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Law firms in trouble


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#1 ckn

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Posted 05 November 2013 - 11:56 AM

Not an industry that many of you will have sympathy with but I found it interesting.

 

The Solicitors Regulatory Authority has formally given notice to 153 law firms that they must close for business by the end of 2013 if they can't sort out their professional indemnity insurance.  They've also been barred from taking any new clients or instructions from existing clients until that time.

 

The insurance companies are rubbing their hands in glee after the SRA insurance safety net was withdrawn meaning they now have law firms over a barrel.  In the past, there was a guaranteed insurer of last resort for law firms that struggled to get PI insurance and could prove they acted in good faith to try to get it, the SRA removed that safety net as anti-competitive.  Some insurers are now asking some troubled law firms for nearly 25-30% of revenue for insurance that's not close to A-rated, I've heard rumours that a good number of small firms of fewer than 10 lawyers are being asked for even higher rates or outright declined by everyone.

 

The estimate is that around half of those 153 firms will be formally closed at Christmas due to inadequate insurance.  That's one hell of a Christmas present for a lot of people, especially if you think that the typical medium sized law firm has about half as many non-lawyers as lawyers.

 

But then, everything's rosy in the UK now, there are fewer people claiming unemployment benefits (hmm...), the FTSE 100 and 250 are rising steadily and large firm corporate profits are increasing.

 

The consequence of this for those of us not lawyers is that our interactions with solicitors firms will inevitably become more expensive.  One of the hardest hit legal groups by this insurance increase are conveyancers and firms that have a lot of property law services for housebuyers.

 

As an aside, this may also cause a few mid-sized law firms to go bust anyway as many are operating far too close to insolvency as it is.  About 5 years of recession trading have reduced many firms to hand-to-mouth financing and massive debts to keep operating.  There are still a lot of big corporate casualties to come from this recession.


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#2 Wolford6

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Posted 05 November 2013 - 12:05 PM

The Legal Aid budget is being cut as well.

http://www.thetelegr...d_cuts_warning/


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#3 JohnM

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Posted 05 November 2013 - 12:31 PM

Anyone know how the SRA insurance safety net was funded?



#4 Wolford6

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Posted 05 November 2013 - 12:45 PM

Parachute payments?


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#5 ckn

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Posted 05 November 2013 - 12:53 PM

Anyone know how the SRA insurance safety net was funded?

Yes.  The system was based on a firm having a 3 year maximum within the system, any PI claim costs while in the system would be met on a co-operative basis across the industry.  Firms being covered by the system were expected to contribute to the pot on level of a basic low-cost insurance package.  The system gave 3rd party insured rights only and gross negligence cover was limited, requiring the insured firm to essentially bankrupt themselves to meet a judgement against them with the insurance pot covering the rest of the judgement.

 

It really was what you'd expect from an insurance cover of last resort.

 

Edit:  To be fair to the SRA, the costs of the system had gone up substantially over the last 5 years as insurers jacked up their rates at the same time as law firm revenue dropped substantially due to the recession.  It really was getting to be unaffordable but the cut to the system was quite brutal and timed very poorly.


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#6 SE4Wire

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Posted 05 November 2013 - 07:30 PM

Yes. The system was based on a firm having a 3 year maximum within the system, any PI claim costs while in the system would be met on a co-operative basis across the industry. Firms being covered by the system were expected to contribute to the pot on level of a basic low-cost insurance package. The system gave 3rd party insured rights only and gross negligence cover was limited, requiring the insured firm to essentially bankrupt themselves to meet a judgement against them with the insurance pot covering the rest of the judgement.

It really was what you'd expect from an insurance cover of last resort.

Edit: To be fair to the SRA, the costs of the system had gone up substantially over the last 5 years as insurers jacked up their rates at the same time as law firm revenue dropped substantially due to the recession. It really was getting to be unaffordable but the cut to the system was quite brutal and timed very poorly.


I actually used to work in solicitors PI.

Having seen some of the "applications" for insurance from some firms of solicitors these would have been more correctly filed in the fiction section. Then there were the ones riddled with spelling and grammar errors that looked like a 4 year old had spent 30 seconds completing them.

The safety net (or Assigned Risks Pool as it was known) was pretty much a place where dodgy solicitors say waiting to be closed down in my experience. It charged a firm 27.5% of gross fees, mostly this wasn't paid, and paid out claims well over 10 times the nominal premium. It was a truly farcical situation.

When you add in the thermos of the cover which didn't allow cancellation by an insurer, even in the case of non payment and fraudulent misrepresentation, I was surprised that anyone offered insurance for them at all.

#7 ckn

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Posted 05 November 2013 - 08:00 PM

I actually used to work in solicitors PI.

Having seen some of the "applications" for insurance from some firms of solicitors these would have been more correctly filed in the fiction section. Then there were the ones riddled with spelling and grammar errors that looked like a 4 year old had spent 30 seconds completing them.

The safety net (or Assigned Risks Pool as it was known) was pretty much a place where dodgy solicitors say waiting to be closed down in my experience. It charged a firm 27.5% of gross fees, mostly this wasn't paid, and paid out claims well over 10 times the nominal premium. It was a truly farcical situation.

When you add in the thermos of the cover which didn't allow cancellation by an insurer, even in the case of non payment and fraudulent misrepresentation, I was surprised that anyone offered insurance for them at all.

Thanks for that.

 

The problem is that the safety net caught legitimate firms at the bottom end, mainly conveyancing heavy firms, that were just penalised because of who they were rather than the genuine risk they presented.  The SRA's reforms are too blunt and are financially targeted rather than addressing the genuine problems of poor management by some firms.

 

I tend to get the hint about how good a law firm's legal processes are when I go to do work with them.  Some of them just couldn't care less if I have PI or not, others demand a copy before I turn up.  Some of those just see a valid certificate and couldn't care if I'd made it up in Photoshop, others actually do check the quality of insurer and values before allowing me to give them advice.  As with many insurances, some are just bare legal minimums that have no payout likelihood while others are genuinely worth the money for both insured and third parties.


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#8 SE4Wire

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Posted 05 November 2013 - 08:09 PM

Yeah, it just really surprised me how little time and effort many put in to what was their third biggest overhead.

The conveyancing firms did get a raw deal but that was because one claim would be 6 figures and the liability is very long tail. Being a "claims made" policy it covered all their past work so an insurance co was on the hook for thousands and thousands of conveyances in the last 6 years from before good risk manager was common practice. When you have that much exposure you need a good chunk of premium to make the risk worthwhile. Small firms didn't have this much spare.

Big firms, even if they were regular claimers, would be able to have enough money to pay premium to cover costs so they were fine. Most insurers made quite substantial losses on solicitors PI hence the lack of proper insurers doing small firms. It was amazing how many firms with "no claims in 20 years" managed to have one while I was their broker. That's before we start on he ones who claim they never had a claim, took offence when I said insurers needed evidence and then, lo and behold, their claims summaries from previous insurers happened to show a few chunky claims.

#9 SE4Wire

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Posted 05 November 2013 - 08:12 PM

Phew, that was a bit of a rant. Good fun few years doing the job though.

#10 Li0nhead

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Posted 05 November 2013 - 09:10 PM

I wonder if a taxpayer funded bailout for the lawyers would be a popular idea politically and if any party will propose this? ;)



#11 Larry the Leit

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Posted 06 November 2013 - 07:55 AM

So essentially some firms that are very poorly run, look like going out of business, despite a certain amount of subsidy over recent years - right?



#12 ckn

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Posted 06 November 2013 - 09:31 AM

So essentially some firms that are very poorly run, look like going out of business, despite a certain amount of subsidy over recent years - right?

That's not really where I was going.  There are a good number of very dodgy firms out there that ruin it for everyone yet the insurance increases that are coming through seem to be disproportionately targeting small firms and firms that specialise in property law rather than the bigger law firms with poorer management than you'd find in your local industrial estate's burger van.  For example, Manches was a fairly big fish in the UK market and went bang quite spectacularly after years of hiding dodgy dealings, in any other market they'd have probably been denied insurance but, as mentioned above, the legal insurance market is fairly murky.

 

Where that hits the consumer is that the cost of conveyancing and other consumer targeted law will inevitably increase as the smaller law firms will have to make their money somehow.

 

As an aside, that Manches collapse will provide some very interesting legal debate in the next year or so.  For example, partners in the firm had their tax due retained by the firm to pay to HMRC on their behalf yet as a partner in a LLP or standard partnership, they're entirely responsible for the tax money until it gets into HMRC's hands.  The simple answer is that either the partners have to pay all of the tax again, directly to HMRC this time, or they persuade the company's administrators that it's a priority debt to HMRC and get some paid back that way.  The real answer is most likely that the partners who aren't on the executive committee of the firm will try to sue someone for the money, maybe an insurance company or the executive committee for spending money they weren't legally supposed to touch.  Lawyers suing lawyers is always a nasty thing, much like a local derby game where there's a serious grudge between the teams.


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#13 Larry the Leit

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Posted 06 November 2013 - 09:37 AM

That's not really where I was going.  There are a good number of very dodgy firms out there that ruin it for everyone yet the insurance increases that are coming through seem to be disproportionately targeting small firms and firms that specialise in property law rather than the bigger law firms with poorer management than you'd find in your local industrial estate's burger van.  For example, Manches was a fairly big fish in the UK market and went bang quite spectacularly after years of hiding dodgy dealings, in any other market they'd have probably been denied insurance but, as mentioned above, the legal insurance market is fairly murky.

 

Where that hits the consumer is that the cost of conveyancing and other consumer targeted law will inevitably increase as the smaller law firms will have to make their money somehow.

 

As an aside, that Manches collapse will provide some very interesting legal debate in the next year or so.  For example, partners in the firm had their tax due retained by the firm to pay to HMRC on their behalf yet as a partner in a LLP or standard partnership, they're entirely responsible for the tax money until it gets into HMRC's hands.  The simple answer is that either the partners have to pay all of the tax again, directly to HMRC this time, or they persuade the company's administrators that it's a priority debt to HMRC and get some paid back that way.  The real answer is most likely that the partners who aren't on the executive committee of the firm will try to sue someone for the money, maybe an insurance company or the executive committee for spending money they weren't legally supposed to touch.  Lawyers suing lawyers is always a nasty thing, much like a local derby game where there's a serious grudge between the teams.

 

Thanks, I asked because I don't know anything about this topic.  I'm not even sure why the need for PI is so great, why are the claims/premiums so high?

 

As an aside, my mate was a partner is a decent sized law firm in a big city in the UK.  He was earning a decent wedge doing boring, repetitive conveyancing and the like.  He jacked it in and now works as a solicitor for a smaller firm, with more varied work which satisfies him more than being an overpaid clerk.  He also doesn't have to deal with senior partners who think it's appropriate to claim prostitutes on expenses, and who refuse to stop smoking in the office, despite the fact that it's illegal.



#14 ckn

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Posted 06 November 2013 - 09:57 AM

Thanks, I asked because I don't know anything about this topic.  I'm not even sure why the need for PI is so great, why are the claims/premiums so high?

 

As an aside, my mate was a partner is a decent sized law firm in a big city in the UK.  He was earning a decent wedge doing boring, repetitive conveyancing and the like.  He jacked it in and now works as a solicitor for a smaller firm, with more varied work which satisfies him more than being an overpaid clerk.  He also doesn't have to deal with senior partners who think it's appropriate to claim prostitutes on expenses, and who refuse to stop smoking in the office, despite the fact that it's illegal.

Say you buy a house, a conveyancer charges you £250 for doing the lot as it seems quite simple.  The conveyancer misses a Coal Board report that the area is likely to subside, your house collapses a month later and becomes a part of the greater neighbourhood underground tunnel infrastructure.  You, or your house insurers, sue the conveyancer for negligence, their insurers have to pay out for the entire value of your house including contents, your interim expenses and legal costs.  This is why a lot of serious legal thought has gone into trying to convince repeated governments that properly qualified lawyers, not conveyancers, trainees or paralegals, should be the only ones who can do property law work, the problem is that this is entirely contrary to the last 30 years of government pushes to make house buying as easy and cheap as possible for the masses.

 

On the second point, law firm partners are a fairly uncontrolled bunch, essentially unreformed 1970s senior managers.  One partner I know had lots of young, pretty, slim blonde trainees and junior solicitors working for him, his view was that he owned the firm so why should he be forced to pay ugly women or men to do basic work when he could be sexually harassing pretty young things?  Once they reached a point where they were after a senior associate role, or a newly qualified role for trainees, then they'd often get booted and replaced with the next year's pretty young things.

 

It's a fairly common thing your mate did, many lawyers make their name in a top tier firm then realise that the long hours and workload will never cease until they retire or drop dead, those who realise it often drop down a tier or two for more varied work but also work that allows them to have a life outside of work.


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#15 Larry the Leit

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Posted 06 November 2013 - 10:12 AM

Say you buy a house, a conveyancer charges you £250 for doing the lot as it seems quite simple.  The conveyancer misses a Coal Board report that the area is likely to subside, your house collapses a month later and becomes a part of the greater neighbourhood underground tunnel infrastructure.  You, or your house insurers, sue the conveyancer for negligence, their insurers have to pay out for the entire value of your house including contents, your interim expenses and legal costs.  This is why a lot of serious legal thought has gone into trying to convince repeated governments that properly qualified lawyers, not conveyancers, trainees or paralegals, should be the only ones who can do property law work, the problem is that this is entirely contrary to the last 30 years of government pushes to make house buying as easy and cheap as possible for the masses.

 

On the second point, law firm partners are a fairly uncontrolled bunch, essentially unreformed 1970s senior managers.  One partner I know had lots of young, pretty, slim blonde trainees and junior solicitors working for him, his view was that he owned the firm so why should he be forced to pay ugly women or men to do basic work when he could be sexually harassing pretty young things?  Once they reached a point where they were after a senior associate role, or a newly qualified role for trainees, then they'd often get booted and replaced with the next year's pretty young things.

 

It's a fairly common thing your mate did, many lawyers make their name in a top tier firm then realise that the long hours and workload will never cease until they retire or drop dead, those who realise it often drop down a tier or two for more varied work but also work that allows them to have a life outside of work.

 

I get your point about conveyancing, but if done properly it's basically an admin task.  As it happens I had my aforementioned mate do it for me, he shares your views on having solicitors do this properly, and echoes the same disgust about the "professional will writers".

 

That sounds very much like my mate's fellow partners.  I had the pleasure of dealing with one of them whilst I was moving house and my mate was on holiday.  Odious doesn't come close.



#16 SE4Wire

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Posted 07 November 2013 - 08:51 AM

I get your point about conveyancing, but if done properly it's basically an admin task. As it happens I had my aforementioned mate do it for me, he shares your views on having solicitors do this properly, and echoes the same disgust about the "professional will writers".

That sounds very much like my mate's fellow partners. I had the pleasure of dealing with one of them whilst I was moving house and my mate was on holiday. Odious doesn't come close.


Yeah but admin work with a decent 6 figure liability attached for making even a tiny error. The reason they have to have the insurance (for £2million each and every claim) is to protect the public from negligence on their part as many smaller firms would not have the money to pay out a claim; the same reason you have to be insured for third party liabilities in a car.

Another example of claims is when someone defaults on a mortgage or indeed in the case of mortgage fraud either purely by an individual or with the the help of a fraudulent mortgage broker. First thing the bank will do is ask for the file and look for any technical infringement by the solicitor which they may be able to argue affected their decision. Because of the breadth of the cover the solicitor's insurer then usually ends up paying a large chunk.

#17 SE4Wire

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Posted 07 November 2013 - 08:51 AM

...

Edited by SE4Wire, 07 November 2013 - 08:53 AM.


#18 SE4Wire

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Posted 07 November 2013 - 08:52 AM

Phone double posted

#19 Larry the Leit

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Posted 08 November 2013 - 08:43 AM

Yeah but admin work with a decent 6 figure liability attached for making even a tiny error. The reason they have to have the insurance (for £2million each and every claim) is to protect the public from negligence on their part as many smaller firms would not have the money to pay out a claim; the same reason you have to be insured for third party liabilities in a car.

Another example of claims is when someone defaults on a mortgage or indeed in the case of mortgage fraud either purely by an individual or with the the help of a fraudulent mortgage broker. First thing the bank will do is ask for the file and look for any technical infringement by the solicitor which they may be able to argue affected their decision. Because of the breadth of the cover the solicitor's insurer then usually ends up paying a large chunk.

 

Thanks.






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