Professional Indemnity Insurance (PII) claims against lawyers have three causes, negligent advice which is rare, dishonesty which thankfully is also rare and non-compliance with a firm’s procedures which is by far and away the biggest cause. Rueful thoughts about the size of this year’s PII premium may perhaps cause you to reflect upon the firm’s claims experience over the last six years and what might have been, in other words how low your premium might have been had this or that claim not occurred.
Our experience in years of advising law firms draws us to the conclusion that Lexcel is a Very Good Thing as a means of limiting claims and so controlling insurance premium. Different insurance companies used markedly divergent ways to calculate premiums but they all have one thing in common: premiums dramatically increase with a rise in the number and size of claims paid and reserved against law firms. For example, a firm had for 9 months employed a rogue conveyancer; it received some dozen claims as a result. At the subsequent renewal their premium was set to increase from £21,500 to £58,750. Fortunately, one of the partners had good relationships with three of the claimants; he persuaded them to withdraw their claims. This caused a drop in premium to £38,000 the minute the insurer received those withdrawal letters. Had they been Lexcel accredited I believe that the firm would have supervised the conveyancer effectively, thereby probably avoiding all of the claims.
A senior underwriter in the London market told me two years ago about a number of firms which they had insured since 2000 which had each suffered costly claims, mostly due to sloppy procedures. Several then became Lexcel accredited. The insurer told me that two years after accreditation, the Lexcel firms’ PII premiums had dramatically reduced. The underwriter’s surprise was still evident two years after the trend became obvious.
No insurer gives a discount for Lexcel accreditation. Instead, firms whose claims experience improves due to Lexcel benefit from lower than benchmark PII premiums, what I like to call the Lexcel Effect. From the insurance broker’s standpoint, it seems that Lexcel accreditation pays for itself many times over.
I believe that Lexcel has huge benefits also for firms which have not had costly claims. Firstly, claims that might occur will not do so. The firm will induct new entrants with greater ease. Staff know what to expect from each other. Partners tell us that adherence to Lexcel’s policies and procedures brings about a happier firm.
Achieving and maintaining Lexcel accreditation however should not obscure the essential need to manage business risk as distinct from legal risk. There has developed a huge disparity between firms with properly drafted and disseminated business continuity plans and adequate insurance arrangements and those who have merely tick-boxed all of these.
In going for Lexcel accreditation, why not use the impetus as a means also of improving the firm’s response to business risk such as fire, departure of significant fee earners, damage in the vicinity causing denial of access to your premises and ET1 claims following poorly managed redundancies? Long years acting as insurance broker to law firms reveals inadequate responses from the insurance industry to the needs of law firms. For example a terribly well known broker failed to make the senior partner fully aware of the need to insurance gross revenue properly to avoid the under insurance penalty, by dealing at a distance rather than meeting him. Significant damage led to a large claim for loss of revenue. The under insurance had gone unnoticed by both the partners and the insurance broker and the insurer was quite correct in decimating the claim. The cost of putting this sort of thing right is peanuts compared to the cost of PII, probably even less than the cost of a Lexcel consultant!
As with Lexcel, so with other aspects of risk management: its cost isn’t so much the fee you pay for the services but the loss of fee earning time in risk management. It really is quite hard to step away from fee earning to deal with these issues. Competent and clear sighted advice from the insurance broker makes a great deal of difference.