The 2020/2021 Legal Practitioners’ Indemnity Insurance Fund NPC (LPIIF) scheme year commenced on 1 July. The team at the LPIIF thought that this would be an opportune time to give De Rebus readers an overall view of what the claims trends have been over the past few years and to highlight the main areas of risk. This will assist readers in understanding how the accumulation of claims over the past years have resulted in the current outstanding exposure.
The LPIIF is a registered short-term insurance company and its regulatory obligations include the actuarial assessment of the reserve requirements for outstanding claims. The actuarial assessment was conducted on the reserve requirement for outstanding claims as at 30 June, being the end of the previous financial and insurance years. The outcome of the assessment was that the reserve requirement for outstanding claims was R 598 574 800. This number is significantly high, considering the nature, size and legislative mandate of the LPIIF. Legal practitioners must address the underlying conduct within their respective practices, which leads to professional indemnity (PI) claims against them. If the growth in claims continues unabated, the sustainability and affordability of the current South African professional indemnity insurance model is put at risk.
It is often noted across many international jurisdictions that periods of economic downturn are characterised by a corresponding increase in PI claims. This was noted, in particular, with claims against legal practitioners following on the 2007 – 2008 global financial crisis. The underlying reasons for this are numerous across the respective jurisdictions. Legal practitioners in South Africa were also affected by the financial crisis, as will be gleaned from the statistics below.
The effects of the current unprecedented circumstances brought about by the COVID-19 pandemic are being monitored by insurers writing the various classes of risk. There is no empirical data available as yet (both locally and abroad) on which predictions can reliably be made on the long-term impact of the pandemic on PI claims.
The inability of firms to continue operating to their full operating potential in the current conditions has been widely covered. The team at the LPIIF are monitoring the situation closely and are keeping an eye on developments in the broader PI market locally and in other jurisdictions. Adequate data on which trends can be drawn will only become available in time. The Prudential Authority and the Financial Sector Conduct Authority have increased the reporting requirements on regulated entities during this period in an effort to collate data on the financial services sector in general, and the insurance sector in particular.
The graphs on below show the LPIIF claims position as at 31 July.
Graph 1: Number of claims notified per insurance year.
Graph 1 above shows the steady increase claims notified in each insurance year. From the 2004/2005 scheme year the LPIIF saw a sharp increase in the notification of prescribed Road Accident Fund (RAF) claims. That year was also the first year where under-settled RAF claims had to be reported separately as that claim type had grown significantly. Prescribed and under-settled RAF claims have, since then, perennially been in the top four claim types (as will be noted from graph 2).
The scheme years between 2007 and 2011 were characterised by an increase in conveyancing related claims as areas, such as bridging finance, emerged. Cybercrime related matters also began emerging in the conveyancing environment from 2010 and continued until 2015. It is for this reason that bridging finance related claims were excluded from the LPIIF policy in 2011 (clause 16(f)) and cybercrime related claims excluded from the policy in 2016 (see clause 16(o)). We have also written extensively about cyber scams and made risk management suggestions that legal practices can implement in order to mitigate this risk (see Risk Alert Bulletin November 2019, August 2019 and August 2018, see www.lpiif.co.za). One of the unfortunate legacies of the last decade is that the two layers of the LPIIF’s reinsurance cover (the excess of loss and the stop loss) have been expunged in the 2009 scheme year and the cover for the 2011 is also close to being expunged. The LPIIF reached its highest peak for incurred claims (reserved and paid) in 2011. The result is that all the outstanding claims for those two scheme years (2009 and 2011), for example, will have to be borne by the LPIIF out of its reserves. This erodes the available resources the LPIIF has, and is a threat to its long-term sustainability, placing all stakeholders at risk.
As a registered insurer, the LPIIF is obliged to maintain the regulatory prescribed minimum solvency levels. High claim numbers and values will threaten the ability of the company to meet the regulatory minimum solvency levels. The genesis of the change in the regulatory model for insurers internationally post-2008 was the collapse of an insurer in Australia triggered by a high number of personal injury related claims against legal practitioners. All stakeholders thus have a role to play in mitigating the risks associated with PI claims.
Prescribed and under-settled RAF claims are particularly expensive for the LPIIF both in terms of the high quantum involved, the cost of investigation and assessing these claims, as well as defending them. The quantum of these claims, in many instances, exceed the available limit of indemnity for the insured legal practitioner against whom the claim is brought. This leaves the respective legal practitioner with huge personal exposure if they do not have adequate top up insurance cover or some other risk transfer measure in place. Many years of hard work in building up a legal practice (and your personal assets) are thus put at risk. The reality is that many of these claims could have been avoided had the legal practitioners concerned developed and implemented appropriate internal risk management measures and registered their claims with the LPIIF’s Prescription Alert Unit, for example. The LPIIF website (www.lpiif.co.za) has useful risk management tools available to legal practitioners. Failure to register matters with the Prescription Alert Unit and to adhere to the notices sent out by that unit will result in a penalty deductible (access) being applied in the event of a claim. More information on the Prescription Alert Unit is available on the LPIIF website.
The pursuit by some plaintiffs of claims against legal practitioners, which have no merit, is an unfortunate practice that must be curtailed. Where appropriate, the LPIIF will seek punitive costs orders against the litigants concerned and their legal representatives. Dishonest conduct on the part of the plaintiffs and/or the defendants (the insured attorneys) will be reported to the Legal Practice Council (the LPC).
The stabilisation of claim numbers since 2016 is welcomed. We wish to express our appreciation to those legal practitioners who have heeded the call to proactively manage risk in their practices.
Graph 2 shows the breakdown of the various claim types notified since 2010.
Professional indemnity claims are long tail in nature. This means that a claim may be reported in one insurance year, but the investigation involved, and the litigation process takes place over many years. Such claims thus take many years to be finalised.
Graph 2: Breakdown in terms of claim type.
Legal practitioners who practice in the areas with the highest risk must make an extra effort to ensure that they have adequate risk management measurers in place to avoid claims. The LPIIF website has extensive information available on risk avoidance and mitigation measures for legal practitioners.
The LPIIF team are also available to give risk management training to all legal practices at no cost. In the current conditions, the training can be done remotely. Contact the LPIIF’s Practitioner Support Executive, Henri van Rooyen, at henri.vanrooyen@lpiif.co.za in order to arrange a risk management training session for your practice.
Thomas Harban BA LLB (Wits) is the General Manager of the Legal Practitioners’ Indemnity Insurance Fund NPC in Centurion.
This article was first published in De Rebus in 2020 (Oct) DR 4.
