Questions of our times

Q: We are looking at the possibility of outsourcing some support services. Would that have any impact on our cover under the Master Policy?

Each case would have to be considered on its merits and it would be prudent to refer to the Master Policy insurers through Marsh before proceeding. There may also be regulatory implications to be discussed with the Society.

As a general statement, it would be expected that any claim made against the firm arising from the outsourced service provider’s negligence would be covered by the Master Policy. However, from a risk management perspective, careful consideration needs to be given to the vetting of service providers and documenting the relationship with them.

What will the service provider be liable for; are they proposing limitations on their liability; will the agreement require them to maintain insurances at prescribed levels (for a prescribed period); what is the financial security of the service provider; how do you assess any credit risk? All of these are issues that may impact on the exposure of the practice in the event of something going wrong. The Master Policy insurers would welcome the opportunity to comment from an insurance perspective on the terms on which service providers are engaged.

Q. We are assessing various strategic options for our business and these include possible merger or acquisition or possible lateral hires. Anything we need to consider from a PII perspective?

The economic environment may well prove to be a catalyst for mergers between law firms or the opportunity for acquisition or strategic lateral hires. Unless thorough due diligence is undertaken, there is a risk of a potentially adverse outcome in that, in addition to the knowledge, experience and client following of the merger partner, there might be unwanted baggage in the form of recession-generated claims or complaints.

Mergers, acquisitions and lateral hires all have potential PII implications and there may be different options available for consideration as part of the process of vetting, negotiating and documenting the arrangement. The PII issue boils down to a question of which practice’s PII cover is intended to respond to a claim arising out of the history of the constituent practice or the lateral hire. The Master Policy team at Marsh can advise on the options and their respective implications.

Q. One of our partners has decided to retire prior to the next practising certificate/ Master Policy renewal in November. Does the retiring partner need to arrange run-off cover? Do we need to do anything about this?

Ordinarily, there ought to be no requirement for the retiring partner to have to make PII arrangements individually for his/her own personal protection. The interests of the retiring partner and the interests of the continuing partners of the practice are usually aligned to such an extent that all are readily able to agree, collectively, on arrangements for the continuing protection for all concerned.

The retiring partner therefore ought to be able to rely on the same continuing Master Policy (and top-up) cover as the other (continuing) partners. Continuing cover will take the form of either:

• continuation of the cover current at the date of retiral, if the continuing principals of the practice elect to have the continuing practice treated as the current practice’s “successor practice” for PII purposes, or
• run-off cover (Master Policy run-off cover and, separately, run-off top-up cover) effected and maintained by all of the retiring and continuing partners.

Again, the Master Policy team at Marsh can advise on the continuation and run-off options and their respective implications.

Q. We have the opportunity to second one of our assistants to a client organisation who will cover the assistant’s salary and other costs on an agreed basis. Are there any Master Policy implications?

Assuming he/she remains an employee of the firm, the secondee remains an “insured” party in terms of the firm’s PII cover. However, depending on the nature of the secondment and who is instructing/ supervising the secondee, arguably his/her activities may be no longer activities “in connection with the practice” of the firm. Because of the potential for disagreement about this, having a clear agreement with the host organisation is always a good idea.

For risk management reasons, insurers tend to be nervous about situations where, e.g. a relatively junior colleague is seconded to an organisation where they will work under the control of personnel of the host organisation but the firm is nevertheless expected to indemnify that organisation for any claim arising out of the secondee’s activities (even something done under direction of the organisation’s personnel).

It is always worth checking on potential PII implications. The Master Policy team at Marsh can provide guidance and, where necessary, refer issues to the insurers for consideration and comment. There may well be regulatory implications which need to be referred to the Society for directions.

Q. Because of the state of the property market, we haven’t had many (if any) big property instructions over the last year. It seems sensible to reduce the level of PII cover that we are carrying and make a saving in our PII costs. Any problem with that?

The answer to this question turns on the fact that professional indemnity insurance (Master Policy, top-up cover and PII cover generally) operates on a “claims made” basis, which means:

• that the cover which applies to a claim is the cover current/in force at the time the claim arises, NOT the cover in force at the time of the (alleged) error or omission giving rise to the claim;
• that in deciding on the level of cover that it is prudent for the practice to have in place, the practice really needs to consider not just the work the practice anticipates doing during the course of the year, but also the whole activities of the firm in previous years which could give rise to a claim during the course of the year.

Consideration needs to be given to any commitment the firm may have given to a client or other party to maintain an agreed level of cover for a prescribed period.

Q. One of our assistants is leaving the firm shortly. If we enter into a consultancy arrangement with him, are we covered for work he does for our clients?

If the firm enters into an arrangement with a solicitor which involves the solicitor becoming a consultant to the firm, undertaking the activities of a solicitor in Scotland “in connection with the practice of” the firm, for clients of the firm:

• the consultant’s activities are covered by the firm’s Master Policy cover (subject to the terms and conditions of the Master Policy);
• the firm has the benefit of cover notwithstanding that the error or omission giving rise to the claim was the error/omission of a self-employed consultant;
• the consultant, personally, has the protection of the firm’s Master Policy cover notwithstanding that the consultant operates on a self-employed basis;
• as a consultant in these circumstances falls within the definition in the Master Policy certificate of parties insured, the insurers would not exercise any rights against the consultant in the event of a claim, except in the event of the consultant’s fraud, dishonesty etc;
• if the consultant is not a principal of the practice, there would be no impact on the firm’s Master Policy premium by virtue of entering into this sort of consultancy arrangement.

The regulatory implications of entering into this sort of arrangement need to be considered. For instance, the prospective consultant will no doubt want the Society’s confirmation whether the arrangement/activities would require the consultant to have separate Master Policy cover.

Q. For budgeting purposes, it would be useful to know now what our premium will be for renewing our Master Policy cover in October this year.

At this time, six months before renewal, it is too early to comment on renewal premiums. However there is a plan to ensure as much information as possible is communicated as early as possible to assist with budgeting for renewal. The communication plan will include providing updates, as in previous years, on changes in each practice’s claims record which may have an impact on premium discount or loading.

Changes in the constitution of a practice or in the practice’s claims record may have a significant impact on the practice’s renewal premium. If there has been a deterioration in the firm’s claims record, that is likely to result in an increase in the practice’s renewal premium. Likewise, if the number of partners has increased since 1 November last year (or an increase is anticipated prior to 1 November this year), it is in the practice’s best interest to notify Marsh of changes as early as possible.

Until renewal negotiations are concluded and premium allocation arrangements finalised, any renewal premium forecasts will inevitably be indicative “best guesstimates” and subject to a number of caveats.

Q. Are there particular recession-related risk management traps that we need to watch out for?

In adverse economic conditions, when people are under greater financial pressures, insurers expect to see an increase in the incidence of fraud and dishonesty, both internal fraud on the part of colleagues and external on the part of clients and other third parties.

Several articles in the Journal over the course of the last year have identified particular fraud risks to watch out for and suggested measures that help to reduce the risk of firms falling victim to fraud.

Aside from the increased risk of fraud and dishonesty, the state of the property market and economic conditions generally have an impact on the potential for errors and omissions resulting in claims.

As an example, there is a heightened risk that any deficiency in a break notice (wrong landlord; notice served after the deadline) will be founded upon as the basis for treating the break notice as ineffective, with the result that tenants remain tied in for a further period contrary to their wishes. This calls for extra care in drafting and serving break notices to comply with the letter of the break provisions in the lease documentation.