- On top of 37 law firms which have closed in past year due to lack of PII
- Some firms are paying up to 25% of their revenue on PII
Nine UK law firms have had to close in the last three months alone due to their inability to obtain Professional Indemnity Insurance cover.
In the preceding 12 months another 37 law firms had to close** as the cost of Professional Indemnity Insurance soared.
Professional Indemnity Insurance is used to pay for the costs of professional negligence claims by customers and is one of the biggest expenses for law firms.
On average, Professional Indemnity Insurance now costs almost 5% of law firms’ turnover. However, firms for whom conveyancing makes up a significant proportion of their income can now pay as much as 20% of their turnover for Professional Indemnity Insurance. Insurers regard firms that make more than 25% of their revenue from conveyancing work as higher risk for professional negligence claims and thus charge higher premiums to these firms.
Professional Indemnity (PI) premiums for conveyancing work are particularly high due to the significant volume of claims in this area as well as the high ‘ticket value’ of property transactions. Claims against residential conveyancers often rise when the property market slows.
The rise in premiums is being exacerbated by more insurers reducing their capacity in, or exiting completely from, what has been a largely unprofitable market. There are also no new entrants who are looking to acquire a share of the lawyers’ professional indemnity market. With an increasingly limited number of insurers to choose from, this has made it difficult for law firms to shop around for a competitive rate.
There are concerns that, if the property market falls then, as in the Global Financial Crisis, there could be an increase in professional negligence claims against lawyers for work they have undertaken in relation to property transactions.
Ian Johnson, Associate Partner, says: “The cost of insurance is becoming an increasing problem for law firms. This is particularly the case for smaller law firms who may not have the same risk management processes as large law firms and ones focused on conveyancing or other higher risk areas.”
“With the number of insurers in the market shrinking and those still left increasingly risk averse, premiums could continue to rise. In order to mitigate any issues, firms should ensure that, over the next 12 months and beyond, they have a funding strategy in place to pay for these increasing premiums and have a strong handle on their financial forecasting so that they can plan for tough times ahead.”
*98-day period from 1 July 2022 to 6 October 2022
**Year to 30 June 2022
