UK law firms plunged into bankruptcy by soaring insurance premiums
Dozens of UK law firms have collapsed into bankruptcy over the last year due to being unable to obtain the insurance policies they need to continue operating, new research shows.
The rising cost of taking out professional indemnity insurance (PII) policies – that cover any losses arising from negligent services – caused nine UK law firms to fold in the third-quarter of 2022 alone, the research from legal sector accounting firm Hazlewoods shows.
Solicitors Regulation Authority (SRA) rules require all private practice law firms operating in the UK to be covered for negligence risks via a PII policy.
Insurers are however exiting the largely unprofitable PII market, in a shift that has caused law firms’ insurance premiums to soar.
Law firms working in the property conveyancing sector have been particularly hard hit by higher premiums, amid a reluctance from insurers to provide coverage due to the high number of claims and the high value of property transactions.
Concerns over an uptick in claims as a result of falling property prices and the global economic downturn have worsened the situation and deterred new firms from entering the market.
Higher premiums mean law firms on average pay out five per cent of their annual turnovers to cover the costs of taking out PII policies, Hazlewoods research shows.
However, in the case of law firms working in the property conveyancing sector, PII insurance costs now consume up to 20 per cent of firms’ annual revenues.
The situation saw 37 firms collapse in the year ending 30 June 2022 due to failing to obtain PII coverage, Hazlewoods’ analysis shows.
Hazlewoods partner Ian Johnson said: “The cost of insurance is becoming an increasing problem for law firms. This is particularly the case for smaller law firms who may not have the same risk management processes as large law firms and ones focused on conveyancing or other higher risk areas.
“With the number of insurers in the market shrinking and those still left increasingly risk averse, premiums could continue to rise.”
“In order to mitigate any issues, firms should ensure that, over the next 12 months and beyond, they have a funding strategy in place to pay for these increasing premiums and have a strong handle on their financial forecasting so that they can plan for tough times ahead,” Johnson said.