By Chris Taylor, Chief Executive, Titlesolv
Since October 2013, the introduction of insurance policies of alternative lengths has enabled legal firms to switch their Professional Indemnity Insurance (PII) renewal date from the traditional October deadline. While it seems that the majority of legal firms have thus far adopted an ‘it ain’t broke so don’t fix it’ approach and adhered to their October renewal date, a growing number are choosing to make the switch. According to research by law firm O’Connors, about 21% of firms have switched to longer policy periods, with 11% choosing an 18 month policy and 10% choosing periods ranging from 15 months to 24 months. More are likely to follow once the insurance market properly adjusts to the fact that it no longer has a hard and fast annual cycle by which it has to operate. For smaller conveyancing firms in particular, or those which may specialise in riskier, contentious or niche work, switching to a quieter time of year could make sense: an underwriter who has more time to evaluate their submission is more likely to give detailed consideration to a firm’s risk profile and to the pricing of that risk than one who is facing a deluge of applications during the autumnal peak season.
Whatever renewal time is chosen, it remains critical that sufficient cover is in place. The deadlock over reforms to the minimum level of PII cover required continues. The Solicitors Regulation Authority continues to lobby to lower the minimum threshold to £500,000 – saying that this will cover the vast majority of claims, help smaller firms, and introduce more competition and flexibility into the market. However, this stance has been continually rebuffed by the Legal Services Board, which says the current level of £2m level (£3m for incorporated firms and LLPs) should remain in place for the foreseeable future as a lower amount of cover would be insufficient for many firms and is unlikely to result in any significant drop in PII premiums. Lowering the threshold could also have another consequence: a threshold of only £500,000 could result in mortgage lenders placing separate insurance cover and passing the costs on to the borrower in an attempt to manage their high risk exposure on conveyancing negligence.
Conveyancing remains the riskiest area of legal and professional practice in the UK. According to a figures published by the Legal Ombudsman last year, one in five of the complaints it receives relates to a residential transaction and the number is rising: 1,476 complaints were received in 2013-14, a 24% increase on the 1,189 complaints received in 2012-13. A single successful claim can have a major impact on a smaller firm given the relatively high values associated with property transactions. In its 2014 Report to the Law Society of Scotland, Marsh, the broker for the Master Policy, reported that for the year 2012 to 2013, conveyancing related claims accounted for 75% of all PII claims on the policy. The report further details that lender-related intimations, mainly arising from failure to report in accordance with the CML Handbook, remain by far the most significant feature of the claims experience, reflecting the level of borrower default during the economic downturn and losses on repossession incurred by lenders. Law firms with heavy weightings in conveyancing transactions and PII insurers alike would agree that conveyancing negligence risk transference is an option which should be explored with a view to improving firm and book performance.
Title insurance was originally conceptualised in 1868 in the US as a means of managing conveyancing risk without proof of negligence prior to claim acceptance. In the UK, volume conveyancers have specifically used title insurance as a surrogate for PII to manage conveyancing risk. There is also an inference based on PII proposal form questionnaires that insurers deem title insured risks as more attractive and tend to reflect this in lower PII premiums.
In anticipation of their renewal, law firms should aim to demonstrate to PI insurers that they are serious about addressing conveyancing risk elements which historically have negatively impacted on their risk profiling. This requires a two pronged approach. Firstly, they should consider illustrating that they have made internal changes to adopt better conveyancing practices which will reduce instances of claim triggers within their control such as drafting errors, search interpretation flaws and missed registration deadlines. Secondly, they should consider more practical ways of managing those elements of conveyancing risk which are outside of their control such as fraudulent transactions and latent title defects which may not be immediately obvious during the transaction. In the latter context, failure to advise on the unintended consequences of title defects or burdens such as restrictive covenants or access issues, can have severe consequences for a conveyancer where their client alleges that they have suffered a diminution in value of their property as a result of improper advice. Title insurance is the perfect tool for managing latent or unforeseen transactional issues. More importantly, as an insurance product, its focal point is the title diligence process which is the nucleus of a conveyancing transaction and is the area from which most PI negligence claims are derived.
If you are a legal firm with a proportionally large conveyancing transaction base which is tackling your PII renewal and you would like to discuss additional ways of managing your risk, please contact our team of title insurance experts at 0844 800 1043.
Titlesolv is the trading name of London & European Title Insurance Services Ltd, authorised and regulated by the Financial Conduct Authority.