Axiom Ince running for cover – who pays losses and is levy necessary?

After the downfall of Axiom Ince running for cover, the questions remain: who pays the losses and is a levy necessary?

The SRA has been quick to float the possibility of a levy on its members for the costs involved in Axiom’s downfall.

At a time when most law firms are already beyond faith in their regulator, they seem to have gone on the front foot to say that there was nothing to see here from their point of view, and that firms should pick up the bill – a more incendiary approach is difficult to imagine.

When looking at who picks up the losses, there are three aspects which will inevitably unfold in ensuing months and years. The professional services firms working for Axiom will be called to account, as forensic investigations review who has done what and whether advisers’ professional duty of care have been dispatched. 

And, of course, the senior Directors within the firm have already been placed under scrutiny and there will be attempts to hold them personally to account. The Insurance sector fits in to all this however, and the SRA seem to have brushed aside this fact in calling for the levy.

Axiom’s PII policy was written by several Insurers. The primary policy will have been written on an any one claim basis, meaning that multiple claims of up to £3m each during the policy year can be submitted. Known as sideways losses in the Insurance sector, this is the major fear for any Insurer, because there is potential for a cash call that can sometimes impact upon their reinsurers and affect the market in general.

Client money losses (the press suggests that a significant aspect of the shortfall sits here) are payable automatically under the firms SRA minimum terms policy where there is a specific carve out for this aspect – the policy writes the cover back in without requiring proof of liability, to mirror the law firms own obligations. Insurers can avoid paying where there is fraud condoned by the partners and directors, however. If that is proven, the indemnity fund might become the last resort, but payments are at the discretion of the SRA.

Because of the size of the losses involved, Insurers will not accept liability to pay without some form of very detailed investigation and engagement by their legal defense teams. That brings into view such aspects as the role of the Insurance broker and client in providing a full submission of all material facts at the time when the PI policy was placed or renewed.

If the broker or client was in possession of material information that was not disclosed, they themselves can be considered a co defendant alongside the other professional services advisers – if indeed it comes to that. The brokers’ PI policy may then come into play. That said, protocol dictates that Insurers move quickly when client money losses are concerned and that might prompt a reservation of rights aspect leaving either the client management ream or the broker and other professionals on the hook for a potential recovery.

Directors and Officers liability is likely to have been available to the individuals within the firm, which will usually protect against the costs of regulatory intervention and prosecution. The policy will pay not only for legal defense around the regulatory aspects but is also intended to introduce early intervention and mitigation, albeit that it is now too late. If fraud or lack of disclosure was in evidence when the policy was placed, then the Insurer could cancel ab initio.

Personal guarantees will have been signed along the lifespan of Axiom, and Insurance protection exists to back this type of exposure, therefore another avenue of cash call might be open to the recovery process.

If the business losses were proven to have been sustained due to a flaw in the acquisition process or performance of Ince and Plexus, warranties will have been signed by the vendors of these firms and warranty and indemnity Insurance would have very likely been offered to cover those losses. It is almost inevitable that the litigators now attempting to recover the money will consider every available route to recovery. If warranty and indemnity Insurance was not offered to the firms, the Insurance and legal advisers could be called to account.

The professional duty of care placed upon the broker in these circumstances is significant. They are required to advise on the scope of risks to which the firm is subject to, breadth of cover, and the suitability of policies and the Insurer involved. It is why the view that many law firms take that their broker oversees a commoditized purchase and is there simply to squeeze price is wrong.

There is always a time when a catastrophic event is triggered in any business’ lifespan, and it is the quality of the protection and professional advice around the firm which can save it, not the price it pays.

The vast majority of professional indemnity brokers in the UK are owned by PE-backed firms and a huge consolidation has taken place to the detriment of choice. There are few privately owned professional brokers left, and fewer still who have the ability to understand and apply the Insurers wordings to the law firm to ensure that they are protected. PE-backed businesses are focused on maximizing profit and exit value (it’s not a crime, simply a fact of life), and those aspects are not always compatible with good client service.

Most importantly however, the ripple effect of these losses is likely to spin out into a variety of issues for the Insurance sector, because, to ensure that advisory firms are protected by their policies, they must notify any incident that could give rise to a claim at a later date, as soon as they become aware of it, so there will be a slew of notifications already out there in the accounting, legal, Insurance broking and other advisory sectors as a result of this.

Insurance business is still sometimes conducted amongst “mates” who meet in London’s Leadenhall market amongst other hostelries, and Insurers speak to each other about individual cases – it is inevitable in the context of a marketplace involving lots of people.

However, the rise in the ability of modern tech to identify the issues involved means that these problems should not continue to be hidden under the radar. Many Insurers (with a few notable exceptions) are very slow adopters of tech solutions and react to market wide issues such as those involved in the Axiom case by simply pulling the cost lever and increasing premiums.

Legal and Insurance tech will enable risk selection to target better firms with better behaviors and evidence for underwriters to cover themselves and protect their reputations – but it needs more enlightenment and adopters to make a difference.

Above all else, unless the SRA knows something that the insurance sector doesn’t, there doesn’t appear to be a forgone conclusion of a huge cash call, and it would appear to be up for discussion.

Kindly shared by Quality PI