Risk + Reward: PII and The Problems of Innovation

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Risk + Reward: PII and The Problems of Innovation

By LexisNexis

We look at how law firms are balancing risk-aversion with innovation, problems around professional indemnity insurance, and the need for law firms to find a healthy middle ground.

Law firms are eager to embrace digital innovation. They have long understood the benefits: improvements to productivity, increased accuracy, reduced costs, fewer hours spent performing tedious tasks, and so on. But risk-aversion remains widespread in the sector, particularly among smaller firms and junior lawyers, and digital innovation can therefore suffer.

The progressive call of innovation conflicts with traditional aversion to risk.  Firms are appearing particularly cautious at present, with rising negligence claims and difficulty insuring against such claims.

It’s a tough landscape for legal innovation. But the alternative – the absence of innovation – will leave firms in a state of stasis, unable to compete in a fast-moving sector due to entrenched risk-aversion. Law firms of the future need to find a middle ground, balancing the desire for innovation with caution.

Risk-aversion and the PII market

Risk-aversion is understandable, particularly at present. Law firms are facing an exponential rise in professional negligence claims, according to the Solicitors Regulation Authority (SRA) report on Technology and Innovation in Legal Services. Such claims can be costly and complex.

Professional indemnity insurance (PII) often mitigates risks associated with the claims. PII works quite simply. Private practice solicitors are required to maintain PII in accordance with the SRA indemnity insurance rules (the Rules). The Rules establish a compulsory level of cover for all solicitors’ firms.

That means a minimum of £3 million of PII cover for any one claim for recognised bodies and licensed bodies – such as alternative business structures and partnerships that are limited companies – and £2 million for any one claim for other structures of the firm – such as sole practitioners and partnerships.

The total amount of PII cover required is dependent on firm size and exposure to risk. The SRA Code of Conduct 2011 demands firms to assess and purchase the level of PII that is appropriate for them.

PII is meant to provide protection, allowing firms a degree of freedom from risk. The problem lies in a volatile PII market, where risk mitigation is increasingly difficult and costly. The Law Society reports premiums have recently increased between 5% and 50%, despite firm turnover being down 10% on average.

We’ve seen insurers exiting the market at an alarming rate and a number of insurers narrowing the types of firms they are willing to cover.  Couple these with a rise in negligence claims – concerns among insurers are not surprising.

In addition, insurers have recognised the increase in conveyancing-related claims, meaning that they are increasingly reluctant to cover firms with a significant property practice. The rise in conveyancing-related claims stems partly from pressure to complete transactions during the stamp duty land tax (SDLT) ‘holiday’, which led to mistakes. By extending the exemption to SDLT in the Autumn budget, the Chancellor provided another deadline that put further pressure on transactions.

Cyber-related claims are also proving problematic. The rise in such claims is explained by changes to business practices and working models. Remote working creates new opportunities for cyber attacks and breaches.  Less secure systems, vulnerabilities in remote infrastructure and the increasing sophistication of cyber criminals, present new risks.

Gaining access to PII

As negligence claims rise and the PII market changes, insurance firms have become increasingly selective. They are placing additional scrutiny on proposal forms, putting in place more robust criteria when deciding on the firms to cover. During such ‘hard’ cycles, law firms have to accept significantly increased premiums or in extreme cases struggle to obtain PII from any insurer.

The rise in premiums and inaccessibility has impacted some firms harder than others. Smaller firms are particularly hard hit by ‘hard’ cycles, with sole practitioners, firms with five or fewer partners, and firms involved in conveyance work facing the greatest challenges.

It’s becoming a big problem. According to the LexisNexis Bellwether Report 2021, for example, the cost of PII is a major concern for small firms. 66% of respondents suggested that PII posed a threat to their business. PII was cited as the second most significant cost facing firms.

It’s not just cost that causes problems. The report also demonstrated that the process behind PII was overly time-consuming and complex, with application and renewal processes taking days.

PII and innovation

Innovation on any scale is always accompanied by degrees of risk. The troubles with PII – the primary mechanism that is supposed to mitigate risk – poses major problems for firms. There are a host of issues around PII, all of which have been greatly exacerbated by the complexity of the PII market.

Lawyers are concerned that innovation-related activities are not covered by their firm’s main PII policy. They are also unsure whether additional insurance is required for cyber-related risk.  Importantly, there is a broad uncertainty around legislation, which means firms are unsure where innovation exists in the wider regulatory framework. According to the SRA survey, for example, 44% of respondents said they did not know if regulations allowed the innovative activity they were considering.

The problems of PII are preventing innovation, due to the inaccessibility of coverage, the cost and complexity of coverage, uncertainly around regulation, particular problems with property and cyber-security, and other issues. It is perhaps no surprise that 63% of respondents to the SRA report listed PII as a barrier to tech adoption.

Risk and the reward

To innovate or not to innovate. That is question. Growing negligence claims in a volatile market is enough to thwart innovation. But firms of the future need to accept a small degree of risk and opt for sensible innovation, as the alternative is stagnancy that undermines the firm’s ability to compete.

Innovation is essential. Firms that fail to innovate fail to compete. The risks around PII are serious, but firms need to perform extensive research, find the best possible cover, try to understand the limitations of that cover, and proceed to innovate on an appropriate scale.

The firms of the future need to embrace digital. The need to innovate is not simply desirable, but necessary. One obvious route to small-scale sensible innovation is to look at products on the market. Lexis Create, for example, helps lawyers to automate legal documents and pinpoint mistakes, offering a small-scale innovation that improves accuracy and frees up time.

The tool allows lawyers to find and reuse clauses, delegate parts of document creation to team members, review and refine legal documents so that small mistakes do not cause big problems,  ensure work is client-ready, validate citations, and more. The tool is perfect for firms aiming to innovate safely and sensibly, without incurring risk.

LexisPSL can also ensure better accuracy. The tool helps lawyers find precise information, offering the latest practice notes, precedents, forms, and analysis across 36 practice areas. The tool not only provides accuracy, but it helps to reduce risk by keeping lawyers informed and up to date.

PSL provides horizon-scanning services, bespoke time-saving tools to speed up process-intensive work, and fully integrates with Lexis®Library for all primary sources, authorities, and exclusive titles.

These tools are simply examples of safe and sensible innovations, where firms can avert risk while still moving with the future. Smaller firms need to embrace such forms of innovation, ensuring adequate protection from risk while still remaining competitive.

In the current PII market, high-risk innovation is ill-advised, especially in an era where firms are unsure of the extent of their protection. But completely disregarding innovation would be disastrous, as firms will surely get left behind in a fast-moving sector. Failure to innovate dooms firms to failure. The middle-ground is small-scale, low-risk innovation that firms can trust.

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