There's a hole in my safety net

Lending Strategy March 2010

In my column in the October issue of Lending Strategy I praised the cleansing effect that increased professional indemnity insurance premiums - and the refusal to offer terms to some - was having on solicitors in the residential conveyancing market.

I pointed out that this effect, which has seen many firms close as a result of being priced out of the market, was not so notable in the last downturn as a result of the existence of the solicitors’ compulsory mutual insurer the Solicitors Indemnity Fund masking potential problems.

Claims brought by lenders - and I played my part on behalf of many lender clients - brought down that fund and forced all solicitors onto the open market. Until now this open market system has not been tested in a downturn, and we are beginning to see some undesirable results.

In the early part of the last decade the IFA market was hit by the effects of a major pensions review.

The redress payable to nurses, police officers and other public servants advised to get out of occupational schemes and take out private pensions was huge.

The insurance market decided enough was enough. It became routine to go through supplementary pensions review questionnaires with a fine tooth comb and spot mistakes - and I can tell you it was not an easy form to fill in.

Many firms can’t even get the minimum mount of cover on sensible terms at the moment - we could end up with only a handful of companies able to do residential conveyancing work

The default position in many cases became to decline to offer indemnities. Countless claims had to be brought by IFAs who insurers calculated - would it be mischievous to imagine they used actuarial calculations? - didn’t have the resources to fight and deals were done.

Insurers saved money.

We are beginning to see similar results with regard to claims brought by lenders against solicitors. The conduct of solicitors is being scrutinised closely and any hint of dishonesty seemingly results in cover being withdrawn, meaning no cover is available to meet claims.

And problems are not limited to the sole practitioners who most lenders have not touched with a bargepole for years anyway. Other partners are having indemnities withdrawn for effectively turning a blind eye or not monitoring partners closely enough.

But this is not the most worrying trend. The biggest single problem is the aggregation of claims.

Linked cases are being aggregated and treated as single claims. They are being aggregated on the basis of linked dramatis personae and other factors.

The net result is that the indemnities offered to solicitor firms are being exhausted, leaving nothing to meet other outstanding claims.
By way of an example, I recently encountered a situation whereby a relatively small law company faced claims from lenders amounting to around £15m. The firm, quite properly, had the SRA minimum cover of £2m per claim.

But all the claims were aggregated and treated as one by insurers. In practice, this meant that £13m worth of claims were unmet.
While arbitration to challenge such decisions is generally an option under policy terms I wouldn’t mind betting insurers calculated that many firms would not have the resources to take them on in this way.

This should make lenders, the Council of Mortgage Lenders, the Law Society and the SRA think.

SRA minimum cover is beginning to look wholly inadequate for lenders. If aggregation of claims is going to continue, cover for firms instructed by lenders will have to be considerably higher than the current minimum to provide any degree of comfort.

It’s hard to argue against the notion that lenders should not instruct firms that have less than £10m to 15m cover per claim. This begins to make the ban on using sole practitioners look like a minor diversion. Many firms can’t even get the minimum amount of cover on sensible terms at the moment. We could end up with only a handful of companies able to do residential conveyancing. Lawyers won’t like that and I’m not sure it will serve lenders or their borrowers particularly well either.

The SRA regulates the terms of cover, not just the level of cover. It should sit down with the insurance industry and resolve this issue while the market is moribund, and the CML and the Law Society in their representative capacities should encourage this.

Otherwise, such will be the seismic effect on the market that the days of residential conveyancing being the mainstay of small and medium-sized law firms will be over. As things stand, I can’t advise lenders to touch them with a bargepole either.

Philip Tebbatt is principal of niche financial services law company Slater-Rhodes and can be contacted at philip.tebbatt@slater-rhodes.com