People love suing solicitors – no wonder PI insurance is so expensive
Out of all of the professional sectors across England and Wales, law firms and their solicitors have been named on the majority of professional indemnity (PI) claims since 2020.
According to a new report by law firm CMS, since January 2020, 792 professional indemnity claims were filed to the High Court – 476 targeted solicitors or legal firms.
Despite the volume of claims remaining “fairly stable”, the report noted an increase in the number of claims being launched by people representing themselves.
These professional negligence claims involve allegations of breach of contract, negligence, breach of fiduciary duty and breach of trust. The banking and finance sector also featured heavily, mostly involving allegations of negligent advice or mismanagement of financial transactions.
Expensive insurance policies
Scarlett West, a partner in the insurance team at CMS, and one of the authors of the report noted: “Solicitors’ firms are facing higher PI insurance premiums and costs associated with regulatory compliance and increasing pressure to take on high work volumes to remain competitive”.
In order to be a regulated law firm or a practising solicitor, there must be a professional indemnity insurance (PII) policy in place, as set out in the rule book by the legal regulator, the Solicitors Regulations Authority (SRA).
But the price of these policies are far from cheap.
A report by the SRA last year detailed that PII premiums paid by law firms were typically between three per cent and nine per cent of annual turnover, with a median value of five per cent.
So if a law firm generated over £1m in turnover, its PI insurance policy is likely to be about £50,000.
Ed Anderson, partner at Browne Jacobson, told City PM: “Insurers continue to view solicitors as a more expensive risk and they continue to pay higher proportionate premiums than any other profession.”
As reported last July, accountancy firm Hazlewoods found that 65 law firms had to close down in 2019/2020 as a result of difficulties in obtaining coverage, but that number dropped to 34 for 2022/23 as premiums fell in October 2023.
Broker Howden reported last year an improving outlook for those renewing their solicitors’ PII.
The broker updated its report two weeks ago with more “positive news” as there were further increases in capacity and appetite from insurers during the 1 October 2024 renewal season.
As West explains: “There was increased capacity in the market for SRA regulated solicitors’ PI insurance during 2023/2024, with three new insurers signing up to the participating insurers agreement and no departures amongst those already signed up.”
Heat from the regulator
The legal regulator received almost 11,000 complaints about individuals or law firms during 2022/23, mostly from the public. This was a similar number to previous years.
Despite that, the regulator is seen to have become more active, with aims to “send a clear signal” to those it regulates.
The CMS report noted a significant increase in the SRA closing down law firms and solicitors’ practices. The number of closures soared from 25 to 65 in 2022/23. While in the same period, the number of cases referred to the Solicitors Disciplinary Tribunal by the regulator rose by 30 per cent.
Will Glassey, partner at Herbert Smith Freehills who advises other professional firms about regulatory investigations, told City PM that anti-money laundering or economic crime has seen an increase in SRA activity.
“In that area, the perception, politically, is that solicitors are a gateway to the UK’s economy, and that solicitors have a responsibility to prevent the legitimisation of unlawful economic activity,” he explained.
This is likely the result of the SRA being heavily criticised for its mishandling of Axiom Ince’s collapse, which resulted in over 1,000 job losses and criminal charges.
This law firm was engulfed in a scandal after approximately £60m of client money went missing.
“[The SRA] is under pressure to be seen to take more active measures to prevent any involvement by law firms in money laundering,” Glassey added.
Eyes on the Law is a weekly column by Maria Ward-Brennan focused on the legal sector.