How Can A Law Firm Minimise Professional Indemnity Insurance Costs

In January 2023, the Law Society Gazette reported that at least nine law firms had ceased trading in the previous three months due to not being able to get Professional Indemnity Insurance (PII). It also stated that in the previous 12 months, covering the year to 30 June 2022, another 37 firms had to close following soaring PII costs.

PII costs now equal, on average, 5% of a law firm’s annual turnover. Insurers are exiting the market and with fewer companies choosing to enter the lawyers’ PII space, law firm operators are finding it increasingly difficult to secure competitively priced premiums.

With little sign of PII premiums decreasing, solicitors must take steps to reduce their risks to help mitigate operating costs. Before discussing the various proactive steps law firm partners can take, let us quickly set out how PII works in the legal profession.

What is PII for law firms?

All solicitors are required under the Solicitors Regulation Authority (SRA) Indemnity Insurance Rules to have PII permanently in place. New law firms must have PII before they can open their doors to clients. The mandatory level of cover is £2 million, however, depending on your practice, you may need more. The Law Society of England and Wales provides a helpful guide to calculating the appropriate level of PII cover.

When is PII renewed?

Up until 2014, law firms had to renew their PII on 1 October each year. Despite the dispensation of the rule, 75% of firms still renew on this date, making it difficult to get quotes in the proceeding weeks. If you want to change your renewal date, inform your insurer who will provide an extended policy to accommodate the change.

How do insurers calculate the price of a law firm’s PII premium?

The four main factors that will determine the cost of your PII cover are:

1. Number of partners

2. Total revenue

3. Categories of legal work undertaken

4. Claims history

Regarding factor number three, the practice areas that underwriters deem involve the highest risk of PII claims (in terms of either the number or overall value) are conveyancing (commercial and residential), commercial (public and private companies), Trusts, and Probate and Estate Administration. Unfortunately, these specialities comprise the bread and butter client work of most small law firms (and many medium size ones).

How can I lower my PII premium?

The first step to lowering your firm’s PII insurance is to identify any operational and client care weaknesses. Meticulously managed firms that have a corporate identity rather than operating as a group of individual solicitors often have lower PII premiums. Applying for an accreditation such as Lexcel will force your law firm to meet exceptionally high standards in:

• Client care

• Risk management

• People management

• Structure and strategy

• Financial management

• Information management

• File and case management

It is important to note that holding an accreditation such as Lexcel will not guarantee that your PII premium will be lower as insurance underwriting is one of those dark arts that would not be out of place in a Harry Potter book. However, it will demonstrate to insurers that you have a framework in place for managing risks and client complaints.

Other ways of evidencing to insurers that your law firm takes risk management seriously include:

·        Having dedicated risk management personnel who follow well-established policies and procedures when undertaking risk assessments.

·        A high partner to staff ratio.

·        Recording the lessons learned from previous claims and any additional staff training that was implemented as a result.

·        Investing in high-quality CMS, cybersecurity, and CPD.

·        If some staff work from home, establishing policies and procedures specifically created to manage risks identified as stemming from remote working.

What should I consider when choosing an insurer?

Although it may be tempting to choose the cheapest PII insurance premium, beware of unrated insurers who may be at risk of insolvency due to being unable to meet their claims. If your insurer goes bust you may find yourself with no company willing to renew your premium under similar conditions as those you previously enjoyed.

Look for stable, highly-rated insurers who have no intention of leaving the legal market. In addition, consider the support they will provide should your law firm be subject to a claim and their customer service record. If a client claim eventuates, the last thing you need to add to your stress levels is an unresponsive, uncooperative insurer.

Wrapping up

Unfortunately, none of the above tips is guaranteed to lower your PII premiums but, depending on the underwriter, they could lead to a reduction. Regardless of the effect on your PII, putting in place robust risk management and client care processes and procedures will increase the productivity and reputation of your law firm, thus providing a solid platform from which you can meet your growth targets.

Albion Legal provides a range of added value products and services, from bespoke employment disputes insurance cover to white-labelled HR software. To discuss any points in the above article or to find out how we can help your business, please phone 0113 2471 717 or email our team.