Solicitors - Do you D&Know the Risks?

Management Liability for solicitors is a tricky business right now, and for good reason. In this article we are going to examine some of the changes in solicitors’ exposure over recent years, as well as the (semi) unique requirements they have of D&O policies and what insureds, brokers and underwriters need to know about them.

Growing Exposures

1. Focus on workplace culture

Unfortunately, the legal profession has appeared far too often in the headlines over the past few years for issues relating to the conduct of employees, and particularly partners, in and out of the workplace.

Whether it’s allegations of sexual harassment, misconduct or bullying and stress it’s no real secret that there have been cultural issues within the workplace for law firms for a while now. The advent of #MeToo and similar social movements have encouraged victims to come forward and insurers are seeing an uptick in claims as a result. In 2020 Legal Cheek reported that sexual misconduct claims to the SRA (Solicitors Regulatory Authority) had risen 152% in 5 years.

The cost of these types of claims can be enormous, with SRA cost orders being seen as high as the hundreds of thousands of pounds, as evidenced by the (now quashed) Ryan Beckwith case in 2020. Another recent example of soaring costs can be seen in Janaury 2022 when Mischon de Reya was hit with a £232,500 fine and £50,000 cost order.

Lack of diversity has also been regularly highlighted. The vast majority of senior figures in the legal profession as it stands are both white and male. Whilst significant strides are being taken, more will need to be done as focus is increasingly placed not just on the activities of the boardroom, but just who has a seat at the table.

2. Growing IPO trend

In 2007, the Legal Service Act made possible something which wasn’t previously. Law firms could undertake an IPO and be publicly traded. However, it wasn’t until 2015 that one firm, Gateley plc, finally took the leap.

To say Gateley opened the floodgates would be an overstatement. There remains only a handful of publicly traded law firms, perhaps the most notable being DWF. However, CityAM reported in in November 2021 that one-third of all firms were “contemplating listing on the stock market in the next year” so, could we be on the precipice on a legal IPO boom?

The exposures that come with an IPO and being publicly traded hardly need repeating and it seems even expert lawyers get things wrong, as was the case with the Ince Group plc in the later half of 2021 when they strangely tried to buy Arden Partners who, at the time, were acting as their “nominated advisor” – a position required under AIM rules. As a result of this, Ince’s shares were suspended for sale on 28 October 2021.

One of the largest firms in the world, Mischon De Reya LLP has received partnership approval to take itself public, although as recently as January 2022 that decision has been put on hold a second time.

3. Increased intervention and powers of SRA

Clyde and Co stated in the FINPRO 2021 End of year review that the SRA continued to “proactively identify and pursue cases” throughout 2021 and that the organisation retained a remarkable ability to operate “almost as normal” with virtual hearings run by the SDT (Solicitors Disciplinary Tribunal). This commentary from within the legal professions is a key indicator that SRA investigations and claims related to these continue to increase in frequency.

We can expect severity of SRA intervention to increase as well. In November 2021 the SRA launched a consultation in relation to its financial penalty powers. It is seeking, amongst other things, to raise its own powers from £2,000 to £25,000 in relation to maximum penalties it can impose as well as proposing to introduce a system which considers the earnings of the individual concerns – a income-based approach to fixed penalties.

4. Remote working and failure to supervise

The legal industry was possibly one of the hardest hits by the shift to remote working. Whilst some firms excelled, the majority had no flexible working plans in place prior to April 2020 and were reliant on ageing systems and personnel dependent administration processes.

Although most firms appear to have successfully made the switch, one key area of exposure from this shift are failure to supervise claims.

Professional services exclusions are standard in D&O policies, and for good reason. They simply exist to ensure an insurer is not paying out on a claim that is more properly covered under a professional indemnity policy. However, most will have an exception for claims in relation to a failure of the firm to adequately supervise work undertaken.

Given the extremely sensitive nature of work undertaken by firms, solicitors continue to be a regular target for PI claims, and, by extension, claims for failure to supervise. The age-old method of having the senior associates sitting at the desk to your left and right and a partner in their office at the end of the hall went out the window with lockdown, and with it the ability of most firms (at least initially) to supervise work properly.

As we approach the two-year mark, it is very likely there are trainee solicitors out there who have never been to the office, perhaps never even met certain supervising solicitors or partners in person, who will be about to ‘graduate’ and receive their full practice certificate. It is only with time we shall know if firms were able to respond effectively to this fundamental shift in training structures and processes.

5. Remote working and protection of client data

As I noted above, many law firms were reliant on legacy systems prior to 2020, and cyber security was no exception. Law firms handle some of the most sensitive client data to be found, and so it is very easy to see why firms would be subject to increased attacks by cyber criminals in search of that data. As remote working becomes the norm, insurers must be mindful of the sheer amount of private data firms hold, and how they protect it.

Of course, cyber criminals are not the only time data will be exposed. As a result of the extreme demands of the job, work is often taken home by solicitors of all levels. This can mean the removal of sensitive files from the secure office environment. All it takes is one overworked solicitor to accidentally leave a briefcase on a train (as was the case here and here) and you have a potential data breach.

It is therefore vital firms maintain and enforce robust data protection and security policies, both electronically and physically.

Bespoke Policy Requirements

Aside from the ever-expanding risks facing solicitor clients, they often require a bespoke policy that more cookie cutter insurers simply do not provide. This can leave clients exposed on unnoticed technicalities of wordings. It is vital to ensure the policy is fit for purpose.

1. LLP Structure

It might seem very basic, but not every D&O policy is set up to fit with the structure of an LLP (Limited Liability Partnership). Brokers need to ensure the definition of directors is sufficiently broad to encompass partners of the firm. Crucially however, some firms have senior officials, such as practice managers, who cannot be partners of the firm owing to the fact they are not solicitors. They will however still require and expect indemnification under a firms D&O policy in the event of a claim. Wordings must therefore cater for these individuals or brokers ensure they are added by endorsement.

2. COLP, COFA and MLROs

As with the above, solicitors are required by a combination of SRA rules and statutory requirements to have three key individuals in place who may not be partners of the firm but will expect and require cover under the firms D&O policy. These are the:

· Compliance Officer for Legal Practice (COLP)

· Compliance Officer for Finance and Administration (COFA); and the

· Money Laundering Reporting Officer (MLRO)

The COLP and COFA are both SRA facing roles, and it is very likely they will be key individuals when the firm is faced with investigation. Therefore, brokers will normally look to ensure these individuals are specifically covered under a D&O policy.

Some more generous policies in the market even offer additional limit for people occupying these positions. If you are really concerned about exposure, this could be a consideration. Of course, they come with a premium attached and increasingly are being reduced or requiring a tower to sit under the reinstatement of the limit.

Recent market developments

1. Entity EPL capacity continues to diminish

Even as new entrants arrive in the D&O market space, the capacity for entity EPL (Employment Practices Liability) remains scarce. Many who offer D&O on solicitors refuse to extend this coverage to CLL and EPL. This has led to allocation issues on a number of claims where both partners and the firm itself are named. What capacity is available offers small limits with high retentions, and there is little sign of significant recovery bar one or two new entrants.

As a general rule clients can expect retentions of at least £25,000 minimum with £50,000 and higher being fairly common.

2. Cuts to line sizes and change of basis

Those who had a £5m AOC limit last year may find that this year they can only source £2m AGG this year. There is a noticeable shift to reduction on primary line exposure for carriers who write solicitors ML. Those buyers of higher limits may find they are forced to source 3x2 or even 4x1 layers.

3. Premium

Premium challenges continue to plague clients, with increases of around 20 – 30% as standard even on basic renewals.