Make it policy to know how you're covered

ALISTAIR SIM identifies some of the circumstances in which careful consideration needs to be given to the terms and conditions of professional indemnity insurance

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 Master Policy.  The purpose of this article is to identify and explain some of the circumstances in which 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 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 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 new and sometimes novel 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 Sedgwick.

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.

Year 2000

The insurers of the Master Policy have committed themselves to providing protection in respect of ‘Year 2000 Claims’ (as defined) at least until 31 October 2003.  It is beyond the scope of this article to go into detail about the terms and conditions of this part of the cover, however detailed explanations have been issued to each practice by the Society and by Sedgwick.

As far as other insurances are concerned, many policies will be subject to exclusions or restrictions in respect of claims arising out of ‘Year 2000’ or ‘Millennium Bug’ problems but it should not be assumed that all insurance policies which do not contain specific exclusions or limitations will provide cover for claims arising out of these problems.

Reference is also made to the comments in previous issues of this page about the need for caution when giving advice where Year 2000 compliance issues are relevant.

Foreign advice

The Master Policy cover extends to situations in which advice is given under the law of a foreign jurisdiction provided the person 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 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 timescales or other requirements.  It is very 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 against the other firm.

Referring clients to another firm in this way may involve some element of risk.  If a specific firm is recommended and that firm proves to be unsuitable for the area of work/advice concerned the client is likely, at the very least, to be dissatisfied if you recommended the firm.  At worst, the client may endeavour to hold you liable for their (irrecoverable) losses on the basis that you assumed a duty of care by identifying the particular firm.  Care should therefore be taken when making any recommendation of this kind.

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 or 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 arrangements by asking for confirmation of the terms and conditions of cover and/or requesting sight of evidence of cover.

You will want to be satisfied about the limit of indemnity, excess, identity of insurers, exclusions (e.g. Year 2000) 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 in any way 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.  Individuals (some locums, for instance) who are self-employed but are not partners and are not named on the firms letterhead need to consider their position very carefully.

Some individuals who provide their services on a self-employed basis have their own cover and the parties are quite clear about their terms of engagement and the extent of cover regarding potential liability and the basis on which professional indemnity insurance protection is being provided.

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 by suitable indemnities and/or professional indemnity insurance arrangements.

Mergers, de-mergers, retirals and dissolutions

These are all events which the profession is experiencing with increasing frequency.  All have potential implications for the firms and the individuals concerned.  One of the features of the Master Policy arrangements which most commonly surprises practitioners is the fact that, like most professional indemnity insurance policies, 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 consequence 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 continuing 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 Sedgwick 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 a type of policy (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 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.  The basis for applying a Nil deductible is all to do with Risk Management.  In order to qualify, clear ‘interim reports’ need to have been seen and confirmation requires to have been obtained from the interested parties that there are no outstanding securities other than those being discharged.  On this basis, the risk to the firm and the Master Policy is reduced to a minimum and the Master Policy regulations recognise this by applying the Nil excess and disregarding for premium rating purposes, the amount paid by the insurers.

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 - £1,000,000 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.

Remember that the cover is on a ‘claims made basis.’  The relevant cover is therefore the cover in force at the date the claim arises rather than the cover in force when the work was done on the advice given.

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 and the possibility of limiting the firm’s liability.

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 will not protect the firm from a claim by a third party who is not a party 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.

The information/advice in these pages is information/advice on risk management.  It should not be relied on as stating the correct legal position.  It is necessarily of a generalised nature and should not be regarded as specific to any practice, individual or situation.

Alistair J Sim is Associate Director at Sedgwick Professions