The recession is over, albeit official figures from the Office for National Statistics (ONS) indicate that the pace of recovery is slowing.
Despite the economic improvement the Solicitors Journal recently reported that High Court cases against law firms for professional negligence almost tripled last year, from 143 the year before to 418. The same publication reported in April 2013 that a quarter of conveyancing firms had been hit by negligence claims in the previous two years.
Last year’s steep rise in claims comes as the six year primary limitation period for issuing claims stemming from the 2008 credit crunch expires. As the figures show, many of the claims relate to conveyancing. A significant number of these will have been brought by sub-prime mortgage lenders making a final attempt to recover their losses from the fall in the property market.
So what does the present position in the economic climate and these statistics on claims mean for insurers of law firms? We look at the impact.
The spate of lenders’ claims over recent years echoes what happened following the financial crisis in the mid-1990s. One of the main issues in both rounds was inflated property prices, which meant lenders did not have adequate security to cover the loan. The sharp rise in property prices across much of the UK last year has a sense of déjà vu. It could mean a third round of lenders’ claims if there is another economic downturn.
However, while the increase in property sales is likely to feed future negligence claims, the impact might not be so dramatic next time around given that the public’s appetite to take on mortgage debt is being limited by the risks lenders are allowed to take. New rules governing who can obtain a mortgage came into force in April and require lenders to conduct a full affordability check on mortgage applicants.
Lenders are also far less willing to offer buy to let mortgages than they were in say 2006/2007, when it seemed that anyone could build a property portfolio. Certain lenders are also now placing greater restrictions on the availability of mortgages to people over 40. The Council of Mortgage Lenders reported that gross lending totalled £16.9 billion in November, down 9 per cent from October, and has predicted that lending in the next two years will rise at a slower rate than in 2014.
Conveyancing: better safeguards?
The Law Society’s online Conveyancing Portal is due to go live this year. One of its aims is to reduce the risk of fraud. All conveyancers will have access to the system if they pass due diligence tests. The Society also launched the Conveyancing Quality Scheme (CQS) four years ago with the aim of providing a recognised quality standard for residential conveyancing practices. A cynic might view the Conveyancing Portal and CQS as window dressing. After all no one has addressed what some view as the root of many lenders’ claims, which is that solicitors are allowed to represent both purchasers and lenders in the same transaction.
Rise in divorce post-recession
Economic recovery is often associated with an increased divorce rate. This is because the petitioner (usually the wife) will be waiting for the value of the matrimonial home and other assets to recover before attempting to split them with her spouse. Figures from the ONS show there were 118,140 divorces in England and Wales in 2012, an increase of 0.5 per cent on the total for 2011.
Many existing claims stem from what appears to have been a lack of understanding by some matrimonial lawyers of changes to pensions legislation several years ago. These types of claims could fall within the 15-year long stop limitation period should information about pension values only materialise, for example, on the wife’s retirement - so there could be a number of such claims still to come. Matrimonial lawyers have however gained a far better understanding of pension sharing rules and as a result the volume of negligence claims in the future arising from the current spike in divorces might not be so significant.
It is always difficult to predict the type and extent of future professional negligence claims. Much will depend on how well the economy holds up as claims tend to increase in an economic downturn. It is almost certain that a large proportion of claims will continue to relate to conveyancing. However, with the current less volatile economic environment, for now at least we think there is unlikely to be any significant change in the volume of claims but insurers will want to keep a close eye on what might be on the horizon.