Member Article

Underwriters drive a hard bargain on professional indemnity renewals

With Watson Burton LLP Law Firm

The current economic climate has generated much heated discussion amongst experts in the financial sector. The insurance industry is no exception, and the effect will be especially hard felt by those professional services firms who are currently looking to renew their professional indemnity insurance.

An increase in litigation has seen Insurers paying out on a greater number of professional indemnity claims and, as a result, finding themselves with a diminished cash flow. This is deterring investors who are worried about falling earnings and the prospect that many in the sector may need additional capital, which would dilute their own shares. If these investment losses keep mounting, they will begin to eat away at Insurers’ capital.

In a bid to stay afloat, Insurers are passing higher prices on to their clients. It is becoming clear that underwriters are increasingly cautious in relation to those firms who undertake a large proportion of commercial and credit-based activities, and are being selective in offering renewals and new business terms. As a result, all firms, even those with clean claims records, are likely to see an increase in premiums.

Those seeking insurance are finding it increasingly difficult to get clients to pay their cost bills. However, they may think twice before suing for their fees. Notification of the counterclaim in negligence, in fee recovery claims, has increased. The trend is for the client to use the counter claim as an avoidance tactic, to avoid paying their bill, or at least reduce it considerably.

Insurers are working on tight margins. Simon Lovat, of United Insurance Brokers, points out that a 100% loss on premiums is the norm, and a loss of 30% above total is becoming more common. It is, therefore, increasingly important for premiums to be set at the right level, or the Insurer risks making a loss. Ratios of premium outgoing compared to fee income will only continue to increase.

Accordingly, Insurers are having to put more thought into the best way of dealing with claims. The reduction in cash flow means that a more commercial view may be taken on claims which would, in different circumstances, have been litigated. The Insured firm finds itself in an unfortunate situation. Any claims made against it, even those where liability is not admitted, will remain on its claims record, and this is likely to increase its premium the following year.

Firms should provide their broker with full information in plenty of time. This means that the broker is in a better position to negotiate with underwriters, who are asking increasingly detailed questions. It should be remembered that, irrespective of the claims record of the Insured, a lack of information may lead to an increased premium.

Not all is bleak though, and underwriters are still prepared to insure what they consider to be the right risks. It is, however, undeniable that the balance of power is shifting in favour of the Insurer. Consequently, those seeking to renew their professional indemnity insurance are advised to speak with their broker early, to give themselves the best possible chance of successfully negotiating a favourable renewal.

If you have any comments or questions about this article or any professional indemnity related matters, please contact Katie Usher of Watson Burton LLP at katie.usher@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .