In real terms

These implications are considered by reference to real examples of provisions which have actually featured as proposed wordings in draft contracts for the provision of legal and other professional services.

Indemnification provisions

Example wording:

The [Solicitors/Firm] shall indemnify and keep indemnified the Client, its servants and agents against all actions, claims, costs demands and expenses incurred by or made against or paid by the Client, its servants or agents in respect of any loss or damage or personal injury or death which arises in connection with the performance of the Services under this Contract

Comment:

Although there is no exclusion in the Master Policy in respect of claims arising in terms of contractual indemnity provisions, cover is provided by insurers subject to the terms, exclusions and conditions of the Master Policy (set out in the certificate of insurance). The broad nature of the example wording could result in the firm having a contractual liability to indemnify the client without there necessarily being a corresponding right to indemnity under the firm’s professional indemnity or other liability insurances.

The Master Policy (as with all professional indemnity insurance) does not provide cover for injury, death or loss of or damage to property (other than loss of documents) unless arising from “advice or omission to perform a professional duty”. The firm may have other forms of liability insurance in place but those policies will also be subject to terms, conditions and limitations.

Note that the indemnification provision illustrated is not restricted solely to losses etc which arise from the firm’s negligent acts or omissions. Inclusion of the words “in connection with” makes the indemnification provision much wider. It is sufficient that the client’s loss arises from “performance of the Services”.

There remains the possibility that the Master Policy will not provide cover for all losses, claims, expenses etc, as a policy exclusion (e.g. punitive and exemplary damages) may apply and this may mean that a loss or claim could arise for which there is no entitlement, or restricted entitlement, to indemnity under the Master Policy.

Finally, the terms of this particular wording mean that the client is entitled to be indemnified by the firm in respect of amounts already paid by the client. In practical terms, this denies the firm’s insurers “conduct and control” of any negotiation or settlement and if the insurers consider that this has resulted in prejudice to them, that may affect entitlement to indemnity under the policy.

In order to make such a contractual indemnification provision more acceptable from an insurance point of view:

• the requirement to indemnify should be limited to circumstances where there is neglect, error or omission on the part of the firm in performance of the services;
• any request for indemnity should be on the basis that the firm (and therefore the insurers) will have conduct and control of any settlement/claim negotiations for which the client is seeking indemnification from the firm.

Insurance requirements

Example wording:

The [Solicitors/Firm] shall effect with an insurance company acceptable to the Client a policy or policies of insurance covering all the matters which are the subject of indemnities and undertakings on the part of the [Solicitors/Firm] contained in the Contract in the sum of £[    ] at least in respect of any one occurrence and unlimited in total unless otherwise agreed in writing by the Client. If requested a certificate evidencing the existence of such policies shall be provided by the [Solicitors/Firm] to the Client

Any requirement that the client must approve the company with which insurance is placed could present difficulties. This in effect allows the client to dictate how/with which insurers the firm places its insurance.

The requirement to effect insurance in respect of “all matters which are the subject of indemnities and undertakings” is onerous and not necessarily achievable. It may be that some of the indemnities or undertakings simply cannot be “insured”. No policy or combination of policies will necessarily provide total coverage for all liabilities that might arise under the contract.

The example wording might be construed as a requirement to effect all types of insurance that are available to provide the most extensive coverage in respect of liabilities arising from the indemnities contained in the contract.

The wording does not state for how long cover is to be effected or indeed when the obligation for its placement is to commence. The period for which cover is required may be read as requiring cover to be maintained for as long as there is a potential liability arising from the indemnities and undertakings granted by the firm. The cost of complying needs to be considered, particularly if there is a requirement for higher limits of indemnity for extended periods.

The basis on which cover is to be provided is important:

• Limits of indemnity under solicitors’ professional indemnity insurance are on an “any one claim” basis. The trigger is the making of the claim and not the “occurrence” of an act, error or omission giving rise to the claim.
• It is not possible to arrange professional indemnity insurance on an “occurrence” basis as apparently required by the terms of the example wording. This is a common area of misunderstanding.

Finally, the evidence that clients request of solicitors’ PII cover varies in the nature and detail of the information asked for. They often require responses which are restricted to either “Yes” or “No” and, for this reason, insurers and brokers will often decline to complete them as they are unable to provide unqualified responses. The Master Policy insurers recommend simply providing a copy of the firm’s renewal schedule as evidence of the firm’s cover.

In order to make such a provision more acceptable from an insurance point of view it might be amended to:

• require that insurances are placed with reputable UK insurers;
• state clearly the classes of insurance required to be carried;
• specify the limits and (relevant) basis on which cover is required;
• specify the period for which cover is required and the date of commencement or renewal;
• state what evidence of insurance is required and how frequently evidence will require to be provided;
• detail the position in the event that the firm finds itself unable to continue to purchase the levels of cover (or extent/scope of cover) required by the contract terms.

Arbitration

Example wording:

All disputes differences or questions between the Parties to the contract with respect to any matter or thing arising out of or connected with the Contract shall be referred for decision to a single arbiter to be mutually agreed and chosen by the said Parties for that purpose whose decision shall be in all cases and at all times final binding and conclusive on all Parties

Comment:

In terms of the example wording, arbitration is capable of being invoked for “any matter arising out of or in connection with the contract”. This could feasibly extend to a matter which is potentially the subject of a professional indemnity insurance claim.

The terms of Master Policy cover are such that insurers have “conduct and control” of claims. While the insurers are supportive of all forms of alternative dispute resolution, it would not be acceptable without prior agreement of the insurers for any arbitration in connection with a matter which is the subject of a claim to be binding on the firm (and thereby the firm’s insurers).

Clauses which provide for determination by reference to binding arbitration are therefore unacceptable to insurers who would want any agreed arbitration to be non-binding, leaving the parties (and insurers) with litigation as an alternative and keeping open the possibility of appealing unsatisfactory arbitration findings.

In order to make such a clause acceptable to insurers it should contain a qualification to the effect that arbitration will not apply where the matter under dispute is or could be the subject of a professional indemnity insurance claim.

Rona Paterson is Senior Technical Underwriter at Royal & SunAlliance, the lead insurers of The Law Society of Scotland Master Policy for Professional Indemnity Insurance.

Case study

You are submitting a tender for legal services to Martin Aston Ltd, international manufacturers of widgets and gadgets for the automotive industry.

The tender documentation incorporates the format of agreement for the provision of legal services. It includes a provision in the following terms:

“17. The Solicitors shall indemnify and keep indemnified the Client, its servants and agents against all actions, claims, demands, costs and expenses incurred by or made against the Client, its servants or agents in respect of any loss or damage or personal injury (including death) which arises from any advice given or anything done or omitted to be done under this Contract to the extent that such loss, damage or injury is caused by the negligence or other wrongful act of the Solicitors, its servants or agents.

“17A. The Solicitors shall take out and maintain professional indemnity insurance for the period of this appointment and for a subsequent six years following the termination of this Contract, said insurance being maintained for a minimum of 4 million euro with an insurance company of repute and without onerous conditions, exclusions or excesses.”

Are you prepared to sign up to an agreement in these terms? How will you proceed?

Rona Paterson’s comments address most of the relevant issues.

Comments:

Consider the cost implications of having to effect/increase top-up cover for specified periods. Is this economic considering the fees involved? Bear in mind that top-up cover cannot be arranged for a single transaction. The “claims-made” basis of cover and the period of potential liability arising from the transaction should be considered as well as any contractual obligation to maintain cover. You may wish to attempt to negotiate a reduction in the period for which cover requires to be maintained.

With regard to the requirement to maintain professional indemnity insurance:

• It might be prudent (bearing in mind the potential for changes in insurance market conditions) to qualify the insuring obligation “to the extent that such cover is available at commercially reasonable premium rates”. Consider however what should happen if the firm takes the view that insurance is not available at commercially reasonable rates – what action should be taken? Who is to judge what are “commercially reasonable rates”?
• What are onerous exclusions, conditions and excesses? Who is to judge?
• Consider the implications of the euro basis of limit of indemnity.

Alistair Sim is a Director in the FinPro (Financial and Professional Risks) Practice at Marsh, the world’s leading risk and insurance services firm. To contact Alistair, email: alistair.j.sim@marsh.com.

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.