Paragon Blog

2020 November

Paragon – October Solicitors’ ‘Common Renewal’ Period

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The Professional Indemnity insurance (PII) ‘common renewal period’ ending 1 October was a particularly challenging one. Both because the market was already hardening and because of additional concerns (from an insurer perspective) introduced by coronavirus (Covid-19).

In this article we explore in a bit more detail what happened and what we expect to carry forward to 1 April renewals.

Rate changes

Most firms experienced rate increases of 10-15%, after taking into account fee changes. Many were frustrated to find insurers not taking this year’s estimated fees (which had generally dropped due to Covid-19) into account when looking at a three-year revenue average. Underwriters have never priced on estimated figures; they can only use the revenue from completed financial years. Affected firms should see a positive impact in the next financial year, when 2020/21 fees are ‘realised’ and taken into account by underwriters.

Underwriters are currently submitting their business plans, and this will give a better indication of what premium rates might do next year. It is widely expected that rate increases will continue, but not to the extent they have over the last 18 months.

For firms buying top-up cover above the £2 million or £3 million mandatory limits, the outlook is bleaker. Very few insurers are still quoting above the primary limits. Those that are will often do so on a co-insurance basis: two or more insurers writing a percentage of an excess layer. If two insurers write a layer on a 50:50 basis, each receives 50% of the premium, but is also liable for 50% of any claims.

Historically, the excess layer market has been very cheap. As a rule of thumb, firms could expect to pay roughly £3,000 for every extra £1 million of cover. There are currently two major total losses in the PII market, one for circa £18 million and the other for £20 million. Almost every excess layer insurer providing top-up cover has been hit at some level by these claims. Some insurers will now be looking at paying a claim of £15 million in exchange for £45,000 of premium. As a result of these two claims, we expect the price of excess cover to increase significantly and remain high for the foreseeable future. The market cycle from hard to soft rates in the primary will continue, but we do not expect the excess market to soften again.

Insurer capacity

Insurer capacity remains an issue both in PII and in the global insurance market. Insurers are suffering significant losses. The uncertainty introduced by Covid-19 and the global economy, set against the backdrop of an unclear Brexit, has resulted in limited additional investment into the insurance sector.

Underwriters are looking very closely at which classes of business they allocate their limited underwriting capacity to. While PII rates have increased notably over the last 18 months, the level and frequency of claims remains high – made even more challenging by the long-tail liability of the claims.

Despite increasing rates, there is no indication that any new insurer capacity will enter the market. Rates will soften again, but we do not expect this to happen until new capacity materialises.

Premium financing

One growing trend has been the challenge in finding premium financing. Providers continue to worry about solvency issues. Their application forms and requests for information (like insurance underwriters) continue to grow.

Start looking at this as soon as you can. Ask your brokers if they have relationships with other premium financing companies. As you do with your PII premium, speak to other providers to ensure you are getting the best deal.

Looking forward

We expect rates to increase over the next six to 12 months. For the first time in almost a decade, insurers are not competing to win business. Many turned down new business as we approached 1 October, either because they had allocated all their capacity or because they did not want to expose themselves to additional claims liability, despite the premium level.

Speak to your broker early, and understand exactly what your insurer requires from you. Expect ‘in-depth’ underwriting to continue. This will mean submitting a full proposal form, Covid-19 / business resilience questionnaire, your latest reports and accounts, and claims information, regardless of how long you have been with your insurer. Many insurers are now requesting 10 years’ claims history, so they understand how firms were affected after the last global financial crisis.

Typically, firms renewing in Q1 wait until the New Year to begin the renewal process. Starting the process sooner will pay dividends.

  • Start the process early
  • Ensure your submission is ‘complete’ and all the information requested is provided to avoid a protracted renewal
  • Engage with other brokers to benefit from their exclusive facilities
  • Understand your firm’s ‘route to market’. How many brokers are in the chain between you and the insured; what value are they adding and what is the additional cost to firm?

Is your Risk Management effective?

As the insurance market changes so do underwriters’ approach to analysing risk. Paragon, in partnership with leading PII underwriters, has developed a new approach to presenting firms. Proposal forms and claims reports show a firms’ past. Our bespoke Risk Management Questionnaire provides underwriters with comfort on how a firm will perform in the future.

To arrange a call or learn more about this new approach to market presentations follow the link here.

Conveyancing and seller ID fraud – what steps can your firm take to protect itself?

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Seller ID fraud in conveyancing matters remains a significant issue for law firms and in turn insurers. These challenges are leading to increasingly onerous agreements from purchaser’s solicitors, more in-depth underwriting from insurers and ultimately more claims and higher insurance premiums.

Reynolds Colman Bradley LLP’s (RCB) article, in partnership with Paragon International Insurance Brokers (Paragon), provides an insight into these challenges This is particularly pertinent as the conveyancing market rallies, although we are now faced with a second lockdown. So, the ability to meet face-to-face is reduced, but the need for transactions to progress continues!

RCB is a specialist law firm with expertise in managing and resolving claims in the Insurance, Commercial and Construction sectors. As LawSelect’s panel solicitors they are well versed in the changing legal landscape and the resultant issues this leads to from an insurance liability perspective.

Don’t Crack the Code – Improve It

  1. When is it a good idea to amend Law Society Best Practice?
  2. Shouldn’t that be obvious?

As a Law Society (“TLS”) Professional Indemnity Insurance Committee (“PIIC”) Member, I regularly hear (and sometimes contribute to) criticism of our solicitors’ establishment in Chancery Lane. But, in encouraging conveyancers to comply with the Code for Completion by Post, TLS is seeking to defend our conveyancers and their clients. Post may have moved on, the principles in the Code have not.

Solicitors are paid to be creative, or awkward, or to get problems solved. But, while it is a long time since I undertook any conveyancing in everyday property transactions, I hope solicitors never stray very far from The Conveyancing Handbook, the Practice Notes and all the learned communications TLS Land Committee contributes to.

That is especially true of the Code for Completion by Post.

Who Compensates An Innocent Buyer? – Pre-contract Enquiries and More

The Court of Appeal judgment of Dreamvar (UK) Ltd v Mishcon de Reya and others is now well over two years old, but it is still challenging conveyancers. In the case, a purchaser’s solicitor in a fraudulent transaction was ordered to pay damages in addition to the seller’s solicitor, despite acting honestly and reasonably. This followed a highly controversial High Court judgement that only the purchaser’s solicitor would be liable.

Wary of a seller’s bona fides, some purchaser’s solicitors now request a representation from seller’s solicitors that the sellers are genuine, indicating that the transaction will only proceed in reliance of that representation. This is about as transparent as one can get about trying to lure a seller’s solicitor to directly accept liability for a ‘client’s’ fraud. And, to weary but wary conveyancers, in a changing regime of risk, this might seem a sensible approach. However, this is a dangerous belief.

Does Dreamvar Change Anything?

Purchaser’s solicitors will always be potentially liable to a purchaser for breach of trust in most fraudulent conveyancing transactions. Relief from sanctions under s.61 of the Trustee Act 1925 might be a possible outcome, although it is by no means guaranteed, and every case will turn on the facts. Dreamvar does not change this. It may be hard to hear, but a warranty or guarantee may not change that either.

Mishcon’s fate as purchaser’s solicitors in Dreamvar, and the Court’s refusal to grant relief under s.61, turned, on their rather spectacular ability to pay out as compared to the purchaser. This was a crucial factor at both the High Court and the Court of Appeal. As the High Court noted, Mishcon acted honestly and reasonably in the transaction, but also had a substantial Professional Indemnity policy.

In Dreamvar, conveyancers should also bear in mind that the Court of Appeal confirmed the seller’s solicitor to be in the best position to query whether the seller is genuine. If these queries are answered incorrectly (or even not at all), then the seller’s solicitor may have liabilities towards the purchaser.

Keep to the Code – even as a Purchaser

Forget about Dreamvar for a moment and consider the Law Society Code for Completion by Post. Remember that under the Code, if the seller is not the genuine owner of the property, the seller’s solicitors should also be liable for breach of trust and breach of undertaking. This will still be true whether or not some sort of warranty is given. Accordingly, and assuming the sale is being dealt with by way of the Code, warranties do not add any comfort for the purchaser.

Because of this situation, it makes almost no sense for a purchaser’s solicitor to demand a warranty or a guarantee from the seller’s solicitors. Of course, you may think, there is no reason not to request such a warranty either – best to be thorough. Even the seller’s solicitors, one might argue, have little reason in denying such a warranty – after all, they are only opening themselves to another claim for the same damages they were already liable for. Such thinking would be mistaken.

Best Practice – Balanced Risk

Conveyancing solicitors would do well to remember that the Code for Completion By Post is ‘intended to provide a fair balance of obligation between seller’s and buyer’s solicitors and to facilitate professional co-operation for the benefit of clients’. Further, the Code for Conveyancing states that parties should ‘Comply with the Law Society Code for Completion by Post without variation unless there has been prior agreement to vary’. Accordingly, the position of the Law Society Conveyancing Committee and the Conveyancing Quality Scheme is that the Code is best practice and provides a fair balance. That is why the Code exists: not as some warning list of minimum requirements, but as part of a comprehensive guide to conveyancing.

A Brief Note on Shooting Yourself in the Foot

If you as the purchaser’s solicitor request warranties from the seller’s solicitor, this may also make your position worse in the case of fraud. It goes without saying that merely stating one relies on the seller’s solicitor to confirm the identity of the seller is not enough to actually impose that liability on the seller. This much was confirmed in Dreamvar. The seller’s solicitor would have to accept liability to the buyer, which they are not required to do and accordingly would not sensibly do.

So, what if you receive a vague or incomplete warranty or even a complete refusal? If the sale does turn out to be a fraud, any court looking at the evidence would see that you accepted an incomplete warranty or proceeded with the sale even though a warranty was refused. This looks bad enough, potentially, to harm your chances of receiving relief under s.61. And, seeing as you cannot compel the seller’s solicitor to provide such a warranty, you would be effectively stuck.

Furthermore, if parties in conveyancing transactions are to request or offer warranties as stock elements of such transactions, the value of those warranties has the potential to sink to a point where a court would be reluctant to treat them as genuine markers of any sort of reliance. Meaningless warranties are far less safe than genuine, case specific, due diligence that responds to the facts at hand. Which is where we move on from ‘Post’.

In the internet age, clients expect more. In time, the Code will need updating. There are specialist online providers. Identities can be checked independently, to a point. As these services develop, new standards will be expected.

The most resourced parties to normal domestic transactions are regulated CML lenders. But it is the not so normal transactions where there are higher levels of concern. That probate property as alleged might not be the cash bargain it seems. You have a duty to warn. Show clients the client verification options: after all; they had to give you ID to be a client. Didn’t they?

Do Not Over-React

Parties in conveyancing transactions should not as a stock practice, request or give warranties as to the genuine identity of the vendor. If you are not confident, warn. In the case where the purchaser demands assurances you cannot be sure of, refer them to the Code, maintaining it offers the buyer adequate protection already. Look at the specialist options. Charge for that.

If there is anything to take away from this article, it is this: the Code is one of the most useful things a conveyancer can stick to.

Paragon recommend, in line with insurers, that firms carefully consider the process, procedures and software used to verify client identities and funds – particularly as a remote working environment appears likely to continue.

We are aware that ThirdFort works with law firms, and in particular conveyancers, helping them to reduce their risk by automating identity and source of funds checks. Further details can be found at ThirdFort’s website.

If you have questions regarding Paragon, RCB, ThirdFort the content of this article or any wider risk management related issues please do not hesitate to touch base with one of our team using the details below.

Email – professions@paragonbrokers.com

Tel – 020 7280 8209

This article has been written by Steven Reynolds and James Witherspoon (of Reynolds Colman Bradley LLP’s London Office).

It is intended to provide commentary and general opinion on its subject matter. It is not to be regarded and/or relied upon as a substitute for professional advice which takes account of specific circumstances and/or any changes in the law and practice. No responsibility can be accepted by the firm or the author for any loss occasioned by any person acting or refraining from acting on the basis of this document.

 

 

 

 

 

 

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