During the last recession several law firms were hit with a variety of property fraud losses which they in turn needed to pass on to their Insurers due to the size and complexity of those losses. A significant number of claims were indefensible because the law firms were unable to demonstrate that they had acted in accordance with CML handbook protocols. As economic headwinds gather and we continue towards what is anticipated to be the next major recessional period in the UK, it is expected that there will be further losses arising from a stressed domestic property sector with falling values and an inability of some owners and landlords to keep up with payments.

Increasingly sophisticated actors are now adding to property conveyancing sector exposures with issues relevant to ID checking, source of funds and increasingly sanctions (one Insurer requires information on a very long list of excluded territories including clients of the law firm who they might have acted for knowingly in the past). We know that some criminal activities have led to client funds being passed on to fraudulent parties via hacking, and cyber crime is so common in the UK that firms experience a staggering amount of attempted cyber hits on a weekly basis.

Following on from the effects of COVID-19 and the glut of conveyancing during the summer of 2021, where many law firms were running fast to mop up new client work, we are already seeing a spike in some law firms property client losses. Combined with recession led aspects, we suspect that some firms may find themselves to be in difficulties in the next twelve months or so.

These losses take time to crystallise, because the lender needs to dispose of the property during a falling market and we know from experience that they will look to a wide variety of possible defendants to pursue in order to achieve financial recompense. The effect of this is that during the last recession some firms carried “live” claims for significant periods of time, where a payment was then made alongside not insignificant defence costs. At the time the Insurance sector for Solicitor firms was experiencing price competition, however after several years of rising premiums, the effect of a glut of claims on some firms might be catastrophic, in what is already a particularly difficult marketplace.

In addition, we are seeing some Insurers impose additional excesses to law firm’s policies relevant to conveyancing, and in some circumstances an any one claim or claimant excess, which is effectively an open ended exposure for a firm. Managing these risks going forward is likely to be an increasingly significant piece of law firms’ risk and governance strategy and oversight.