Assessing the level of professional indemnity cover limits for law firms

26 October 2018

The Solicitors professional indemnity insurance (PII) rules require every firm to purchase a professional indemnity policy compliant with the minimum terms and conditions (MTC’s) and the minimum required limit is GBP 2,000,000 for sole practitioners and partnerships rising to GBP 3,000,000 for recognised bodies (limited liability partnerships, limited companies and the like).

With effect from 1st April 2015 new Code of Conduct Outcome 7.13 was introduced. This requires that; “You assess and purchase the level of professional indemnity insurance cover that is appropriate for your current and past practice, taking into account potential levels of claim by your clients and others and any alternative arrangements you or your client may make.”

It is expected that firms will be compliant with this obligation by the earlier of:

1. The date on or after 1 April 2015 of the commencement, renewal, replacement or agreed extension of the policy period of any qualifying insurance.

2. The start of the new indemnity period on 1 October 2015

Thus all firms should now be compliant. It is important to remember that as this is a Code of Conduct requirement it will be necessary for firms to be able to evidence that they have a process for continuing to assess the required level of the indemnity limit and that the process has been followed and that cover has been purchased in accordance with the final assessment.

The SRA has stated: “If a firm is able to demonstrate to our satisfaction that it made an assessment and reached a reasonable and rational decision as to the appropriate level of its PII cover then it is very unlikely that we would challenge that decision.”

CONSIDERATIONS IN ASSESSING THE APPROPRIATE LEVEL OF COVER

Nature and type of work – The first thing that you should remember is that the Solicitors Professional Indemnity policy is written on a claims made basis which means that it is the policy in force at the time the claim is made or circumstance first notified that pays not the policy in force at the time that you did the work. As a result it will be necessary to give consideration not only to the type and nature of transactions or work currently being conducted but also the nature and type of work carried out in the past.

Aggregation – The MTC’s contain an aggregation clause which states

(a) all claims against any one or more insured arising from:

(i) One act or omission

(ii) One series of related acts or omissions

(iii) The same act or omission in a series of related matters or transactions (iv) Similar acts or omissions in a series of related matters or transactions

And

(b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.

This is an important consideration if you are conducting work for clients or groups of clients that could involve multiple claims being considered for the purposes of the coverage as one claim. For example the aggregation clause might apply if you were to use standardised contracts and a drafting error caused multiple claims.

Limitation to Liability – Many firms may limit or attempt to limit their liability to their clients in their terms and conditions. It is appropriate to have regard to such limitation to liability when considering the level of cover to purchase. You will need to consider however whether such limitation is enforceable having regard to the unfair contract terms Act thus the nature of your clients might be important as limitation is unlikely to be effective where the client is a private individual as opposed to a sophisticate corporate client.

Value of engagements and estimate of maximum probable loss – Clearly the value of the cases that you work on will be relevant although it may not be the case cover needs to mirror the highest transaction value and so it would be necessary for you to consider the maximum probable loss for each type of transaction. For example if you are acting for a client in the purchase of a property, whilst not impossible, a total loss is unlikely. The property will still exist and have some value claims are likely to be for diminution in value or for the costs of rectification of the problem. On the other hand where a firm is conducting personal injury work a total loss is a real possibility as an error in process can cause the whole claim to fail.

Historic Claims experience – In their guidance notes SRA have suggested that the historic claims experience of the firm can be taken into account. By this it is assumed that they mean that frequency and value of historic claims is some indicator of future claims values. Whilst this has some merit it would be dangerous for too much weight to be placed on the historic claims position as it is certainly the case that a firm with a clean claims record can still experience a significant claim as a result of an isolated error.

EXCESS LAYER (TOP UP) INSURANCE

Many of the qualifying insurers for Solicitors Professional Indemnity Insurance are only prepared to offer firms a limit of indemnity compliant with the minimum limits in the Indemnity Insurance Rules and so if firms establish a need to purchase limits of cover higher than the minimum limits then it may well be the case that it will be necessary for firms to purchase excess layer insurance from another insurer(s).

Whilst in general terms excess layer insurance follows the terms of the underlying policy, there is no requirement on the insurer to issue policies that comply with MTC’s and there will almost certainly be some differences in the policy terms and conditions between the primary cover subject to the minimum terms and an excess layer policy. Firms should bear this in mind and should ensure that they are able to comply with the terms of the excess layer policy and that there are no exclusions relevant to the type of work carried out.

The considerations for establishing the limit that a firm purchases are exactly the same for excess layer insurance as for the primary insurance and the excess layer is merely a method by which a firm is able to purchase a limit that is in line with its assessment of its needs.

At this point it is probably relevant to explore a question that we are often asked by firms and that is; we have an unusually large (for the firm) transaction that we would like to conduct, can we purchase cover just for this transaction. The answer to this is usually no. Whilst there is no technical reason why it can’t be done in practice insurers very rarely provide cover restricted to a one off transaction and it is usually the case that the firm will need to purchase additional cover across the whole of its business to achieve the desired result.

The other consideration is an economic one. Where a firm is considering increasing their indemnity limit to reflect an unusually large transaction it must be remembered that it will be necessary to keep purchasing the additional cover each year until the possibility of a claim from this transaction is passed. As a result it may be that it is not economic to take the particular instruction.

Download Risk Focus

For further information please contact, James Frost on +44 (0)121 626 7841 or email james_frost@jltgroup.com