Professional Indemnity Coverage and the Future of Law
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Now, let’s continue our journey into the #futureoflaw…
A few weeks ago I shared The Digital Fingerprint as a means to help Legal Practices understand how a unique signature will help them thrive in the digital arena.
Make sure you read The Digital Fingerprint before coming back and enjoying this article 🤓
From there several lawyers raised a point on LinkedIn about how Professional Indemnity Coverage/Insurance plays a large role in how the top end of town select which Legal Service Provider (LSP) to go with. The level of cover that the LSP has is an assurance for large corporate clients and demonstrates the capacity to at least be covered in the event of malpractice, error or otherwise.
So I had the pleasure of exploring this theme further with Richard W Smith a lawyer who has worked at several large firms in the areas of marketing and business development in the Asia-Pacific region and has his own blog.
Thank you Richard, for the wonderful and insightful conversation 😊🙏
So in the spirit of integrating PI into the Digital Fingerprint where it could sit under the Size (or capacity) lever, I want to break it down as it brings about some fascinating systemic realities.
What is Professional Indemnity (PI) coverage?
In professional services, most disciplines (law, accounting etc.) require you to take out some form of indemnity insurance. This is often a regulated requirement either by the professions leading regulator, or by government as a general requirement for business. At a minimum it’s well established best business practice, which speaks to how ingrained Insurance is as a function of business and the wider economy (hat tip to Buffet).
Essentially for law, the protection is in place to cover the professional or business that makes an error or was negligent in their carriage of a matter.
How does the Digital Fingerprint intersect with PI Coverage?
After my conversation with Richard, it became clear that PI coverage is a lever under the Size (or Capacity) theme for the top end of town. As I understand it, most large corporations or organisations procuring legal services have a PI coverage requirement as advised by their legal panels. That means that if you’re not covered for a certain amount, you don’t make the shortlist for consideration or at minimum will be flagged as a risk purchase. This will be an important factor for future-facing legal companies who have spent time tuning their tech-stack and customer journeys and are considering their approach to growth and winning larger clients.
From a numbers perspective, I’ve been loosely informed that the average level of PI coverage expected in Australia from an ASX listed client is roughly AUD 100 million. For State and Federal government their requirements may vary but can sit around the AUD 20 million mark and local councils as a buyer would expect you to have around AUD 10 million worth of coverage. Interestingly, it is undecided who sets the standard for PI coverage - it is very much “chicken and egg” (Buyers or LSPs) and something that becomes more relevant later on in our exploration.
Benchmarks like these inform what may need to be your allocation for insurance premiums as a strategic growth decision - something that certainly is achievable with a future-facing legal practice that focuses on the Digital Fingerprint to drive efficiency and superior experience. Part of the gains made from efficiency and scalable services allow room for allocation to a increasing premium if it’s decided that is the best route. Irrespective of jurisdiction, it is important to consider this as part of your growth strategy: know what the PI coverage requirements are for the larger buyers in your market.
In true FutureLab.Legal fashion however, I’m not resigned to the fact that it will remain this way or that it is the only way. So, let’s dive into the implications so we can set our horizon point further than we may have before and explore what disruption - and therefore opportunity - exists.
What is the systemic challenge?
If we agree that a significant motivating factor for behaviour change is largely driven by client demand, we could simply assume that PI coverage in the tens of millions and beyond is what the clients demand. But if PI coverage is always a factor (and seemingly significant) in the procurement environment, we need to recognize other players in the arena which affect the negotiation and procurement of Legal Services.
The Insurance Industry is predominantly the main stakeholder for this issue as they set the standard for coverage and decide the premiums. The systemic challenge is then that buyers and providers of Legal Services are beholden to PI Coverage: the terms, amounts and premiums of which are defined by a stakeholder external to the Legal Industry.
So, how does insurance work?
Basically, you pay a regular premium or fee on the possibility that something will go wrong at some point on your respective timeline (in this case, the business cycle of your professional services). If something does happen, you can then apply to be covered for the damages or loss up to the amount you were covered subject to the terms you agreed to when you signed up.
In my understanding, Insurance as a concept depends on the interplay of two probabilities:
The probability that for the most part things will go well in business ventures, and that at a certain volume of policy holders this probability assumption is increased.
There is generally a lesser probability for things to go wrong (across the business cycle) that requires a substantial payout of money to remedy the issue. At a certain volume of insurance customers, this probability assumption is decreased.
These probabilities run on certain calculations of risk stemming from historical data and multiple business factors including: the precise nature of the work you carry out, perhaps which area of law you practice, which locations you provide service in, your business structure, past indicators of risk etc.
In a trigger event, Insurance companies look at a scenario and identify one or two milestones it would consider in finding fault and establishing liability. With that limited knowledge they then either limit, negotiate, accept or refuse to pay the insurance amount.
So what we have here is the Insurance Industries challenge of “visibility that informs probability”. With only a few flag-posts or milestones on a event timeline they have to make decisions and the outcomes of that work is what produces the perceived risks and therefore, premiums.
But, what if it wasn’t?
What could be the systemic solutions in the #futureoflaw?
As the industry shifts and introduces new models, questions arise about where the liability and onus of PI coverage sits. Say, with contracted lawyers on a platform or managed legal services the assurance could sit with the contracted lawyer, or with the umbrella brand/group, or even a third party underwriter.
What could be done however, in startup or spin-off legal/reg-tech form, is expand the visibility in order to better predict the probability. I suggest this can happen in a variety of ways:
As Contract/Document Management Platforms continue to mature, they will not only maintain audit trails when contracts are being negotiated by parties (exists currently in several offerings) but will begin to add a smart, connected layer to report and respond to triggers (this has been called “Smart Contracts”). This means that any insurance company underwriting a Legal Service Provider that dominantly uses this type of Contract Management Platform will have access to much more visibility, can manage trends and therefore lower the risk profile and premium (to the customers advantage) based on oversight.
As an additional layer, the integration of ledger technology that would guarantee the accuracy of that audit trail would only enhance the immutability of the report as to what is or has “happened". Whether that comes from the LegalTech side or the RegTech side is down to what unique business manages to break through in their particular market conditions.
Side note: what do you think IoT devices and their return-to-base data will be used for by insurance companies 🤔
The development of Insurance Industry backed proposal software (likely LegalTech/Reg-Tech crossover) which would - due to the way in which the proposals are written - be cogent as a tender for legal services and have the backing of insurance standards and come pre-underwritten. This is potentially the work of a smart few who see the opportunity, build the right relationships with a willing Insurance company to: a) Provide a stellar experience to the Lawyers and b) The necessary oversight by the Insurance company to benefit from underwriting these instruments.
Firms that have leveraged tech-stacks that allow an increased level of oversight and can point to their own data to predict, pre-empt and maintain a granular level of operational understanding and progress of matters would be in a far stronger position to invite Insurance companies to the table to negotiate the terms and prices of their insurance.
As an additional point, we are not far from Insurance companies requiring LSPs to leverage technology knowing that doing so will remove a lot of potential human error traditionally occurring through repetitive menial labour all the way to legal interpretation.
And there we have it!
A little in the weeds but hopefully you’ve enjoyed the journey discovering how PI Coverage is a factor that would sit under Size (or Capacity) of firms when dealing with the top end of town and some of the opportunities available to us as we move into the future of law. Thanks for walking with me 😊
As always, the future of law is in our hands 🔥
Q.
Photo by Lukas Blazek on Unsplash