While negligence cases against lawyers have fallen from their 2009 peak, larger law firms are facing a sharp increase in sums claimed – and the threat of rising insurance premiums is also looming, warns Richard Harrison

It remains the case that, following a peak in 2009, the number of claims against solicitors has generally decreased. It has been widely reported that the most marked increase has come from lender litigation. Residential claims are now tailing off to a degree, although commercial property claims continue to come through. Opinions are divided about whether the worst of the lender claims are now over. If interest rates rise (perhaps unlikely while economic troubles continue) we may see something of a resurgence.

For larger firms the trend is towards fewer claims, but of markedly increased severity in terms of amounts claimed. This is because the downturn followed a boom period where there were many complex high-value transactions.

A significant development has been this April's introduction of the Jackson reforms to litigation procedure and costs, which end the recoverability by a winning party of a success fee under a conditional fee agreement (CFA) or an after-the-event (ATE) insurance premium. 

Although it is early days the reforms have ended the situation in which some claimants could exert pressure on defendant firms to settle claims regardless of the merits, on the basis that the claimants' costs would be disproportionate to any damages.

We may see more claims against solicitors over the conduct of litigation after the reforms. The courts have said they will take a zero tolerance approach to non-compliance with court orders and procedure, meaning a solicitor who makes a mistake will find it much harder to rectify, leaving the client with the remedy of a negligence action.

There may also be mistakes over new costs budget rules, and issues arising from solicitors' advice to clients about funding litigation.

Regulation

Outcomes-focused regulation (OFR) has been with us for 20 months. A recent Law Society survey showed that 86% of law firms agreed OFR placed too great a burden on them – an increase on the 77% who felt this way under the rules-based regime. However, we believe that following the initial burden when the regime came in many (especially larger) law firms are now more comfortable with OFR.

The compliance officer for legal practice (COLP) and compliance officer for finance and administration (COFA) regimes started this year. Commentators had voiced concerns about the COLP role, including the difficulties deciding what is a "serious material breach" of regulation requiring a report to the Solicitors Regulation Authority (SRA) "as soon as reasonably practicable", and the difficulties some COLPs might face getting necessary information from within the firm. 

A number of uncertainties remain. The SRA has indicated it intends to remove the requirement for COLPs to report non-material breaches in an annual report, although firms will need to maintain records of such breaches to spot material patterns.  

A particular concern to the SRA is the financial stability of law firms following several law firm failures including Cobbetts, Blakemores, and Dewey & LeBoeuf. The SRA will expect COLPs to have access to sufficient information from their firm's management, ensuring they are on top of any financial issues. 

Insurance shake-up

The single renewal date for professional indemnity insurance is to be removed from October 2013. Insurers will now be able to issue policies at any time and of any length. Another key development is the end of the assigned risks pool (ARP), which closes to new entrants in September. 

Previously, law firms unable to obtain insurance entered the ARP in return for a punitive premium. Qualifying insurers met the cost of ARP claims, although the costs spiralled from 2008 leading to concerns about the market's viability and an SRA decision to phase out the ARP. 

Now firms that fail to obtain insurance will have a 30-day period of extended cover under their existing policy to obtain new insurance. If they fail to do so the existing policy will enter a cessation period of 60 days, during which the firm will have cover for claims but must only engage in work to discharge its existing instructions. The firm must close if cover is still not obtained. Closure will trigger run-off cover for six years under the existing policy following the minimum terms.

The effect of the ARP closure on premiums is yet to be seen. However, it does mean that insurers will look even more closely at the firms they insure, to ensure they are not obliged eventually to provide run-off cover.

On a separate note, the Legal Services Consumer Panel, which provides advice to the Legal Services Board, has recommended research into the viability of a single entity to oversee financial protection arrangements across legal advisers in the regulated sector. This would set minimum terms and conditions for professional indemnity insurance and administer a single compensation fund. No doubt lengthy debate will follow. 

Keeping up to date

Although numbers of claims against solicitors have decreased, firms are at greater risk of facing substantive negligence claims while economic difficulties continue, and it is more important than ever that risk processes and procedures be kept under review and fully enforced. The effect of recent changes in the professional indemnity market on premiums is something many law firms will be looking at with interest.

Richard Harrison is head of the lawyers' liability group at Clyde & Co.