Navigating 2021 Renewals: Law Firm Professional Indemnity Insurance

The market for lawyers top-up professional indemnity (PI) Insurance, which plays a vital role in risk management for law firms, continues to be challenging. Along with issues in the local PI market, challenging insurance market conditions exist globally across all major insurance product lines. As COVID-19 continues to impact insurance pricing, terms, and conditions in Australia and elsewhere, there are additional considerations for law firms in upcoming PI renewals.

Five considerations for law firm professional indemnity renewals

Key issues for law firms to keep in mind during the June 2021 renewal season include:

1. Market capacity

2. Silent cyber

3. Logistics and processes connected to renewals

4. Timing of crucial renewal milestones

5. Underwriting information related to COVID-19

1. Market capacity

The top-up PI market for Australian law firms has faced significant challenges for some time now, with insurers having a constrained appetite for insurance layers immediately above the statutory PI policy ($2 million). At the 2020 renewal period, some insurers reduced capacity or declined to provide renewal terms. This was also the case in the London market, with a contraction of supply following the Lloyd’s Syndicate Decile 10 review, which has had a substantial impact on available overseas Insurer capacity.

For some larger law firms that had previously bought significant insurance limits, the capacity reduction in 2020 meant they were unable to purchase similar limits at renewal. This trend is expected to continue during June 2021 renewals.

At the same time that capacity is contracting, overall pricing increases for top-up PI are generally ranging from 20% to 35%, depending on the attachment point above the statutory policies.

In addition to ongoing market challenges, COVID-19 has created an additional layer of complexity for law firms as they navigate PI renewals.

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2. Silent cyber

Beginning in January 2021, Lloyd’s will look to apply affirmation language concerning so-called “silent cyber” coverage on all PI policies for law firms through the application of a new standard endorsement. Silent cyber refers to the exposure to cyber losses within traditional insurance policies — such as property, casualty, and other non-cyber coverage — that has not been expressly affirmed or excluded. The details of the language and the implications of the endorsement are under review.

At this writing, insurers have raised the issue regarding what is the cyber risk relative to a PI policy as they seek to confirm available/excluded coverage. Many cyber insurance policies for law firms are placed subject to a difference in conditions/difference in limits (DIC/DIL) endorsement, which effectively makes the third-party coverage of the cyber policy sit in excess of the coverage within the PI policy. This is generally done because the protection of sensitive information is a key part of a law firm’s professional services/duty. A breach leading to a third-party claim is normally intended to be insured under the PI policy in the first instance.

Removing such coverage would mean:

• Insureds can no longer rely on their PI policy for such claims, which should act as an incentive for placing a standalone cyber policy.
• Renewals where a standalone cyber policy with a DIC/DIL clause in place may be more difficult for insureds as the insurer can no longer rely on the clause to shift most of the third party liability coverage into the PI policy. This would likely lead to premium increases and a review of capacity for cyber liability placements.

The other changes are generally less problematic. The scenarios outlined below, which may now be expressly excluded under a new PI policy, would typically be covered under a standalone cyber insurance policy:

• Malware spreading to clients.
• Third party financial losses from breach of suitable systems (in the absence of an insured's negligence).
• The EU General Data Protection Regulation (GDPR) where the insured has unsuitable systems.
• Mitigation costs, such as forensic expenses.

Generally, as the new language in the endorsement has yet to be agreed with Lloyd’s (as of this writing), the drafting of these clauses is likely to evolve. There is unlikely to be a ‘final’ version while the language and implications are being clarified.

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3. Logistics and process connected to renewal

The standard approach used by larger law firms regarding their PI insurance renewals has long been to conduct face-to-face presentations with insurers in both local and London markets. Overseas travel restrictions due to the COVID-19 pandemic are changing the format of these renewal presentations. In 2021 — and potentially 2022 — presentations are likely to be held via video conferencing, with most UK meetings in a group setting rather than one-to-one.

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4. Six crucial steps in renewals

In a challenging year for PI renewals, it’s essential for insureds to allow sufficient time to navigate a complex market. As insurers face their own challenges — and may take longer to respond throughout renewal negotiations — there are a number of steps to help manage the PI renewal, including:

1.  Start early: Start collating renewal submission information at least three months before renewal. It is important to discuss and agree on strategy early.
2. Be transparent and differentiate: Be prepared for insurers to require more detailed underwriting information. Speak to your broker to establish the most effective way to present underwriting information. Identify and use marketing differentiators, such as key features of your risk management program.
3. Identify your risk appetite: Work with your broker to identify organisational risk appetite, including through retentions. Understand what will be an acceptable renewal program from a coverage, pricing, and risk retention perspective.
4. Capitalise on the value of your insurance broker: It is important to partner with an insurance broker that has the experience of operating in a harder market, and has strong relationships with insurers and the decision makers to whom the risk may ultimately be transferred.
5. Use your relationships: The strength and size of a corporate relationship will be taken into account in the underwriting process. It may be effective to use insurers that are involved in your other placements, where appropriate, to secure visibility and senior management invovlement, as well as maximise leverage in negotiations.
6. Stick to agreed milestones: Allow time before renewal to arrange for all capacity to be in place, and arrange on policy wordings. If a strict timeline is not adhered to, placement timing can lose momentum. It is best to avoid making decisions under the pressure of a current program's pending expiry.

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5. Underwriting information related to COVID-19

In recent years, law firms have prepared for renewal presentations by differentiating their risk profile through size, geography, risk management, claims history, and more. This renewal season will see underwriters emphasise the impact of COVID-19 as they seek to differentiate an insured’s risk compared to other law firms. Information related to the pandemic that underwriters may seek in the renewal process includes:

• Financial impact in various areas, including:
• Revenues and details of various revenue streams.
• Key clients and segments.
• Partner distributions. 
• Partners' injection of capital into the business.
• Deferring partner annuities.
• Sources of additional funding.
• Impact on work practices, including:
• Remote working, for example, ability for electronic desktops to be accessed remotely.
• Staff ability to remotely access core systems.
• Presence of an electronic document management system versus reliance on paper files.
• Material changes to workflows due to remote working.
• Application of internal controls to remote workforce.
• IT support.
• Operational impact, including:
• Resilience of key suppliers.
• System bandwidth and security.
• Existence of a central diary system to log business critical dates.
• Contractual protections in place with respect to COVID-19.
• Managing the potential application of COVID-19 policy exclusions.
• Impact on workforce, including:
• Employee mental health and physical wellbeing.
• Change to working practices and hours worked.
• Planned changes to recruitment, promotions or headcount.
• Contingency plans.

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We are here for you

Marsh’s Legal Sector Specialty Practice brings together key brokers with extensive experience and technical capabilities in servicing our longstanding portfolio of Australian law firm clients, ranging from smaller boutique firms to five of the top six Australian firms. We are well integrated and have a coordinated approach between the retail broking team within Australia and wholesale insurance broking team in London, as well as experience in broking professional indemnity insurance for law firms through hard market conditions, allowing us to deliver the best possible outcome for our clients.

If you have any questions or would like to have a conversation about your upcoming PI renewal, please reach out to your Marsh representative, or contact us.

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.21/062.