April 2020 - the legal profession exposed?

Published on
4 min read

During this coronavirus pandemic, every business faces enormous challenges both operational, and also to survive, whilst at the same time primarily focusing on the well-being of their people.

The legal sector is no different, and many law firms will inevitably face cash-flow issues. That is already in evidence via the legal press, with firms taking up ‘furloughing’, redundancies, four-day weeks, unpaid leave and partner retained profits to keep the business afloat. Each firm will respond differently, largely influenced by their imbedded culture and extrinsic factors (ability to manage / existing debt, existing infrastructure commitments and, for the listed companies, their shareholders).  However, the profession will undoubtedly come through this stronger.

Many firms will already have the infrastructure to work from home, which at least enables business to continue safely. However, IT stability will be an increasing risk area given we are in unchartered waters. The SRA have recently announced a pragmatic approach will be taken over ‘Conduct’, and the courts are starting to react (albeit this experience is showing how piecemeal and over-complicated the civil justice system has become). In addition, the Law Society has been pro-active in advising its members on key affected areas, such as conveyancing and will drafting.

What does this mean for the Insurers who write solicitors business?

Before very recent events, the market had already hardened with many firms seeing 15% - 20% premium increases, even where their claims record had been ‘OK’. The general view before this month was that this may well continue to be the case for many as we moved into 2021.  Those predictions were based on a growing economy, and stability in the marketplace. Times have quickly changed.

Also, it is interesting to reflect on how the legal sector has ‘evolved’ in the last decade. Three key trends have been to grow (merger, or mainly acquisition), to float or MDPs. However, one trend that gets missed is the regular movement of individuals and teams between some of the largest law firms which can cause instability. Indeed we have seen key partners leave Firm A, move to Firm B only to return to Firm A just a few years later.  So, some of the key trend outcomes are not necessarily always beneficial to clients.

In terms of the immediate crisis:

  • Law firms are considerably better positioned and resourced to deal with risk, than in 2008
  • Firms that have a strong/embedded people-centric culture, and empathetic leaders, are likely to manage their way through this better
  • IT has been the largest investment cost for most law firms for a number of years, and this will come into its own now
  • Many firms will have been more cautious over the last decade regarding their property overheads, given this was a primary cause of some high profile collapses post-2008
  • Firms that have existing high debt, and financial stability plans based on high lawyer hours, will likely face the greater challenges

The immediate day to day concerns for Insurers primarily rest around the enhanced risks that arise from long periods of lawyers working in isolation.

  • Reduced supervision (of concern in normal times, as well)
  • Capacity to deal with agreed retainers
  • A willingness of law firms to take on inappropriate work/too much  - ‘panic acceptance’
  • Missed deadlines/limitation periods/eye off the ball
  • Increased workloads in certain areas/insufficient skill base
  • The impact on mental health

The longer term concerns will be around the ability of some law firms to survive, and the increased risks of claims that can arise from that stark predicament.

Property Crash?

Earlier this year I wrote about the potential for a third round of lender claims (given property market conditions). This now is a clear area of concern, with talk of the UK facing its deepest ever recession. Lending rates are at an all-time low and this may well be the saving grace. However, Insurers will no doubt want to look closely at their book of business at renewal, to ascertain where the greater potential exposures could be. Lenders have reacted quickly, with many removing low deposit mortgage deals and cutting the residential mortgages that can be issued through mortgage brokers.

The prediction that has driven this is a 10% fall in property value over the next 6 months. For my part, the concern will be if the 10% drop prediction turns out to be too optimistic. The market was due a correction in any event, and so anything up to a 25% fall in some areas is perhaps a more realistic outlook by 2021. Of course, it will recover in time.

Conclusion

Experience from the last three recessions is important here (accepting this situation is very different) and lessons can be learned/plans made accordingly. There are three main phases to anticipate:

  1. Phase 1 – a potential spike in notifications directly arising from our new ‘working environment’
  2. Phase 2 – notifications arising as a result of law firm financial deterioration
  3. Phase 3 – recessionary based claims (a potential spike in 2020 but often there is a lag so from 2021/2022 onwards)

Whilst it is hoped that the above scenario is the ‘worst case’ and events materialise to a lesser degree, it is inevitable the claims environment will be a busier place over the next 12 months. That said, risk management (both resource and adherence) across the profession mean that it is in a far more robust position to cope than in any other recessionary period.

Mills & Reeve Sites navigation
A tabbed collection of Mills & Reeve sites.
Sites
My Mills & Reeve navigation
Subscribe to, or manage your My Mills & Reeve account.
My M&R

Visitors

Register for My M&R to stay up-to-date with legal news and events, create brochures and bookmark pages.

Existing clients

Log in to your client extranet for free matter information, know-how and documents.

Staff

Mills & Reeve system for employees.