Pressure is mounting within the legal sector in renewing PII cover by 1 October 2021, impacting the cashflow and viability of firms
Post Jackson Reforms/LASPO
It came as no surprise that the legal sector (particularly personal injury and criminal practices) would be hard hit by the reforms.
The withdrawal of traditional lending to the legal market, the introduction of efficient and well-funded ABS factories, and pressure on the Court processes have all contrived to further adversely impact pricing and profitability, and more importantly, cash flow and WIP lock up.
It is therefore not surprising that we have seen an escalation in the failure of practices since 2012 as firms have run out of cash, with many more still requiring reconstruction.
With the increase in law firm failures and increasing claims frequencies, professional indemnity insurers have started to take a long and hard look at their cover on solicitors’ practices with many limiting their exposure or withdrawing altogether – particularly in the excess layer area.
This has led to a hike in premiums and, latterly, the requirement for personal guarantees from principals and in some cases cash cover for excesses.
Covid-19 – The calm before the storm?
From a financial perspective and in many cases, the pandemic has benefited certain practices through Government stimulus. Cash flow has been alleviated by the introduction of the furlough scheme and loans by way of CBILs and BBLs. Whilst Government assistance has buoyed certain practices to position themselves to remain viable post-Covid, it has for others delayed the inevitable effect of operational losses yet to be felt once we are out of the pandemic.
Combined with the cessation of the furlough scheme and government loans no longer being available (which currently is expected), we are likely to see tremendous pressure on cash flow within the industry. The bail out of lending in the alternative market will also be more selective and harder to secure.
As the clouds gather, insurers are seeing a potential storm that lies ahead and are focussing more than ever on the long-term financial viability of a firm when looking at their appetite to offer renewal terms or consider new business.
Renewal of PII?
The 1 April 2021 PII renewal season was heralded by The Gazette as ‘…hardest PII market for 20 years’ with worse to come for those renewing 1 October 2021.
For those who are not able to secure renewal terms, or afford the increased terms offered, firms have no option but to stop taking on new work as they enter the 30 day extension period. If cover is not secured within those 30 days, the firm has 60 days run off to satisfactorily deal with its clients and files. Failure to do so could see the SRA intervene.
For those firms that expect to enter the 30 day extension period this October, it is imperative that principals take immediate and specialist reconstruction advice as to the options that are available.
The earlier that advice is taken, more options become available that may include an orderly cash management workout, securing new funding, or a seamless transfer of clients, cases, and employees by way of a merger or acquisition.
In the event a solvent solution cannot be found then firms will have to consider a voluntary arrangement with its creditors or a transfer of the business by way of a process.
In any scenario, the options mentioned would seek to avoid the need for SRA intervention, comply with regulations, mitigate personal guarantee exposure, or rescue the business and preserve jobs if required.
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