Navigating the tricky territory of lawyers’ PI Insurance
This article looks at various issues lawyers and law firms should be considering in relation to their Professional Indemnity (PI) insurance to ensure they are adequately protected. Andrew Beven of AIG Insurance New Zealand Limited answers some common questions as to why PI insurance is important, what risks it covers, examples of when having such cover is crucial, recent trends in the market, and factors to consider in choosing your policy.
Why is PI insurance so important for solicitors and law firms?
Solicitors and law firms, like any skilled professionals, offer vital expertise. In fact, society depends upon lawyers in more ways than one – the role of lawyers is a critical component underpinning a variety of essential trades, transactions and interactions in the business environment, the public sector, and other areas as well. Lawyers are under duties to exercise skill, care, and judgement as they exercise their (often specialised) skills and perform their role.
Unless a solicitor or law firm has faced a serious allegation of negligence or professional wrongdoing in the past, they may only see their annual PI premiums as another, not altogether welcome, cost of doing business. Indeed, it can be difficult to fully appreciate just how challenging a PI claim can be. However, when such a claim does happen, many solicitors find that objectively managing a claim themselves can be difficult and extremely time-consuming. It quickly becomes apparent that the insight, support and resources of an experienced and knowledgeable insurer are invaluable.
Every day at AIG, we help numerous solicitors and legal practices as they face serious claims situations that can impact their professional reputations and good standing in our communities. Often, a claim can lead to protracted litigation and significant financial losses. AIG’s claims team is equipped to manage these situations quickly, getting expert help involved early in the process, and working hard to mitigate any financial loss. By acting quickly, the amount of time that a practice spends on managing a claim can be reduced, enabling the focus to remain on what is important – servicing clients and maintaining business momentum.
What are some of the risks PI insurance covers, and what exposures can solicitors face if they do not have adequate coverage?
Solicitors are exposed to a variety of perils as they practise. Over the years, AIG’s PI insurance policy has developed to provide protection and broad financial support for solicitors when they are faced with third party claims for:
- errors & omissions;
- breaches of professional duty (including negligence & breach of contract);
- breaches of the Fair Trading Act 1986;
- libel, slander and other defamation issues; or
- loss of documents.
Importantly, regardless of whether an allegation of wrongdoing against a policyholder is proved to be spurious or not, PI protection will meet the costs and expenses associated with defending against such an allegation. The cost of defending a claim can escalate to levels that could threaten a practice, and many firms are simply not equipped to meet these costs without insurance support from a PI insurer.
With both local knowledge and an unrivalled global network to draw on, AIG’s professional indemnity underwriters can shape the right programme for our customers, while our claims handlers are adept at managing claims made against solicitors. We also have relationships with the most capable legal representatives available in New Zealand and overseas, whose aid we can enlist to help policyholders manage even the most complex claims situations.
What are some examples of where PI has been saved a law firm from a potential disaster?
Last year AIG’s global claims network paid over USD79 million in claims daily. With over 20 years’ experience as the market leader for solicitors’ PI cover in New Zealand, AIG has managed and settled many complex losses, a high number of which have had the potential to cause a practice severe financial pressure, or even bankruptcy.
In one recent example, a solicitor advising a company and its shareholders on the terms of a lease for a property that comprised a guesthouse, restaurant and golf course failed to advise the company that the property did not have land use consent for the operation of the proposed business. The company entered into the lease, with some of the shareholders even giving up other jobs to run the new business. When the omission of land use consent was discovered, the company had no option but to exit the lease and the shareholders had to seek new employment. The defence costs associated with the company’s claim against the solicitor were approximately $200,000.
The complexities in managing professional indemnity claims mount when overseas parties are involved. This is especially true when international property clients (as opposed to domestic clients) are involved.
Recently, a New Zealand solicitor acting for a foreign company that had purchased land requiring Overseas Investment Office consent was sued, as he had failed to advise the buyer about the required consent. The land was then resold at a loss by the purchaser, as it could not retrospectively obtain the required consent (in fact, the Overseas Investment Office ordered the sale of the land). This claim was settled against the solicitor for approximately $400,000.
Litigation in land transactions can be huge as both the scale of purchase (particularly in the case of property developments) and rising property prices can drive up transaction values, which in turn flow into higher damages amounts.
Are there any new trends in PI of which legal firms should be aware?
The environment in which solicitors conduct their business is constantly evolving. Two recent trends stand out – one being “litigation funders”, and the other the emerging risks associated with data security.
Litigation funding by a third party “litigation funder” is on the increase in New Zealand, although this has traditionally been met with caution. The increase may reflect trends in Australia (where class actions that often rely on litigation funding are more common). Such increased use of third party funding may see the scope of litigation against New Zealand-based companies widened, thus increasing the potential of a professional indemnity claim against a company’s solicitors.
Data security in the legal field is also a growing concern. As businesses rely increasingly on computer networks and systems that hold sensitive data about their company, its activities and their client’s details, we are starting to see a significant rise in the number and scale of cyber-attacks and data breaches.
In response to this emerging threat, AIG has developed and launched a cyber-insurance product (CyberEdge) in New Zealand. This innovative new protection can meet the financial risks posed by a data breach or cyber attack. The policy also covers the costs incurred by a policyholder in maintaining its business should its network be infected by a virus or subject to a hacking attack. AIG has already supported one solicitor’s practice where the system was infected by a malicious virus that resulted in remediation costs in excess of $35,000. These costs were met by AIG’s CyberEdge policy.
In addition to helping solicitors with managing the financial impact of a cyber-attack, an added benefit of AIG’s policy is that it provides support through our data crisis response cover. This benefit enables our policyholders to have direct access to legal, public relations and technology experts in the event of a data breach. Due to the speed at which a cyber event can unfold, having fast access to these experts (without the need to first contact AIG) can be critical.
Other than the cost of the policy, what factors should law firms consider when evaluating policies?
As with any insurance, while cost is always a factor, solicitors must also consider the insurance company behind the policy. All insurers are not the same and a great sales pitch is no indication of great claims service. A practice should be certain that its insurer has the ability and experience to manage complex, high-value claims, obtain the best expert help and support, and have a track record of delivering on their promises and following through on their commitments.
Additionally, as claims against solicitors can often be complicated – sometimes involving several parties and even taking years to reach a settlement – it is essential that an insurer should have proven financial security and a long-term commitment to the market. At AIG, our claims team’s ability to manage claims quickly and efficiently ultimately reduces overall claims costs in the medium term and enables the cost of policies to remain competitively priced.