Are you covered?

Reviewing limit of indemnity

In the course of preparation for renewal of the practice’s professional indemnity insurance it may be appropriate to consider the adequacy of the level of the practice’s cover.

It is essential for a careful assessment to be made of the potential liabilities to which the practice is exposed arising out of its activities past, present and future. This includes the risk of claims arising out of fraud or dishonesty (see the comments below concerning application of an aggregate limit).

After making this assessment, it may be appropriate for the practice to consider effecting (optional) professional indemnity “top-up” insurance to extend the cover provided by the Master Policy.

The practice itself will require to decide on the appropriate level of cover. The principals of the practice are, in any case, the people best placed to assess the practice’s potential exposure.

In making this assessment, there are numerous issues to be considered. The following are just a few of these. There could well be more that are specific to your practice:

• the maximum potential claim (“the worst case scenario”);
• the opportunity for and likelihood of a series of negligent or fraudulent acts occurring;
• the extent to which the practice’s risk management systems and controls affect the possibility of such losses or claims, their likelihood and their severity – including the extent to which the practice has been able effectually to limit its liability contractually;
• the potential for claims to exceed the original transaction value, e.g. where the client’s loss involves business interruption and other consequential losses, or where securities are on an “all sums due and to become due” basis;
• the potential value of a claim made against your practice today, arising out of past work;
<> n there may be situations in which claims could arise many years after the error or omission occurred. Bear in mind the following common features of cover:
• Cover is on a “claims made” basis, which means it is the cover current at the date of intimation of a claim or the date when a “circumstance” which could give rise to a claim is intimated which is relevant, and not the cover which was current at the date of the (alleged) mistake etc giving rise to 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 could mean, for example, that all losses arising out of a single error (on a website, for instance) could be treated as a single claim for indemnity purposes – as could losses arising out of a course of fraudulent actings.
• If any part of the cover is subject to an aggregate limit (rather than any one claim), this obviously restricts the amount of the indemnity provided by insurers in any period of insurance. This will be relevant in the event of more than one major claim arising in the same period of insurance.

Benchmarking

It is useful to have some means of assessing and benchmarking the effectiveness of the practice’s risk management. An indication of the practice’s performance can be obtained by reference to measures related to the practice’s claims record.

The Society’s premium discount and loading arrangements provide for premium differentials between practices according to their claims records. This is not a definitive measure of the effectiveness of the practice’s risk management but it can at least provide some broad indication. These arrangements allow practices to benefit from low claim premium discount if they have claims-free or low-claims Master Policy records.

If the practice has very effective risk management procedures, that can have a significant impact on the practice’s risk profile. For example, effective diary systems (incorporating countdown warnings) in combination with escalation procedures and effective client engagement arrangements ought to ensure that the risk of time bar claims is minimised, if not eliminated. Improving the firm’s risk profile in this way ought to be reflected in the firm’s claims record and that is likely to make a material difference to the level of the firm’s Master Policy premiums.

If a practice’s risk management is less effective, this can result in a poorer claims record and there is provision for the level of premium discount to be reduced or for the practice to incur a premium loading. The loading may be as high as 250% if the practice has a high “loss ratio”. If this is combined with a high frequency of Master Policy claims intimations, the firm’s loading may be increased up to 275%.

How well is your practice doing?

A year-on-year comparison of the level of the practice’s own premium discounts or loadings may reveal a trend, whether improving or deteriorating, in the practice’s risk management performance. This is an imperfect measure of risk management performance – mainly because new risk management practices introduced today, however effective these may be, are unlikely to have an impact on errors or omissions which occurred last week, last month or years ago. These may not emerge for some time, perhaps many months or even years after the event, long after the improvements in the firm’s practices were introduced.

The number of intimations on the practice’s rolling five year record is also worth comparing as the number of intimations arguably provides a better measure of the relative effectiveness of risk management than the “value” of those intimations. A series of lower value intimations on a firm’s record may provide a much more meaningful insight into the relative effectiveness of, and weaknesses in, the firm’s risk management performance than a single high value claim.

Remember – these measures of practices’ claims records are imperfect measures of risk management performance and remember too that the fact that an innocent error or omission has been made in the past does not necessarily equate to being a “bad solicitor” or a “bad risk”.

Other measures

Is there any more objective standard against which to measure, and measure changes in, risk management performance? There is no truly objective measure but it can be instructive to go through a self-assessment exercise based on measures which are, as far as possible, objective. There is an example of a brief self-assessment questionnaire in the risk management booklet “Ensuring Excellence: Even Better Practice in Practice” (page 30), issued to the profession in 1998. It is aimed at assessing the extent of risk awareness and risk management at the level of the firm as a whole.

Previous issues of this page have reproduced the questionnaire and suggested running through this brief self-assessment exercise on a periodic basis to test your approach to risk and risk management. If you considered the questions in December 1998 and in January 2000, how have your answers changed since then?

Intimating claims and “circumstances”

No-one in the practice should be afraid to admit that they have made an honest mistake which may make it appropriate for a claim or “circumstance” to be intimated. If there is a “fear culture”, there is an increased risk that someone will be more inclined to conceal a mistake or sit on a problem file rather than own up.

It is in everyone’s interests that colleagues should be ready, willing and able to make the appropriate person aware that a mistake has been made or that they need help. It should be made clear who needs to be informed when a mistake is made/discovered and what is required in terms of intimation to insurers.

What needs to be intimated?

Guidance on intimation of claims and “circumstance” matters appears in this column in the September 2003 Journal.

If you have any doubt at all about whether you should notify circumstances please contact the team at Marsh.

Risk management – learning lessons

For the firm concerned, the opportunity to learn lessons and minimise the risk of recurrence is probably the only positive aspect of receiving a complaint or a claim. A constructive discussion about appropriate preventive action may also be cathartic, although potentially difficult, for those who were personally involved in/responsible for the error or omission giving rise to a claim.

It is all too easy to underestimate the scope for learning lessons, to dismiss the circumstances of the claim as unique and to conclude that there is no way that the situation could have been avoided. Occasionally, that may be a justified conclusion. However, more often than not it will be possible to derive some risk management benefit from a thorough discussion about the underlying cause or causes and the contributory factors.

This is something that Marsh can help with – for instance, by facilitating the review process.