Professional indemnity insurance – not total
Various points concerning professional indemnity insurance which raise risk management issues
Limiting liability to clients by contract
It seems that solicitors are increasingly giving consideration to the potential for limiting liability to clients by contract.
The wording of any proposed clause limiting liability and the effectiveness of any such clause are matters of law and of professional practice which are beyond the scope of this article. Subject to complying with relevant rules of professional practice and law, it is for the practice and the client concerned to agree the terms of any limitation of liability. The Master Policy insurers can have no objection to the principle of solicitors limiting their liability to clients.
The following general comments are made on an indicative basis for guidance only:
- contractual limitations of liability may require to exclude certain areas of potential liability
e.g. liability for personal injury.
- some contractual limitations of liability could be subject to challenge in terms of the Unfair Contract Terms Act
- contractual limitations of liability will not operate in relation to a claim by a third party who is not a party to the agreement.
- some firms appear to be adopting the approach that their liability is limited to the extent of (or related to) the firm’s Professional Indemnity Insurance limit of indemnity. Disclosure of the firm’s limit of indemnity does not invalidate the cover.
Contractual indemnity provisions
Sometimes, clients and prospective clients of solicitors seek to include indemnity provisions in the terms of contracts for the provision of legal services. These sometimes include indemnity for consequential losses/economic loss and go so far as to require the solicitor to indemnify the client for ‘all losses whatsoever and howsoever arising’ or words to that effect.
If solicitors commit themselves to such a provision, there is a risk of the solicitor incurring a liability to the client for which there is no entitlement to cover under the Master Policy. While cover under the Master Policy is wide, it is not unlimited or unqualified.
The Master Policy provides cover for civil liabilities and does not provide any indemnity for criminal acts. The cover is subject to terms, exceptions and conditions (eg. punitive and exemplary damages are not covered). All of this may mean that a loss or claim arises which is not covered under the firm’s cover but the client is nevertheless entitled to indemnification under the terms of the contract with his solicitor.
It is suggested that indemnity provisions should be restricted to those losses which are naturally and directly attributable to the particular act or omission of the firm and that the indemnity should be limited to those costs which the client (or other indemnified party) incurs in either dealing with the breach, error or omission or as a result of a third party claim for damages.
Certificates of Title
Questions continue to arise concerning the professional indemnity insurance implications of:
- granting a certificate of title to parties, typically lenders, who are not the solicitor’s clients
- expressly acknowledging a duty of care to the addressee of the certificate
- addressing the certificate not only to the client’s lenders but also to the lenders’ successors and assignees.
The content of a Certificate of Title is the critical issue as cover applies only in respect of matters which fall within the scope of Master Policy cover, namely “all manner of business …which is customarily (but not necessarily exclusively) carried on or transacted by solicitors in Scotland”. Provided the Certificate does not go beyond certifying matters customarily certified by solicitors in Scotland and does not constitute a personal financial guarantee, then it falls within the scope of cover.
The principle is already well established that there is cover under the Master Policy in respect of Certificates of Title issued to non-clients. The Master Policy insurers have confirmed that the number and range of addressees does not affect the firm’s cover which may be expected to operate irrespective of the party to whom the Certificate of Title has been addressed and irrespective of the party who asserts a claim based on an error in or omission from the Certificate. This confirmation of cover is provided subject to the terms and conditions of the Master Policy.
While conferring the benefit of the Certificate on additional addressees or assignees and successors of the addressee(s) does not take the Certificate outside the scope of Master Policy cover, the practice may wish to consider limiting the benefit to the named addressee only.
Bear in mind also the following additional risk management points which apply equally to the granting of Certificates of Title and of Reports on Title to lenders:
- Certain undertakings could give rise to the application of a double (Risk Management) deductible - e.g. if a warranty/undertaking is given in respect of a matter not within the solicitor’s own knowledge / control.
- Undertakings which constitute “classic” letters of obligations will attract Nil deductibles. This applies to standard undertakings (e.g. delivery of searches) granted after seeing clear searches and after making proper enquiry with regard to undisclosed securities.
- Whether or not you are familiar with a particular lender’s “standard” form of documentation, each set of instructions and each certificate/report should be considered individually. Even if the lender’s instructions appear to be standard or pro forma, you must always consider:
- whether the certificate/report can be granted in the terms demanded/ if qualifications need to be attached.
- how best to avoid providing commitments in respect of matters which are outwith your control.
The comments concerning cover under the Master Policy will apply to any Top-Up cover the practice may have as long as that cover follows the terms of the Master Policy.
“Claims-made” basis of cover
What is the significance of Professional Indemnity Insurance cover being on a “claims made” basis?
When we say that Professional Indemnity Insurance operates on a “claims-made” basis that means that the cover which applies to a
particular intimation (claim or ‘circumstances which may give rise to a claim’) is the cover in force at the date of first intimation and not the cover, if any, in force at the date of the negligent act etc. giving rise to the claim. For this reason, the important terms and conditions of cover are those current at the date of intimation.
This feature of Master Policy cover, and of professional indemnity insurance cover generally, can cause confusion and it can raise potential complications in relation to various practical aspects of the management of a practice, including -
- assessing adequacy of the practice’s cover
The “claims-made” basis of cover is particularly relevant when considering the adequacy of the firm’s professional indemnity insurance cover. The practice’s cover at the time a transaction or litigation was being conducted or advice was being given may have been perfectly adequate to cover the worst claim imaginable but what if the claim arises now? Is the firm’s current cover sufficient to meet the worst case scenario today? Site values may have increased, the level of awards may have been raised, consequential losses may result in far higher potential claims than previously envisaged.
Claims arising out of property/conveyancing work may arise only when a property is re-sold or when a borrower defaults and the lender wants to call up the security. That might be several years after conclusion of the transaction.
Regulating practice mergers and break-ups etc
When the terms of agreements regulating the merger or de-merger or dissolution of a practice or the assumption or retiral/resignation of a partner are being drafted or discussed, the Professional Indemnity Insurance implications are often underestimated or disregarded. This is probably because there is an assumption that the Master Policy operates on the basis that claims arising out of work done prior to the merger, de-merger, dissolution or other change are covered by the policy which was in force when the work was being done. That is not the case.
Since the cover is on a “claims-made” basis, the relevant cover is the cover in place on the day the claim arises which may be many weeks, months or very often years after the work was done, long after the change in the practice’s constitution. By that time, it may appear that the practice bears little resemblance to the practice as at the date of an alleged error or omission. That makes it crucial that the agreement between all the principals concerned anticipates the risk of claims arising from past work which will fall to be dealt with months or years later under the cover current at the date of first intimation of the claims.
The comments in this article concerning Master Policy cover are necessarily somewhat superficial and you may find it appropriate to seek specific, detailed advice whether in relation to the Master Policy or to other insurances.
The information in this page is (a) intended to provide guidance on matters of practical risk management and not on issues of law and (b) is necessarily of a generalised nature. 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 Liabilities Division at Marsh UK Limited (e-mail: Alistair.J.Sim@marsh.com)