Reality checks

Is it fair to say that, contrary to some predictions, the recession has really had no impact on the experience of Master Policy claims? 

That wouldn’t be quite correct. The recession and adverse economic climate have impacted in a number of ways, directly and indirectly. For example, lender claims have been a significant factor in the claims experience and the drop in property values since the height of the property market has been a material contributory factor.

In relation to commercial contracts, where deals have not worked out as parties expected or hoped they would, there have been instances of professionals, including solicitors, being blamed, citing failure to advise or some deficiency in contract drafting/revisal. Quite often, the cause of the party’s loss is down to economic factors (drop in property values, for example), or commercial decisions made by the parties themselves, and nothing to do with any fault of professional advisers. Such claims may nevertheless be pursued with apparent conviction and require to be defended.

Going into a recession, there is always a concern that volatility of markets, including stock markets and property markets, could be a contributory factor in claims. For example, a delay in the course of the administration of an executry estate which, in stable market conditions, might be a cause for criticism and client dissatisfaction but no material loss to the estate and its beneficiaries, could result in a more significant loss if the delay coincides with a period of falling share prices or property values. That is a situation which has arisen over the course of the current recession, but not to a significant extent.

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 economic conditions are causing financial hardship. The opportunities for stealing or other fraud aren’t necessarily any greater, or any less, in a recession.

When a partner retires from a firm, he/she must arrange his/her own continuing cover under the Master Policy. Is that correct?

This is a point which continues to be raised in discussions regarding changes in practices. As long as there is a continuing practice and the remaining/continuing principals of the practice elect to be treated as a continuing practice for the purposes of Master Policy cover, the retired partner has the benefit of the cover provided by the continuing practice’s continuing Master Policy cover. In other words any claim arising out of pre-retiral errors or omissions is covered under that continuing Master Policy cover.

If the remaining/continuing principals do not elect to be treated as a continuation for Master Policy purposes, then the practice’s cover for its past history proceeds on a run-off basis. It is run-off cover under the Master Policy that continues to protect the retired partner along with the other partners and staff of the practice, year by year as long as the Master Policy continues.

If the solicitor retiring is a sole principal, then the question is what is happening to the practice on the sole principal’s retiral, and is another, continuing practice taking on the insuring obligation in respect of the history of the sole principal’s practice? If yes, then the continuing practice is the “successor practice” and its cover applies in the event of any claim arising out of the history of the ceased practice. Otherwise, run-off cover applies, as mentioned above.

Even in continuation or successor practice situations, a retired partner arguably ought to take an interest in how continuing cover is being provided for his/her continuing protection:

• Cover is on a “claims made” basis, so that it is whatever cover is in place (whether run-off cover or the cover of a continuing practice) when a claim arises that is relevant in the event of a claim – not the cover in place at the date of the (alleged) error or omission giving rise to the claim.
• The adequacy of cover depends on the level of cover provided by the Master Policy for the time being and the amount of (any) top-up cover put in place on an annual basis.

Marsh recently issued an aide-mémoire on the subject of Master Policy implications of practice cessations and other practice changes. For a copy of that aide-mémoire, please contact the team at Marsh or email alistair.j.sim@marsh.com

Letters of obligation, including the definition of “classic letter of obligation”, continue to be the subject of enquiries. Where are the sources of guidance on these issues?

The Law Society of Scotland’s website provides guidance on a number of questions in relation to letters of obligation at: www.lawscot.org.uk/rules-and-guidance/section-f/division-c-conveyancing/guidance/letters-of-obligation

The Marsh website for Scottish solicitors also contains guidance at: marsh.co.uk/login/lawscot/resources/insurance.php

You will need your practice’s username and password to access this. If you don’t have a note of your practice’s username/password, please contact the team at Marsh or email alistair.j.sim@marsh.com.

If a firm is being instructed in higher value transactions much less frequently now than it was a few years ago, does that justify a reduction in the level of the firm’s cover?

There isn’t a simple answer to this question. So much will depend on, for example, the nature of the higher value work being handled in the past, and still being handled now; the firm’s assessment of the risk of a claim arising now out of work handled in the past; whether undertakings have been given to clients to maintain cover at a particular level for a minimum period of time following completion.

The key point to remember is that professional indemnity insurance operates on a “claims made” basis, which means that it is the cover in place when a claim arises that is relevant rather than the cover in place at the time the work was being done, which gives rise to the claim. To give a simplified example, that means if a property transaction was completed during 2007 and an identified title defect gives rise to a claim in 2012, it is the cover in place in 2012 that is relevant rather than the cover in 2007.

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 a 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.

Questions continue to arise about cover under the Master Policy in situations which would involve firms undertaking English work or advising on English law. Are such situations covered by the Master Policy?

A guidance note was issued to all practices on this subject in August this year, and the guidance note is on the Marsh website for Scottish solicitors. For a copy of that guidance note, please contact a member of the team at Marsh or email alistair.j.sim@marsh.com