True or false?

Experts have warned that there are far greater opportunities for internal fraud in law firms as a result of the recession. True or false?

False. Experts warn that the motivation to steal or commit fraud is heightened when the economic conditions are causing financial hardship. The opportunities for stealing or other fraud aren’t necessarily any greater in a recession.

The experience of the Master Policy has tended to show that it is usually loyal and apparently honest colleagues who commit theft of clients’ funds. True or false?

True. The fact is that the more trusted and senior in any firm, the greater the scope for a colleague’s actions to go unquestioned/ unchallenged. The most costly claims arising out of misappropriation of clients’ funds have been perpetrated by partners of law firms.

There is cover for dishonesty under the Master Policy but only dishonesty on the part of employees. True or false?

Partly true. There is cover under the Master Policy for dishonesty, including misappropriation of clients’ funds, on the part of law firm employees. However, there is also cover for dishonesty on the part of principals of the practice as long as there is at least one principal of the practice who has a liability; is entitled to seek indemnity under the Master Policy; and is innocent of participation or condonation/ collusion in the dishonesty. Accordingly, dishonesty on the part of a sole principal cannot be the subject of Master Policy cover.

Under the Master Policy, the normal self-insured amount (excess) is doubled in relation to claims arising out of theft of clients’ funds by an employee for whom no references had been obtained at the time he/she was recruited. True or false?

False. A doubled self-insured amount applies to all claims arising out of theft of clients’ funds – whether by an employee of the firm or by a partner. The doubled self-insured amount applies to such claims whether references were obtained or not.

There is no cover under the Master Policy for advising on transactions which are governed by English law. True or false?

False, with an important proviso. The Master Policy covers practices for undertaking work in England & Wales and for advising on the law/practice of England & Wales, but this is subject to the proviso that those concerned are demonstrably competent to do so: i.e. in the event of a claim arising out of an error or omission in advice on a point of English law/practice, the firm would require to be able to demonstrate that the person who gave the advice was, at the time, demonstrably competent to give the advice. This does not mean that a qualification in English law would demonstrate competence, nor indeed would possession of such a qualification be a necessary prerequisite in order to demonstrate competence. The fact that the person concerned did have a formal qualification is not a critical consideration and may be irrelevant.

A high value property purchase handled by the firm was concluded more than five years ago so it’s reasonable to assume that there is no longer any risk of a claim. True or false?

Not necessarily true. Analysis of the time lapse between alleged errors and omissions and intimation of claims and circumstances shows that there is a significant difference in the time lapse from one type of work to another. There tends to be a longer time lapse in relation to property/ conveyancing work, due in part to the relative infrequency with which properties change hands. There may therefore be a continuing risk of a claim arising out of the purchase transaction even though settlement occurred more than five years ago. It will be a matter of judgment on a case-by-case basis whether the risk of a claim remains. PII 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.

Solicitors are permitted to cap their liability to clients. True or false?

True. However, it is considered to be not permissible to limit the firm’s liability to an amount lower than the current Master Policy limit of indemnity. Subject to that, it is permitted to cap the firm’s liability by contract. Whether or not that is effective is a matter which may fall to be determined by reference to unfair contract terms legislation.

Your firm has accepted instructions to act in a property transaction where the sums involved are far in excess of anything the firm has ever been involved in previously – and anything you anticipate the firm is likely to be involved in again. The firm is not permitted to take on the instruction unless it has PII cover for the full amount of the transaction value. However, this can be arranged by paying a single premium to increase the level of the firm’s PII cover for this particular transaction. True or false?

False and false! While (a) it may be prudent to consider increasing the firm’s cover to reflect the risk exposure, and (b) the prospective client may insist on the firm having a particular level of PII cover as a condition of the firm being instructed in the transaction, there is no regulatory requirement to have PII cover in excess of the compulsory level of cover under the Master Policy.

It is not possible to arrange PII cover on a single transaction basis.

Or, if it is, the premium payable is unlikely to be any different to the premium insurers would charge for the increased level of cover applying to the entirety of the practice’s work. PII cover is on a “claims made” basis, which means that it is the cover current/in place at the date of a claim arising rather than any cover that may have been in place previously (say, at the time of the transaction).

Accordingly, for a one-off high value transaction, it is essential that PII cover is renewed and kept in force for as long as there remains the risk of a claim at that level. That may mean maintaining cover over a protracted period – for an annual premium. When taking on a one-off higher value transaction, it has to be borne in mind that it may necessitate maintaining continuing top-up cover without any certainty as regards the future cost of that cover. The open-ended, unknown cost will impact on the economics of taking on the transaction.

Claims by lenders form the single largest source of intimations? True or false?

True. However, while there has been an increase in the number of lender claims intimated to the Master Policy, insurers over the course of the last two years (as noted in our article “Road to Recovery” – Journal, July 2009, 42) the numbers are not as high as they were in the early 1990s when around one in three claims was by a lender.

With effect from 1 November 2008, there is no cover provided under the Master Policy in respect of claims arising out of failure or delay in presenting deeds for recording/ registration. True or false?

False. However, since 1 November 2008, a doubled self-insured amount is applied for this category of claim. The doubled self-insured amount is designed to encourage effective risk controls to minimise the risk of such (avoidable) claims.

In spite of the increase in contentious work being undertaken, the number of time bar claims is stable or reducing. True or false?

True. The Master Policy claims experience indicates success on the part of the profession in managing the risk of claims arising out of missed critical dates.

As a consequence of the many and varied changes in the law in recent years, there has been a very noticeable increase in the number of claims arising out of getting the law wrong. True or false?

False. There has been no discernible increase at all in the proportion of claims attributable to solicitors “getting the law wrong” and, over a period of years, this category of claim has accounted for only a very small proportion of Master Policy claims.

The introduction of the new licensing regime which came into force on 1 September 2009 has had an adverse impact on the claims experience. True or false?

False. The absence of claims is consistent with past experience of changes in the law which arise frequently and are not a significant factor in the claims experience.

The Marsh Risk Management eLearning programme is free of charge, available to all in the profession, and provides three hours of management CPD. True or false?

True! There are currently four e-learning modules available on the Marsh website (www.marsh.co.uk/lawsociety), along with a variety of other risk management and PII related materials to assist solicitors.

Alistair Sim and Marsh

Alistair Sim is a former solicitor in private practice who works in the FinPro (Financial and Professional) National Practice at Marsh, the world’s leading insurance broker and risk adviser. 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.

Marsh Ltd is authorised and regulated by the Financial Services Authority.