AI – Don’t spook your PII underwriter banner

AI – Don’t spook your PII underwriter

  • Posted on

AI is the subject of considerable discussion amongst law firms. It is developing at break-neck speed and anticipated to transform the legal sector.
We are seeing everything from administrative tools that gather information from clients, to regulatory tools that streamline processes such as AML checks, and at the other end of the spectrum, sophisticated applications designed to predict the outcome of cases.

These developments are also being driven by the increasing expectations of clients. Many use Artificial Intelligence (AI) tools in their everyday life and are looking for the same experience when they instruct a law firm.

There is a mix of responses to AI across law firms. Many see AI as offering exciting opportunities, whereas others consider it an irritation – or mildly terrifying. But every law firm, from sole practitioners to those in the Top 100, should have AI on their agenda. It would be unwise to dismiss AI as “a passing phase”.

What Professional Indemnity Insurance (PII) Underwriters think about the use of AI in law firms is an important question. After all, if a firm cannot get PII cover, that will be the end of the practice. Are underwriters concerned about AI? Are they asking questions about it? Could the use of AI impact the premium your firm is paying, or its ability to secure PII at all? Or will it be seen as a positive development?

The answer is that PII underwriters are in the same boat as you. We are all learning and feeling our way as the use of AI in the legal sector develops and evolves. This means it’s important to take your underwriter with you on the “AI journey”. You need them to understand what you are doing and why. You also need to reassure them that risk management is at the forefront of every step the firm is taking.

While you might not find questions about AI on PII proposal forms yet, you should take the opportunity to tell underwriters about any technology the firm has implemented, or is seriously considering. This can be discussed in the additional information your firm submits by way of a covering letter or supplementary document.

If AI goes wrong and leads to significant claims activity, then we should expect that underwriters will react. At that point we will see more questions about the use of AI emerge on proposal forms, and particularly those tools associated with claims. PII premiums could also increase where AI responsible for claims activity is (or has been) used. In the worst-case scenario, underwriters might have no appetite at all for offering cover in this situation. So, we have to take care. We have to get it right.

To stay on the right side of PII underwriters, law firms will need to adopt a cautious and planned approach when considering, implementing and using AI. Here are some pointers to help.

Stay informed
Stay informed and keep pace with the ongoing development of AI in the legal sector. Keep an eye on the legal press, sign up for conferences, engage in discussion with experts or those “in the know”, and follow information and guidance published by your regulator and membership bodies. Gathering information will assist you to determine what is right for your firm – and why.

Even if you do not have the appetite for introducing AI to your practice, you still need to know what is happening and the potential impact that AI developments by other firms could have on your business model. If AI enables competitors to complete work faster, cheaper and more accurately, then that could adversely impact the viability of your own business. You need to consider what your strategy will be to respond to that, before it is too late. The financial viability of a firm is always an important consideration for PII underwriters.

Do your due diligence
AI is no longer the preserve of large firms with sufficient funding to develop AI tools aligned to their practice. There are new solutions that are commercially available and enable firms of all sizes to take advantage of AI technology. However, quality will differ and your due diligence needs to be robust when choosing AI technology that is appropriate for your firm.

To the extent that you do not have the expertise within your firm to undertake the level of due diligence needed, then consider engaging an independent consultant to advise and guide you. This will be money well spent and something you can highlight to your underwriter by way of reassurance.

Keep your broker and underwriter in the loop
The implementation of AI that significantly impacts your practice will need to be disclosed as “material information” to your underwriter, and it would be useful to know how they might view this before you make the investment. They might raise questions or issues you have not considered. Alternatively, it might be that your underwriter is enthusiastic about the benefits the technology will bring to your firm – in which case you will be proceeding with confidence.

Risk management is key
Keep risk management “front and centre” as you consider and develop your plans to implement AI. Ensure you fully understand what the AI does, take care with implementation and continue to test the accuracy of the output. Remember AI can get things wrong. If there are errors, then these could be replicated across multiple clients. “The robot did it” will not be a defence to a negligence claim.

Setting guidelines for fee earners regarding the use of AI is a top priority – and this is the case whether you are implementing AI tools or not. There are a number of AI tools now readily available online. Do you know the extent to which your fee earners might already be using a Chat GPT model to assist them in their work? This is a question that all firms must address.

A further key issue is protecting client information and confidentiality. This will be particularly important where third party systems are used. Care will be required to ensure this fundamental regulatory duty is not compromised.

Consideration also needs to be given to suitably informing clients about the use and involvement of AI in their case.

The SRA published a Risk Outlook Report in November 2023 entitled “The use of artificial intelligence in the legal market”. It is available here. The content in the report is helpful and includes useful risk management tips grouped around five principles set out in a 2023 Government Policy Paper.

Diversity of skill sets
It is likely that more diverse skill sets will be needed to ensure that a firm gets the most out of AI technology and can maintain management of the risks associated with its implementation and use. Training for staff will go some way to closing the skills gap, but having individuals with knowledge and expertise in the use of data and technology is likely to give added comfort to underwriters.

Consider your pricing model
One of the advantages of AI is creating efficiencies and therefore reducing the time that a fee earner spends on a file. Firms need to consider how this fits in with their pricing model. Perhaps it is time to revise pricing models based on billable hours and adopt a value-based pricing approach?

Whatever you do, it is important to ensure transparency with clients. Fee disputes and dissatisfaction with the approach to charging can lead to complaints, and possibly PII claims that have to be notified whatever their merit.

Remember it is your PII on the line
If you develop your own AI tools your PII will be on the line. If you use third party AI to provide advice or services to your clients, it is still your firm that will be responsible to a client if they incur any loss as a result of your reliance on the AI used.

It is always important to check what PII cover an AI supplier has to support a third party claim that your insurers might then wish to make against them. However, the cover that a supplier has is unlikely to be as comprehensive as your PII policy and you have no guarantee that it will be live at the point a claim is made. This again underlines the importance of due diligence and risk management discussed above.

AI can deliver considerable benefits and advantages for law firms including increased accuracy, improved control of risk and greater profitability. But if it is not managed correctly, it also has the potential to deliver an increase in claims activity. Don’t let that happen to your firm. You need to proceed in a way that keeps your underwriter onside and reassures them you have everything under control.

Written by Jenny Screech LLB (Hons)
Legal Consultant, Howden PII