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.