Ruth Parker, Managing Principal at Marsh Australia, discusses professional indemnity and how can you best be prepared for renewal.
Solicitors’ season is upon us with many Australian law firms due to renew their Professional Indemnity (PI) Insurance Programs on 30 June 2022. So what is happening in the Solicitors’ PI market and how can you be best prepared for renewal?
What insurances are mandatory for law firms in Australia?
It is compulsory for solicitors to hold or be covered by an approved Professional Indemnity Insurance Policy before you engage in legal practice, unless you fall into certain categories of solicitors who are exempt. Below are the representative bodies for the legal profession in each State and their approved Policies. These compulsory Policies provide cover for up to $2m each claim including claimant’s costs and defence costs.
- Law Institute of Victoria – Legal Practitioners’ Liability Committee (LPLC)
- Queensland Law Society – Lexon Insurance
- Law Society of New South Wales – Lawcover
- ACT Law Society – Lawcover
- Law Society of South Australia – Legal Practitioners Professional Indemnity Insurance Scheme
- Law Society Northern Territory – Lawcover
- The Law Society of Tasmania – Law Society Professional Indemnity Scheme
What is “top up” professional indemnity insurance and why do law firms need it?
Top Up PI is the Professional Indemnity coverage a law firm elects to take on top of the compulsory layer. Although not compulsory, most Australian law firms purchase some level of top up professional indemnity insurance for additional protection, as the compulsory $2m cover is generally perceived to be inadequate protection against a law firm’s legal liabilities.
Defence costs can accumulate significantly when a claim is brought against the firm for an alleged error or omission, especially when it involves a large or complex transaction, which can have a severe impact on the firm’s financial health if the claim erodes the $2m limit.
When considering the appropriate limit, it is imperative to account for the size of the firm, practice areas, jurisdictional standards and the limits required in various contracts for service. The team at Marsh can guide you through this assessment and decision making process.
What is happening in the Top-Up PI market?
The Top-Up Professional Indemnity (“Top-Up PI”) insurance market for Australian law firms was already presenting significant challenges for the sector approaching the 2021 renewal season. Insurers focused on particular areas of the organisation pre-renewal such as: impact of COVID-19 (both operational and financial), cyber risk, the management of junior lawyers’ working hours, employee wellbeing, and risk management practices with respect to on-boarding new clients.
We at Marsh have concerns that pricing will unfortunately continue to rise for the foreseeable future due in part to the unsustainable low premiums applied during 2014 to 2019, the long-tail nature of solicitors’ PI claims experience, accompanied by the COVID-19 pandemic.
Established law firm/insurer relationships have continued to be beneficial in terms of continuing to support Australian law firms by providing capacity; however, the prevailing market conditions have often tested these relationships in terms of the premium increases applied. Law firms also enjoyed increases in revenue throughout 2020/2021 which contributed to the overall premium increase on programs.
During the 2021/22 renewal season, Marsh continued to deploy our placement strategy to ventilate capacity throughout the law firm PI programs and leverage the relationships held by our UK office with London insurers to obtain the most competitive cover, and ensured that the PI insurance program was tailored to each firm’s risk profile.
Marsh are aware of continued claims being paid by insurers for law firm clients over the last 2 years; these payments being for outstanding claims in prior years. For this reason we expect that we will continue to experience premium increases in 2022. Our additional concern is that underwriter appetite for participation in the first excess layer (above the $2m compulsory layer) as there are limited markets willing to attach at this level. Similarly, insurers participating between the layers attaching at $10m to $50m are showing signs of wanting to move higher up programs which brings additional challenges given the limited appetite amongst insurers to participate in this part of the program.
How do I optimise my renewal?
A relevant underwriting submission is key
A detailed and relevant underwriting submission is key to help you stand out from your peers. Insurers are continuing to conduct deep dives into COVID-19, cyber, business activities, claims, Environmental, Social & Governance (ESG) and supply chains. It is critically important to present strong underwriting submissions and robust underwriter presentations to markets in order to mitigate the impact of rate and premium increases for renewal.
Be transparent and differentiate
Be prepared for insurers to require more detailed underwriting information. Speak to your broker to establish the most effective way to present underwriting information. Identify and use marketing differentiators, such as key features of your risk management program.
Identify your risk appetite
Work with your broker to identify organisational risk appetite, including through retentions. Understand what will be an acceptable renewal program from a coverage, pricing, and risk retention perspective.
Capitalise on the value of your insurance broker
It is important to partner with an insurance broker that has the experience of operating in a harder market, and has strong relationships with insurers and the decision makers to whom the risk may ultimately be transferred, both here in Australia and abroad.
Use your relationships
The strength and size of a corporate relationship will be taken into account in the underwriting process. It may be effective to use insurers that are involved in your other placements, where appropriate, to secure visibility and senior management involvement, as well as maximise leverage in negotiations.
Stick to agreed milestones
Allow time before renewal to arrange for all capacity to be in place, and align on policy wordings. If a strict timeline is not adhered to, placement timing can lose momentum. It is best to avoid making decisions under the pressure of a current program’s pending expiry.
Disclaimer: Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983)(“Marsh”) arrange the insurance and is not the insurer. This publication contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire the product, refer to the specific policy wordings and/or Product Disclosure Statements available from Marsh on request. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors.
After spending 10 years in private practice in Sydney handling insurance litigation matters, Ruth have been working in London for the past 11 years, initially employed in the in-house legal team of a specialist underwriting agency managing a large professional indemnity practice involving claims against solicitors, independent financial advisers, surveyors, architects, engineers, brokers, IT consultants and others. Thereafter, she was employed at Xchanging in London. Xchanging are responsible for managing claims on behalf of certain syndicates at Lloyd’s of London. She managed an extensive caseload of high value, complex Bankers Blanket Bond, E&O and D&O matters in all jurisdictions in which Lloyd’s operates. After returning to Sydney, she was employed at Ace Insurance (now Chubb) and at Allianz Global Corporate & Specialty managing high value, complex D&O and professional indemnity matters including substantial class action litigation. As Client Manager in the Financial Specialties Team at Aon and now as Managing Principal at Marsh, her focus is guiding clients through the challenges in the insurance market, considering their risk management strategy more broadly and securing our clients’ Financial Lines insurance Programs including Directors & Officers Liability, Professional Indemnity, Commercial Crime and Cyber. Connect with Ruth via LinkedIn.
Marsh Australia’s Lawyers Practice currently comprises more than 70 colleagues who are dedicated to serving the insurance broking and risk advisory needs of Australian legal firms. They are look after largest portfolio of law firms of any Australia.
Marsh’s Practice team belongs to the Marsh global Lawyers Practice network incorporating professionals who work with law firm clients globally. Marsh’s UK and US Lawyers Practice regularly meet with the Australian Practice team to share thought leadership and key insights.