Lexcel – A Brokers View
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.