Opinion: PI pointers

By Peter Maguire, partner responsible for professional indemnity insurance and risk management, CMS Cameron Mckenna LLP

From time to time, all law firms have cause to review their professional indemnity strategy and the detailed arrangements they have in place. While price is the determining factor for many firms, others will wish to take a broader range of factors into consideration. What then are the key issues for management to consider and how can a firm make itself a more attractive proposition to insurers?

The very broad scope of cover negotiated by the Law Society with qualifying insurers in the minimum terms and conditions (MTC) is more than adequate for the vast majority of law firms. However, larger firms – particularly those with international practices – usually require tailored policies that extend or broaden cover in a number of ways.

In general terms, a review of the activities of the firm is essential, usually with broker input. It is also highly desirable (wherever possible) for the wording of the excess layer policies to follow that of the primary in order to avoid the risk of a ‘mis-match’.

The appropriate level of professional indemnity cover is, by definition, practice-specific. In terms of ‘top end’ work, the value of transactions has continued to increase and it has become difficult or impossible to purchase enough insurance to cover all potential exposures. In practice, what is required is a sufficiently large level of cover to persuade a claimant to settle within the policy limits where these are exceeded by the firm’s potential liability. Most firms seek to arrange insurance at levels commensurate with their peer group – an area where brokers are able to assist.

While current market conditions mean that excess-layer cover is plentiful and reasonably priced, however, the cyclical nature of the market means that this cannot be guaranteed in the future.

What features attract insurers?

Although qualifying insurers target different sectors of the profession, they all wish to insure firms who:

Have a good claims record;
Give a fair and honest presentation at inception/renewal (rather than suppressing problems in order to try and secure better terms);
Notify problems promptly;
Perform a skilled and effective salvage job when things go wrong;
Learn the lessons of claims and ‘near misses’;
Are stable and well managed at all levels;
Do not stray outside their areas of expertise;
Have good internal risk-management procedures and are able to demonstrate that these make a difference;
Monitor and enforce compliance with key rules and guidance.

What do firms need to do in terms of risk management?

Insurers generally seek evidence of:

Commitment and input from central management in driving through any necessary cultural change;
An awareness of risk-management principles at all levels;
Appropriate resources being devoted to these issues and evidence of the firm taking them seriously;
The availability of clear rules and guidance and attempts to monitor compliance;
Training at practice-group level;
Other positive features, such as client vetting and incorporation of general terms of business into client retainers.

Getting your message across

Insurers have very little time to assess a risk and many larger firms ensure they maintain a dialogue with their lead underwriter throughout the policy period.

Where renewal presentations are made to primary and, where applicable, excess-layer insurers, it makes sense to involve central management as well as any designated insurance partner. Management can then provide insurers with an update on what is happening at the firm; what has changed; and what plans are in place for the future. These meetings are an opportunity for underwriters to ask questions that go well beyond those in the proposal form.

Likewise, while continuity of insurers is highly desirable for law firms, it is also imperative to be able to attract an alternative quote or quotes at renewal if necessary in future. The prospects of doing so will be enhanced if the approach set out above has been adopted.

Peter Maguire is a partner at CMS Cameron McKenna LLP. He can be contacted at peter.maguire@cms-cmck.com