Legal update: Law firm closures due to failure to get Indemnity Insurance falls to lowest level since 2018/19

  • Only 34 law firms closed compared to recent high of 65
  • Pick up in M&A activity also leading to fewer law firm closures

The number of law firms having to close due to their inability to obtain professional indemnity insurance cover has fallen further in the past year (year-end October 31 2023), from 36 in 2021/22 to 34 in 2022/23, shows our new research.

The new drop in firms being forced to close due to a lack of professional indemnity insurance cover comes as many firms begin managing their costs more effectively. This is a strong sign of recovery for the legal sector.

Professional indemnity insurance cover (PII) is mandatory for all practicing law firms and is used to pay for the costs of professional negligence claims made by customers against their providers. Law firms may be hit with these claims if they are alleged to of provided inadequate advice or service.

Obtaining PII is one of the top three annual expenses for law firms, alongside overheads such as staffing and property costs. This places law firms at greater risk of insolvency if PII premiums increase.

Soaring costs in PII premiums placed enormous stress on law firms, previously forcing more firms into insolvency. 65 law firms closed due to their inability to obtain PII in 2019/20, more than three times the number of firms forced to close in the previous year.

Ian Johnson, Partner, says: “The drop in law firms having to close due to lack of PII coverage is welcome news for many legal providers.”

“Since the pandemic, the cost of PII had been rising for several years – forcing firms to endure a period of soaring premiums and rising overheads. For some firms, this was often the final push into insolvency.”

“As well as negotiating much lower premiums, law firms have also been able to cut their costs by either reducing their head count or subletting their office spaces to optimise their homeworking measures.”

The bounce back of M&A deals in the legal profession has also helped lower the number of law firm closure. After a sharp drop in deals during the pandemic, consolidators are now picking up their activity, leading to the acquisition of more firms that would been forced to close due to their inability to obtain PII.

Says Ian Johnson “As premiums continue to fall, and with M&A deals forecasted to pick up in the new year, we can expect to see the number of law firm closures continues to fall.”

Law firm closures due to lack of PII falls to its lowest level since 2018/19

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