- Professional Indemnity Insurance
The Knowledge
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24th January 2024Firms, regulators and insurers will all have a role to play
For law firms handling property transactions, it feels like a storm is brewing. From small conveyancing departments handling residential sales and purchases to multinational firms handling large commercial property acquisitions, it’s likely that challenges are ahead, but it can be difficult to know exactly how to prepare. For months, higher borrowing costs and stretched budgets have stalled property purchases. Businesses have also been tightening their belts amid uncertainty in the UK and abroad. The consumers and businesses who have cash are reluctant to spend it.
As a result, law firms are having to make difficult business decisions – in their property departments and beyond – and these decisions can have unfortunate consequences. Some firms might be tempted to ride out the stagnant market by operating more leanly; however, this could lead to dabbling in other areas of the law where they lack expertise, or to rerouting employees into new roles without sufficient training. Other firms have made employees redundant, but if the market turns around in a few months’ time and property transactions rise again, firms without sufficient staff could be caught short and forced to engage in another war for talent.[1] All told, the current economic environment opens the door to a range of risks for firms.
“Firms of all sizes are likely to experience more insurance claims,” said Sharon Glynn, Managing Director, Underwriting, Bond & Specialty at Travelers Europe. “The larger the firm, generally the larger the claims. Firms acting for corporate clients in multijurisdictional transactions may not have the close personal relationships with clients that create a goodwill bank that we might have seen five or 10 years ago. Corporate clients may now consider suing advisors to be part of the nature of a transaction. At a time when everyone is scrutinising their finances, some clients have the view that they can’t afford to not sue their solicitors.”
Regulators are also monitoring the environment to see where firms may be succumbing to business pressures. In recent months, the Solicitors Regulation Authority (SRA) reported an uptick in law firm closures. Over the 12 months ending in October 2023, 365 firms opened; in the 12 months ending in August 2023, 558 firms closed. Though we don’t know the specific reasons why the firms that have ceased practicing have done so, the number of closures is significant and could point to the increased pressures law firms – and the individuals and businesses they serve – are facing right now.[2]
One such business pressure faced by law firms and their clients is fraud, which leads to an increase in claims and notifications for insurers. Fraud tends to be greatest during economic downturns.[3] In 2023, UK Finance reported a 46% increase in reported cases of fraud as compared to the previous year, while Cifas reported a 7% climb in fraud over the same period. Research released in June found that businesses in the UK had lost more than £2.1 billion to fraud over the previous year.[4]
Sources of shelter and stability
In this environment, stable insurance partners become more important – but may be harder to find. Insurers have been approaching the turbulence in the property market differently. Some are actively reducing their exposure to conveyancing. Others are looking for growth opportunities and offering lower premiums in order to achieve it, though they may well sacrifice underwriting discipline in the process.
“We believe that it’s important to take a longer, sustainable view of the market,” said James Graham, Managing Director, Professional Indemnity at Travelers Europe. “The diversity of our book and client base, as well as our consistent underwriting discipline and appetite, mean we have not had to take extreme underwriting decisions. This has helped us weather economic storms and geopolitical unrest in the past – and it lays the foundation for us to build partnerships with our insureds for the long term.”
Insurers who offer ongoing stability in challenging economic environments will be looking for discipline in their insureds.
“Underwriters will closely scrutinise firms’ financials and assess their supervision policies so it’s clear the firm will avoid dabbling in times of crisis,” said Glynn. “They will also consider how firms are managing workloads, where they are making employees redundant, and how they are upskilling employees if they are relocating staff from different departments. We want to understand what firms are doing to safely keep the lights on. Travelers is in this business for the long term so no matter what our insured is going through, chances are we have seen it and been through it with our insureds before. It enables us to draw upon our accumulated experience and assist our insureds in conducting their business safely regardless of the challenges that arise – both now and in the future.”
