Small law firms face extinction

Small law firms in the West Midlands are at risk of being driven out of business by crippling insurance premiums.

A survey of its members by Birmingham Law Society reveals that sole practitioners across the West Midlands faced massive professional indemnity insurance (PII) hikes this year.

However, larger firms fared much better: rises on average were less than 10 per cent and some firms even managed to secure a discount.

Law firms are required to take out professional indemnity insurance to cover any negligence claims brought against them by clients. However, the disparity of rates between small and large firms is growing.

Dean Parnell, president of Birmingham Law Society, said: “For some years the gulf between small and large firms has been widening. However, it has now become cavernous.”

Mr Parnell predicts that there will be greater consolidation in the profession as a result, with many High Street firms having to give careful consideration to some of their practice areas. Worcestershire practice Brownings Solicitors recently went into administration, citing its £100,000 PI bill as one of the reasons. It was acquired by Solihull firm Harris Cooper Walsh.

It is not just the rise in premiums that is causing concern. The profession’s curious renewal set-up, whereby all PII renewals happen on 30 September each year, continues to create problems.

Many firms complained that proposal forms were too lengthy and over complicated, and that they had been given impossible deadlines in which to take up an offer. One firm was given just seven hours to respond, before extracting a three-day extension from their broker.

Some insurance brokers also demand a “sole appointment” and refuse to share information, making it difficult for firms to get competitive quotes.

Property conveyancing is an area of practice which tends to be penalised by insurers, due to the high proportion of claims in this field. This is traditionally a core service for smaller firms.

Firms described the renewal process as “stressful” and a “racket”, with some sole practitioners claiming it could see off High Street practices for good.

Some firms, however – albeit generally medium-large sized practices – were successful in reducing their premiums this year.

Reductions were achieved by increasing the excess on the premium and by obtaining industry quality standards, such as ISO 9001 or the Law Society accredited Lexcel practice management standard.  But the biggest wins could be had by shopping around.

Alistair Pettersen, managing partner of Coventry- based two partner firm Ward Rider, which is Lexcel credited, managed to get a 19 per cent reduction in his firm’s premium by changing insurers, but still described the process as “bruising”.

He said: “Despite what appears to have been a relatively positive outcome for us this year, we have had our confidence in the process bruised and expect a tough round next year. It is yet another concern.”

Birmingham Law Society will be reporting the findings of its survey to the Law Society.

Dean Parnell said: “Smaller law firms are finding trading tough at the moment. The triple whammy of the recession, rising PI premiums and the threat posed by Alternative Business Structures means many of them are finding it very hard. 

“High Street practices offer convenience and, in many cases, cost savings to the general public. They are an important part of our legal landscape and it is important that they start giving thought to next year’s renewals now by implementing changes within the business to bring the PII to a more affordable level.  This may well include looking at the practice areas currently undertaken by such firms as well as reviewing risk management policies to try and limit any claims over the next 12 months.”

Birmingham Law Society is currently looking at arranging a PII conference early in the New Year, which should assist member firms in preparing for next year’s renewals.

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