The effect of high premiums on law firms
High insurance premiums ultimately lead to a huge overhead that has to be passed onto clients. They also lead solicitors to adopt a very cautious approach when advising clients because of the harm done from a claim which would lead to their already expensive premium increasing. I believe this is a big factor in contributing to the accusation that solicitors are ‘un-commercial’ and overly wary of risk.
The high premiums also severely restricts the ability of small new law firms to enter the market and helps to explain the lack of innovation and the prevalence of old working practices in the legal sector.
The US experience
However, a law school graduate in the United States can set up their own practice straight away without any experience, yet still pay professional indemnity insurance (malpractice insurance in the US) of only a few hundred US dollars each year. This is especially remarkable as the US is a far more litigious country than the UK and the value and frequency of claims against lawyers are likely to be far higher. Also of note is that not all states in the US make taking out malpractice insurance obligatory for lawyers.
Other than surveyors, I don’t know of any other service industry in the UK that has to pay anything like the insurance cover required for solicitors. I know web developers who are potentially exposed to massive liabilities yet very few in their industry pays for insurance to cover any negligence. The largest professional negligence claims in the UK courts have been made against accountants, yet I know sole practitioner accountants who pay an insurance premium that is only a fraction of what it would be if they practised as a solicitor.
Problems with the insurance market
When I enquired about getting my own insurance I was told there very few insurance providers existed in the market. I have also been told that very high premiums are charged to small firms even though they have no history of any meaningful claims and also do work that is very low risk. There are suggestions that the SRA or Law Society could collude with, or be in the pay of, the insurance industry, or at least the main players in the legal market, to help them operate a cartel.
The length of time that it takes each practice to fill in a bespoke form for each insurer also reduces the competitiveness of the market as it make it impractical for a firm to get a quote from more than one or two insurers. In a digital age, surely a universal electronic form can be submitted on a web platform for all insurers to access.
There is also the common accusation that insurers encourage claimants to sue (or at least don’t discourage them) as this enables the insurer to raise the premium again.
The Assigned Risk Pool (ARP) is a scheme for those solicitors that cannot obtain professional indemnity on the open (yet still very narrow) market. Despite the fact that ARP candidates have to pay a higher premium to get insured and also their total liabilities are relatively small compared to the whole market, insurers insist that the ARP scheme is a heavy burden on them and use it to justify higher premiums across the industry.
Legal practitioners without insurance
I am forever meeting ‘HR consultants’ and ‘Legal affairs advisers’ who practice as unregulated (by the Law Society and the Solicitors Regulation Authority (SRA)) and therefore uninsured lawyers, some of whom are experienced solicitors and others who have no formal legal background. They are winning more and more work that would otherwise be done by an SRA regulated firm of solicitors. Businesses know they are not covered by indemnity insurance but have no problem instructing them because they are comfortable they have the requisite experience and knowledge and don’t want to pay the premium necessary to instruct a highly regulated firm of solicitors burdened by insurance premiums. With Alternative Business Structures (ABSs) being allowed to operate from October 2011 the distinction between solicitors and non solicitors will become increasingly blurred.
Solution: Allow clients choice of whether work is insured?
All work done by a SRA regulated solicitors practice is currently covered by insurance whether the client likes it or not. The client should be given an option on a case by case basis whether they would like to incur the extra cost of having their matter covered by insurance and solicitors practices should operate two divisions, one carrying out insured regulated work and the other doing everything else. In the majority of cases, other than where there is a big asset or potential liability at stake, I think clients would choose not to incur the cost of having their legal adviser’s work insured. Indeed, large companies are happy for their in-house legal departments to carry out ever more complex and important work, yet I don’t believe companies take out insurance to cover any possible negligence of their legal staff.
There are only six reserved legal activities that the Legal Services Act makes a criminal offence for anyone other than a qualified, regulated and insured solicitor or other legal professional, such as a barrister, to carry out. These six activities are the exercise of a right of audience, the conduct of litigation, reserved instrument activities (i.e. conveyancing), probate activities, notarial activities and the administration of oaths. Yet, most commercial firms earn the vast majority of their income from non-reserved transactional work which can be lawfully carried out by an unregulated professional. With the coming competition from ABSs more and more law firms may consider whether they should be regulated at all and just operate a separate regulated entity for, or outsource, any reserved activities.
What does anyone else think?