Law firm professional indemnity: Navigating your 2020 renewal

COVID-19 continues to disrupt both the local and the global economy. The pandemic has changed the way we work and how our organisations operate and has contributed to an increasingly challenging market for businesses approaching their insurance renewals. Law firms are no exception. To ensure your firm is prepared, we outline the impact that COVID-19 has had on the legal sector, and specifically what law firms may face this forthcoming renewal season as a result, especially in light of what were already challenging insurance market conditions.

Market capacity
The Top-Up Professional Indemnity (“Top-Up PI”) insurance market for Australian law firms was already presenting significant challenges for the sector approaching the 30 June 2020 renewal season. These challenges have existed in the local market for some time now, where the appetite for the insurance layers immediately above the Statutory PI policy (i.e. $2mil) has been constrained. However, we see this also now being the case for the London market, with a contraction of supply within the Lloyd’s market following the Lloyd’s Syndicate Decile 10 review, which has had a substantial impact on available overseas insurer capacity.

In some cases, larger law firms buying significant limits of indemnity have not been able to continue to purchase those same limits because of this contraction in capacity. We expect this to continue to be the case moving to the peak 2020 renewal season in June.

On top of these already challenged market conditions, law firms are finding themselves having to manage an additional layer of complexities caused by COVID-19, as they navigate through this year’s insurance renewal. We expect this to take a number of forms:

Logistics and process connected to renewal
For larger firms, the standard approach for many years has been to conduct face-to-face renewal presentations with insurers both in the local and London markets. These renewal presentations will not be able to be conducted in the same form in 2020 while travel restrictions remain in place, and while the relevant parties (insured, local retail broker, London wholesale broker, local underwriters and London underwriters), are working from home.

Timing of crucial renewal milestones
It is generally accepted advice in the current market that insureds should be looking to accelerate renewal timetables in order to give all concerned sufficient time to navigate inevitable challenges connected to renewals. While this may be acceptable in principle, it is more difficult in practice with insurers taking longer to respond throughout renewal negotiations and having their own internal challenges and considerations to navigate such as peer review or manager sign-off.

Underwriting information
As part of renewal presentation content, most law firms and their brokers have become well versed in endeavouring to differentiate the insured firm’s risk profile, whether that be through size, geography, client profile, work specialisms, risk management, practice management, financial performance, personnel management and/ or claims history. For this renewal season, a completely new scope of underwriting information connected to the impact of COVID-19 will need to be addressed and presented to insurers to help differentiate a firm’s risk from others. For example:

1.  Financial impact
   · Impact on revenues
   · Modelling of client impact on key clients/segments
   · Impact on partner distributions
   · Partners’ injection of capital into the business
   · Deferring partner annuities
   · Sources of additional funding
2.  Impact on working practice
   · Remote working. i.e., can electronic desktops be accessed remotely?
   · Do all staff retain remote access to all core systems?
   · Do you have an electronic document management system, or are you reliant on paper files?
   · Have you made any material changes to your workflows because of remote working?
   · Utilisation
   · Application of internal controls to remote workforce
   · IT support
3. Operational impact
   · Resilience of key suppliers
   · System bandwidth and security
   · Does your firm have a central diary system to log business critical dates?
   · What contractual protections do you have in place with respect to COVID-19?
   · Managing the potential application of COVID-19 policy exclusions
4. . Impact on workforce
   · Employee mental and physical wellbeing
   · Change to working practices and hours worked
   · Planned changes to recruitment, promotions or headcount
   · What contingency plans do you have in place to cope with increased staff absence because of the COVID-19 crisis?

In order to properly manage these challenges, it is critical that your insurance broker partner is experienced in navigating law firms through hard insurance market conditions and is able to advise you in differentiating your firm’s unique risk profile. In selecting your broker, some key attributes to look out for include:

• A wholly integrated and co-ordinated approach between the retail insurance broking team in Australia and the wholesale insurance broking team in London;
• Experience in broking Top-Up PI programs for law firms through hard market conditions. Many firms will not have experienced market conditions such as those which will be evident through the 2020 renewal season given the last true hard market for Australian law firm PI was some 18 years ago in 2002 -2003. 
• Technical capability to engage insurers in negotiation on the potential application of exclusions. We are seeing some proposed exclusion wordings which we believe are unacceptable for our clients, and acceptance of these sorts of terms could have a potentially critical impact on overall policy coverage;
• Advice around the need to potentially notify precautionary circumstances which could give rise to claims prior to renewal, especially where insurers are seeking to impose additional exclusions for the 2020/2021 policy period;
• Systems capability to support arranging and conducting renewal presentations with underwriters wherever they might be located, on a virtual basis.

We are here for you
As COVID-19 continues to affect how we all do business and interact with one another, Marsh are committed to continue to deliver timely and relevant information to our clients and broader community.

As we head into the challenging June renewal season, it is imperative that you are partnered with a knowledgeable, experienced and specialist broker to guide you through the renewal process (and beyond) and advocate for you in the insurance market. Marsh’s Legal Sector Specialty Practice brings together those of our key brokers with extensive experience in servicing our long-standing portfolio of Australian law firm clients, ranging from smaller boutique firms to 5 of the top 6 Australian firms. Leveraging off our experience and market clout, both locally in Australia and internationally in London, we are able to negotiate and deliver the best possible outcomes to our clients in a challenging market.
If you have any questions or would like to have a conversation about the impact COVID-19 is having on your business or your upcoming renewal, please reach out to your Marsh representative, or contact us.

Disclaimer: This document and any recommendations, analysis, or advice provided by Marsh (collectively, the ‘Marsh Analysis’) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Any projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. LCPA No. 20/165.