Caroline Goorney is a sole practitioner based in Newcastle-upon- Tyne, specialising in family law. For the past 20 years, she has practised law without facing a single claim. However, when she organised her professional indemnity cover this summer, she was confronted by a 35 per cent hike in her premiums. The rules affecting solicitors' indemnity insurance changed on October 1 2005. The minimum cover re-quired by all practices has now doubled to Pounds 2m, and is set at Pounds 3m for limited liability partnerships. This will be the first change in cover limits in 17 years.
Tim Readman, who sits on the Law Society's Insurance Indemnity Committee and is a former council member, says there were good reasons to increase the cover limit. "The number of claims were increasing, damages were increasing. Overall it's in the public interest," he says. However, the effects on certain segments of the legal profession could be severe. For many sole practitioners and small firms, their professional indemnity payment is their largest single overhead. Although the big commercial law firms will not be greatly affected by the new rules, the other 85 per cent of private practice law firms with partners of four or less will. Mr Readman says: "For sole practitioners who are already struggling, it could mean the difference between continuing and not continuing."
Some brokers say in-creased premiums are not necessarily the result of the changes. Geoffrey Pointon, chairman of PYV Group, a specialist financial services company, says: "Smaller law firms who looked around the market probably saved over 50 per cent on last year. Most were expecting to be charged extra for the Pounds 1m but we had more underwriters offering us cover this year than ever before." However, this will only be a temporary reprieve. Next year the impact of the changes is expected to hit the smaller practices in their pockets. Research from AON, the insurer, shows that smaller practices are most likely to require good negligence cover. Almost half the negligence claims in the UK (43 per cent) arise from residential conveyancing work undertaken by firms with 10 or fewer partners.
At the other end of the spectrum, the biggest UK law firms are unaffected by the changes as most of the top 1,000 carry cover well in excess of the Pounds 3m upper limit. However, the process of putting professional indemnity in place is still onerous and time consuming. Many firms since September 11 2001, and the subsequent capital scarcity, have had to go through what amount to "marketing exercises" where they display their risk-management processes to insurers to obtain cover economically. In addition, with commercial transactions now regularly ex-ceeding Pounds 1bn in value, the potential for a catastrophic claim - one that exceeds a law firm's insurance cover - grows. Mr Pointon says: "The big, big firms can't buy the cover they need because the insurance market is not big enough, so some major firms are uninsured effectively above a couple of hundred million."
Chris Perrin, executive partner and general counsel at the global law firm Clifford Chance, says this problem is not new for the big firms. "We have as much cover as we can reasonably get and this is materially more than Pounds 200m," he says. One of the ways in which Clifford Chance covers itself is to buy indemnity policies from as many as 40 different underwriters from around the world, with no individual underwriter having an exposure above Pounds 20m-25m. Similarly, Ian Dinwiddy, finance director at another global law firm, Allen & Overy, says it has been widening the group of insurers that are interested in underwriting law firms by going to New York and Bermuda.
But, as Mr Dinwiddy says, although most big firms have total cover that is a multiple of the largest claim that has ever been paid, "it's no guarantee that it's the largest claim that will ever be paid in future".
Tim Readman, who sits on the Law Society's Insurance Indemnity Committee and is a former council member, says there were good reasons to increase the cover limit. "The number of claims were increasing, damages were increasing. Overall it's in the public interest," he says. However, the effects on certain segments of the legal profession could be severe. For many sole practitioners and small firms, their professional indemnity payment is their largest single overhead. Although the big commercial law firms will not be greatly affected by the new rules, the other 85 per cent of private practice law firms with partners of four or less will. Mr Readman says: "For sole practitioners who are already struggling, it could mean the difference between continuing and not continuing."
Some brokers say in-creased premiums are not necessarily the result of the changes. Geoffrey Pointon, chairman of PYV Group, a specialist financial services company, says: "Smaller law firms who looked around the market probably saved over 50 per cent on last year. Most were expecting to be charged extra for the Pounds 1m but we had more underwriters offering us cover this year than ever before." However, this will only be a temporary reprieve. Next year the impact of the changes is expected to hit the smaller practices in their pockets. Research from AON, the insurer, shows that smaller practices are most likely to require good negligence cover. Almost half the negligence claims in the UK (43 per cent) arise from residential conveyancing work undertaken by firms with 10 or fewer partners.
At the other end of the spectrum, the biggest UK law firms are unaffected by the changes as most of the top 1,000 carry cover well in excess of the Pounds 3m upper limit. However, the process of putting professional indemnity in place is still onerous and time consuming. Many firms since September 11 2001, and the subsequent capital scarcity, have had to go through what amount to "marketing exercises" where they display their risk-management processes to insurers to obtain cover economically. In addition, with commercial transactions now regularly ex-ceeding Pounds 1bn in value, the potential for a catastrophic claim - one that exceeds a law firm's insurance cover - grows. Mr Pointon says: "The big, big firms can't buy the cover they need because the insurance market is not big enough, so some major firms are uninsured effectively above a couple of hundred million."
Chris Perrin, executive partner and general counsel at the global law firm Clifford Chance, says this problem is not new for the big firms. "We have as much cover as we can reasonably get and this is materially more than Pounds 200m," he says. One of the ways in which Clifford Chance covers itself is to buy indemnity policies from as many as 40 different underwriters from around the world, with no individual underwriter having an exposure above Pounds 20m-25m. Similarly, Ian Dinwiddy, finance director at another global law firm, Allen & Overy, says it has been widening the group of insurers that are interested in underwriting law firms by going to New York and Bermuda.
But, as Mr Dinwiddy says, although most big firms have total cover that is a multiple of the largest claim that has ever been paid, "it's no guarantee that it's the largest claim that will ever be paid in future".
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