Unsecured Debts and Law Firm Failures: Insights into Professional Indemnity Premium Recovery
Summit Law LLP
Employment law, insolvency and commercial legal advice and litigation, London Based.
The legal industry is grappling with an increasing number of law firm closures, and the financial consequences of these failures are profound. A recent Law Gazette article shed light on the staggering debts left behind, with over £400 million outstanding to unsecured creditors from law firms in the last five years. Considering that this report focuses only on firms owing £1 million or more, the actual total across the sector is likely even higher.
For many unsecured creditors, these closures bring harsh financial realities. When a law firm enters administration, liquidation, or opts for a company voluntary arrangement (CVA), unsecured creditors often face the grim prospect of receiving pennies on the pound—or sometimes nothing at all.
The Growing Problem of Unpaid Run-Off Premiums
One specific area that’s often overlooked is the substantial amount owed in professional indemnity insurance (PII) premiums, particularly for run-off cover. As solicitors working closely with insurers, we witness this problem first-hand. Run-off cover, which is most often triggered when a law firm ceases operations, provides essential protection for past legal work. It is required by regulation to protect against claims that may arise after a law firm closes, yet premiums for this cover are so often left unpaid.
Our firm regularly assists insurers in recovering unpaid PII premiums, including these run-off premiums. Unfortunately, insolvent law firms frequently leave significant sums unpaid, adding to the financial exposure of insurers. The Law Gazette report underscores the significant sums owed to unsecured creditors, but, from our experience, the list is far longer when considering all those firms owing less than the £1m threshold used for the report.
A Collaborative Approach to Recovery Efforts
In support of our insurance clients, we work closely with insolvency practitioners to maximise recovery of these outstanding sums. By coordinating with insolvency experts, we aim to help creditors receive fair recompense where possible. This collaborative approach is essential to ensure that every feasible step is taken, to ensure the best possible return for our clients in the professional indemnity market.
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Impact on the Professional Indemnity Underwriting Industry
This growing trend of unpaid debts is causing increasing concern within the professional indemnity underwriting industry. Insurers face a delicate balancing act, weighing the risks associated with insuring a law firm against the potential reward of annual premiums. With so many law firms closing each year, insurers are perhaps taking on greater risk, especially when run-off premiums usually go unpaid after firms become insolvent. This is a dilemma that threatens the sustainability of PII for law firms if left unaddressed.
A Call for Regulatory Intervention
While some efforts are underway to address these issues, regulatory change is needed to ensure a more stable landscape. Strengthened guidelines around financial accountability and enhanced security for insurance obligations could mitigate some of these concerns and reduce the financial strain on unsecured creditors, including insurers.
As debt recovery experts, we understand the unique challenges posed by these insolvencies. Our ongoing work seeks not only to secure recovery for insurers but also to contribute insights to the PII underwriting sector in the hope of achieving a more resilient and equitable framework for handling law firm closures.
If you would like to know more about our services and how we can assist with recovering unpaid premiums and other debts, please get in touch on 020 7467 3980 or by email to jb@summitlawllp.co.uk. Our team is here to help navigate this complex landscape with professionalism and commitment to achieving the best possible outcomes.