust remote access IT systems which allow access to electronic files, time recording and other case management software. Enforced working at home, with no (or very little) access to the office does however bring a variety of issues to the fore, including:

Hard copy documents

Despite best endeavours (and urged by both financial and environmental considerations), it is rare for a firm or a practice area to be entirely “paperless”. Important notes recording client instructions may have been faithfully recorded in notebooks which never quite find their way to be scanned onto the matter file. A hard copy “mark up” of an agreement may contain important drafting notes or placeholders. In the hurry to ready ourselves for a long stretch of home working in late March, many such important pieces of paper may be languishing on desks or in cabinets at the office.

Collaborative working

Many large deals often include suites of interconnected agreements, possibly drafted by different solicitors or even parts of the firm (think of all the teams involved in a large corporate transaction). Collaboration between the teams (to ensure the documents “hang together” and are consistent) would often be achieved through physical meetings within and outside of the firm (most commonly in the run up to completion). Progress could frequently be made through meetings with opponents where the parties would work together to record the common commercial intentions of their clients.

Supervision

To some extent this is perhaps the easiest risk to mitigate. Supervision can be given readily to colleagues over the telephone or video link and drafts of documents can be reviewed and amended. However, what of the more nuanced supervision which can be given from working in close proximity to someone? For example, giving feedback on how a difficult call or issue was dealt with, or how a meeting was marshalled and an agenda set.

Confidentiality

We commented last week on a sad case from the Solicitors Disciplinary Tribunal concerning the loss of documents whilst working at home. Data breaches are far more likely in a home working environment – whether that is from documents being worked on from home computers outside of the firm’s IT security, the overhearing of telephone calls or video conferences or the loss of hardcopy papers printed off at the office and sent home for review.

Illness and mental health

Lawyers, like everyone else, have been affected by the virus in different ways – either suffering illness themselves, caring for family members or suffering symptoms of isolation. Some lawyers will not be “their best selves” at the moment, and hence silly mistakes caused by lost concentration are more likely.

With that working environment, what claims could we expect to see in the short term? We would suggest the following:

  • Missed time limits: Either to issue proceedings or to comply with a particular direction. This is, of course, an old favourite and frequent generator of claims against solicitors. However, following SRA v Howell-Jones [2018], how these are to be dealt with has become more acute. What mitigation steps can be taken by a firm without breaching the conduct rules against own conflicts?
  • Rectification: Despite the downturn in corporate activity, deals are still completing. Without the collaborative office environment, rectification of mismatches in documents are more likely. If the rectification is disputed, then costly Court proceedings will be required (often indemnified by the solicitors involved). Own conflict conduct rules will also be engaged.
  • Data breaches: We would expect notifications to the ICO and SRA to spike during the home working period, not least as scammers are using the current crisis to increase their phishing efforts. There is also the added risk of “Zoom bombing” or other breaches of video conferencing facilities.
  • Private client claims: Private client solicitors tasked with taking wills are facing considerable problems, not least in ensuring that wills are appropriately executed in front of 2 witnesses. Where instructions are not taken quickly enough (both wills and other planning) and the testator dies, claims by disappointed beneficiaries are possible.

Longer term

Looking at matters through a longer lens, most economists predict a recession into 2021 and beyond. Will the claims in this cycle be the same as previous ones?

We would suggest there will be one very significant difference in the recessionary claims we can expect to see – the (relative) absence of lender claims. Previous recessions in the early 90s and post 2008 period were caused in part by a property market and consumer credit driven boom. Those economic circumstances have not prevailed over the past few years. Indeed, lending conditions have been tight rather than lax.

The type of longer term recessionary claim could therefore include:

  • Insolvency driven claims: The current crisis may push “zombie” companies (and indeed many others) to the financial wall. Insolvency professionals will then start to review historic transactions for evidence of wrongful trading or payments. Solicitors can often be caught up in such claims, particularly if monies have passed through a client account – there could be an accessory breach of trust.
  • Under-settlement: Many individuals and companies will be experiencing cash flow problems. “Cashing in” litigation now might prove a necessary expedient. We can expect cases of “settlement remorse” where the lawyers are blamed for not having conducted the litigation/claim to date in such a way that maximum settlement advantage could be obtained from the paying party.
  • Property claims: Another perennial favourite but, as described above, not lender driven. Instead we would expect to see claims arising from possible societal changes in the use of commercial property, for example, a business finding that it no longer needs as much office space realising there is no break clause in its lease.

Comment

The market faces a testing few months in the run up to 1 October renewals. Rates significantly hardened in 2019 and many firms are now experiencing financial hardship, furloughing staff, reducing drawings and letting people go. With professional indemnity insurance usually the third largest overhead of a firm, many firms and brokers will be eager to see how the market prices these risks over the next few months.

Focus area

Coronavirus (COVID-19)

As developments unfold, Kennedys experts across the world advise on what the COVID-19 pandemic means for you and your business.

Go to focus area