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Make it policy to know about policy cover

1 September 02

Some of the circumstances in which careful consideration needs to be given to the terms and conditions of professional indemnity insurance

by Alistair Sim

Insurance is an important aspect of the management of risk in professional practice.

There are situations in which, for instance, your firm or you as an individual could be exposed unnecessarily and, indeed, unwittingly to a claim which is not protected by the professional indemnity insurance. The purpose of this article is to identify and explain some of the circumstances in which some care needs to be taken in considering who is at risk, who is covered and who is not.

This is intended to be a brief synopsis only. The comments are necessarily somewhat superficial and are largely confined to the cover provided by the Master Policy. You may find it appropriate to seek specific, detailed advice whether in relation to the Master Policy or to other insurances.

What is (not) covered?

The scope of the Master Policy cover extends to “all manner of business… which is customarily (but not necessarily exclusively) carried on or transacted by solicitors in Scotland”. The cover is therefore wide but it is not unlimited. Solicitors’ activities continue to expand in to the new areas of activity. Any query regarding the scope of the cover provided by the Master Policy should be referred to the Society (Douglas Mill or David Cullen) or to Marsh.

The Master Policy provides cover in the event of fraud involving clients’ funds provided there is a principal entitled to indemnity who did not commit or condone the fraud. Building Society agency monies are treated as clients’ funds for these purposes. The Master Policy does not apply to the firm’s own money although there are insurances available to cover theft of firm’s money.

"Foreign Advice"

The Master Policy cover extends to situations in which advice is given under the law of a foreign jurisdiction provided the person doing the work or giving the advice is “appropriately qualified” to do so. This means that the firm may give advice on French succession law, for instance, if either (a) the firm sub-contracts to a suitable firm of French avocats or (b) the advice is given by a member of the firm’s own personnel who is ‘appropriately qualified’ in the relevant area of law/practice.

"Appropriately qualified" in this context means demonstrably competent in the area of law/practice and doesn’t mean that the individual requires to be an expert.

Instructing other professionals

It isn’t just in the context of foreign work that the need may arise to instruct another firm or to sub-contract work. This may arise whenever specialist work is involved or where the firm concerned does not have the resources to cope with the client’s timescale or other requirements. It is good Risk Management practice to avoid getting into a situation where work is taken on which the firm cannot cope with.

Some firms prefer to refer their clients to a suitable firm rather than sub-contracting. In this way, the firm ensures that the client is in a direct client relationship with the firm concerned and the client’s claim would then be expected to lie against the other firm. There are certain risk issues that ought to be considered when referring clients to another firm in this way.

Consideration needs to be given to the matter of who is to be liable to the client or to any interested third party in the event of an error of omission on the part of either firm. Where there is a sub-contracting arrangement involved, an engagement letter ought to be entered into to regulate the firms’ respective responsibilities and appropriate indemnity provisions ought to be included. You need to be satisfied with the other firm’s Professional Indemnity Insurance arrangement by asking for confirmation of the terms and conditions of cover and/or requesting sight of the policy. You need to ask questions about the limit of indemnity, excess, identity of insurers, exclusions etc.

The same considerations arise when passing work to the firm’s local agents or undertaking work for the firm’s correspondents. Remember, you ought to keep in touch with your local agents and you should not assume that your responsibility to your client is reduced just because your local agent is involved.

Employed or Self-Employed?

Numerous enquiries have been received regarding the protection provided by the Master Policy for the benefit of the firm and its personnel where members of staff (not partners) are self-employed rather than employed.

Broadly speaking, the position is that the firm itself will be covered for claims arising out of work undertaken or advice given whether the individual concerned was employed or self-employed. It is the individual who may be vulnerable if he or she is self-employed but is not a partner and is not named on the firm’s letterhead. Any individual in this situation may not have the protection of the “employing” firm’s Master Policy cover in the event of a client of the firm making a claim against the individual personally.

If the claim is made against the firm (i.e. not the individual personally), the Master Policy insurers would indemnify the firm but may be entitled then to recover from the self-employed individual all or part of the amount paid out. It is for this reason that the locum solicitors, for example, need to consider their position very carefully.

Some individuals who provide their services on a self-employed basis do have their own cover and, provided the parties are quite clear about their terms of engagement and the extent of cover, the points raised in the previous paragraphs are satisfactorily addressed.

It is important for all concerned to be quite sure of the position and for confirmation to be obtained if there is any room for doubt.

See the October 2001 issue of this column for a commentary on the position with regard to cover under the Master Policy for the benefit of employed solicitors (and formerly employed solicitors).

Secondments

Increasingly, situations are arising where solicitors are being seconded to or from other firms or by firms to their client companies. These arrangements can make good business sense but care does need to be taken to ensure that the possibility of a claim arising is properly addressed with appropriate risk management controls and by suitable indemnities and/or professional indemnity insurance arrangements.

Mergers, de-mergers, retrials and dissolutions

These are all events which have potential professional indemnity insurance implications for the firms and the individuals concerned. Once of the features of the Master Policy arrangements which most commonly surprises practitioners is the fact that cover is on a ‘claims made’ basis. This means that it is not normally the cover which was in force at the date of the (alleged) error or omission which deals with claims. The practical consequences of this may require some careful thinking where partnerships break up or dissolve.

To ensure that the implications are managed and so that the consequences are not unexpected, appropriate provisions really need to be included in the relevant agreements. These agreements need to cover issues such as responsibility for the Self-Insured Amount and the impact of claims on the premium rating position of the surviving partners of a practice or of practices formed on the de-merger of a larger practice. Guidance on the Master Policy implications should be sought from the Master Policy team at Marsh at the earliest possible stage.

What is the Excess?

The Self-Insured Amount (or excess) is the amount which the firm is required to contribute towards the settlement of a claim.

The level of the Self-Insured Amount contribution is intended to act as an encouragement to good Risk Management practice and while it is possible to increase the level of the firm’s contribution to the settlement of a claim by doubling the Self-Insured Amount, it is not possible to reduce the amount of the contribution. There is the possibility of arranging separate insurance cover in the form of Deductible (Infill) Insurance with separate insurers whereby there is total or partial cover for any Self-Insured Amount contributions payable in respect of claims intimated during the period for which the cover is in force.

There are certain categories of claim where the Self-Insured Amount contribution is Nil – for instance, claims arising out of granting undertakings which are "Classic" letters of obligation (an article on the subject of letters of obligation will be featuring in a forthcoming issue of the Journal).

Conversely, there are also categories of claim where the contribution is doubled. These include fraud claims and claims within one of the categories of "Risk Management Deductibles". Briefly, these are claims where the cause is (a) acting in breach of the Conflict of Interest Practice Rules, (b) granting a non-standard undertaking (letter of obligation), (c) repeated time bars (of specified types) and (d) conveyancing work for which the fee charged was (in the opinion of the Council of the Society) unreasonably low in all the circumstances.

Have we sufficient cover?

The Master Policy provides cover for all current practices for the mandatory limit of indemnity – £1,250,000 any one claim. The limit of indemnity has to be sufficient to meet the claimant’s costs but the Master Policy limit is extended to meet costs incurred by the Master Policy insurers in defending the claim.

“All claims attributable to the same act, error or omission or series of acts, errors or omissions consequent upon or attributable to the same original cause or source will be regarded as one claim”. This is an important provision of the Master Policy and its practical effect is that, for example, all losses incurred by a client as a consequence of a mistake made in a proforma document used by the client may be treated as a single claim. In that event, only one Self-Insured Amount contribution will be payable but, similarly, the limit of indemnity will be provided once only in relation to the client’s total claim.

If work is undertaken or advice given which gives rise to the risk of "multiple claims", particular consideration needs to be given to the adequacy of the firm’s limit of indemnity. It might also be appropriate to consider the possibility of limiting the firm’s liability by contract.

Limiting liability

Some firms seek to limit their liability to clients by way of a contractual agreement between the firm and the client. This might be incorporated into the firm’s terms of business or engagement letter. It is beyond the scope of this article to consider whether such a limitation would be enforceable in particular circumstances but clearly such a limitation may not protect the firm from a claim by a third party who is not party/privy to the agreement.

Some firms adopt the approach of limiting their liability to the amount of their limit of indemnity. Disclosure of the firm’s limit of indemnity does not invalidate the cover.

MASTER POLICY RENEWAL – EARLY WARNING

Cover under the Master Policy falls due for renewal as at 1 November. It is anticipated that renewal papers will be issued at the end of September and those who have responsibility for renewal of their practice’s cover, might plan ahead by considering the following points:

  • Make a diary note in case the renewal papers don’t arrive by, say, 5 October.
  • Consider whether the holiday absence of a colleague, or colleagues, during the early part of October could hold up any part of the process and call for forward planning.
  • The information required to complete the proposal form is more or less unchanged from last renewal.
  • Claims and circumstance matters to be reported – start making enquiries of colleagues towards the end of September, particularly if colleagues are going to be on holiday when the proposal form is ready to be submitted.
  • Information is requested regarding breakdown of fee income according to areas of work. The work categories will be the same as last year so it might be worthwhile looking at a copy of last year’s proposal form and starting to collate the information for this year’s form.

The information on this page is (a) intended to provide guidance on matters of practical risk management and not on issues of law; (b) necessarily of a generalised nature; and (c) not intended to endorse or recommend any particular product or service. It is not specific to any practice or to any individual and should not be relied on as stating the correct legal position. Alistair Sim is Associate Director in the Professional and Financial Risks Division at Marsh UK Limited.