As firms conclude the annual renewal of their Master Policy cover, some answers to questions on the relationship between claims, risk management and firms’ professional indemnity insurance premiums

Q What are the Master Policy premium implications for a practice which has intimations on its record?

A The short answer to this question is “It depends”. The Master Policy premium impact of an intimation on a practice’s record depends on a number of factors:

Whether the intimation is a claim or a “circumstance” at the “snapshot” date – if only a “circumstance”, the intimation is disregarded by the insurers for the purposes of calculating the practice’s renewal premium.

If the intimation is a “claim” at the “snapshot” date, does it fall within the relevant period for the Master Policy premium calculation?

Premium loadings or discounts may apply, depending on the individual practice’s own claims record, based on a loss ratio calculation at the end of May preceding renewal. In summary, practices which have higher loss ratios (because of a claim or claims on their records) will incur a premium loading, and eligible practices which have lower loss ratios (because they are claims-free, or have low claims records) may benefit from a premium discount. In effect, these arrangements recognise and incentivise effective risk management.

(Note: The Master Policy premium arrangements are complex and the comments in this article provide only a general, simplified overview.)

Q What are the implications for a practice which has a high frequency of claims on its record?

A The Master Policy premium rating applies an additional claims-related loading in the case of practices which have not only high loss ratios but also high frequencies of claims on their records. There tends to be a correlation between frequency of intimations and the effectiveness of practices’ risk management.

Q What are the implications for a firm which has a high value claim on its record?

A As far as the Master Policy is concerned, there is the potential for a substantial premium loading. If the incurred cost of the claim exceeds the Master Policy limit of indemnity (currently £2 million on any one claim plus defence costs), there may also be a loading of the premiums payable by the firm for any optional top-up cover.

Q Are there any other ways in which the Master Policy encourages or incentivises effective management of risk?

A There are different levels of self-insured amount (excess) which are designed to provide targeted incentives to reduce risk by ensuring appropriate levels of risk awareness and putting in place effective risk controls. For example, a self-insured amount of twice the standard level will apply in relation to a second claim arising out of a failure in compliance (after 1 November 2014) with specified reporting requirements in the CML Handbook. In the event of a third or subsequent claim in a rolling five-year period, a trebled self-insured amount applies.

There are various other categories of claim to which doubled or trebled self-insured amounts apply, all of which represent incentives to encourage focused risk awareness and to put in place targeted risk controls, all with a view to reducing the incidence and risk of the targeted categories of claim.

Q Is there an increased level of interest and engagement with risk management around Master Policy renewal?

A Inevitably, for some practices, the run-up to renewal and the notification of firms’ claims-related discount/loading position does prompt an increased focus on strategies they can adopt to reduce their overall premium spend. There is the potential to secure a low-claim premium discount and to avoid claims-related premium loadings and liability for self-insured amounts, and the most effective way of reducing Master Policy costs is to aim to maintain a claims-free record through effective risk management.

Any type of claim can lead to severe financial consequences for a firm, including increased premiums and payment of the self-insured amount. Additionally, firms can also incur “indirect costs” such as payments to clients without recourse to insurers, write-offs, lost productivity and reputational damage. In order to reduce this exposure, firms need to have a strategy to ensure that:

  • risk management systems are in place;
  • those systems address the underlying causes of claims;
  • the systems are well understood and observed by all staff; and
  • all staff are risk aware.

The last point is arguably the most important of all, as risk awareness is key to the effectiveness of a firm’s risk management.

Q Where can solicitors get guidance on how to address the critical risks in their practices, in a particular practice area for instance?

A A review of previous issues of this column would provide guidance on a wide range of risk and risk management issues, including live risk issues. At this time, the risk of exposure to external frauds and scams is a priority.

Since the beginning of this year, the risk issues addressed in this column have included:

  • IT security risks and practical risk controls; property/conveyancing-related claims, including lender claims;
  • frequently-recurring claims for family law practitioners;
  • cyber risks, risk controls and cyber insurance;
  • avoiding errors and omissions in exercising break options;
  • top 10 underlying causes of claim.

The search capabilities within Journal online (www.journalonline.co.uk) make it easy to locate articles on specific areas of risk concern.

Q What training materials and resources are available on the Marsh website?

A At this time of year, with the CPD year end approaching, the training materials and resources available in relation to risk management can both deliver a risk management benefit and meet solicitors’ CPD requirements.

Marsh can supply materials for use in firms’ in-house training, or members of the Marsh team can take a more active role as presenter of a seminar or facilitator of a workshop or other group discussion. There are training modules and online assessments on the subject of:

  • Frauds and scams – increasing awareness;
  • Information security;
  • Managing critical dates;
  • Terms of engagement;
  • Introduction to professional indemnity insurance;

Client and transaction vetting

The “Frauds and scams” module is the most recent training to be made available to all in the profession on the Marsh website, free of charge and with an online assessment. It has been reported (“Russian gangs in ‘Friday fraud’ hit solicitors for £50m”, The Times, 4 September 2015) that solicitors across the UK have been the subject of external frauds and scams totalling some £50 million in a six-week period up to the beginning of September this year.

Against that background, it is difficult to imagine a more pressing priority for risk awareness training for all colleagues.

Alistair Sim and Marsh

Alistair Sim is a former solicitor in private practice, who works in the FINPRO (Financial and Professional Risks) Practice at Marsh, global leader in insurance broking and risk management. To contact Alistair, please email Alistair.j.sim@marsh.com

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.

The Author
The Marsh solicitors website can be accessed at www.marsh.co.uk/login/lawscot. Each firm’s risk management contact has been issued with details for access to the website. If you have any difficulty accessing the site, please contact Nada Jardaneh, a member of the Master Policy team at Marsh – nada.jardaneh@marsh.com Marsh Ltd is authorised and regulated by the Financial Conduct Authority. 
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