Professional indemnity insurance – trends and claims examples
This article looks at some issues lawyers and law firms should be considering in relation to their professional indemnity (PI) insurance and provides several claims examples in common areas of practice.
Why is professional indemnity insurance important for law firms?
A significant claim against a legal practice could lead to protracted litigation and financial loss and severely impact on a solicitor’s professional reputation and good standing in the community.
Unless you or your law firm have faced a serious allegation of negligence or professional wrongdoing in the past, you may see annual PI premiums as just another unwelcome cost of doing business.
It can be difficult to fully appreciate just how challenging the impact of a PI claim can be on your practice or you personally, both emotionally and in terms of time and financial resources.
When an event happens, many solicitors find that managing a claim objectively on their own behalf can be difficult and extremely time-consuming. This is where the insight, support and resources of an experienced and knowledgeable insurer can be invaluable.
NZI has been in business for 157 years, helping solicitors and law firms facing serious claims. NZI’s Claims team is well equipped to manage these situations quickly, providing expert advice and assistance early on in the process, and working hard to mitigate any financial loss.
By taking action quickly and utilising the experience and resources of a reputable insurer, the amount of time spent on managing a claim can be reduced, allowing you to continue to focus on what is important – servicing clients and building your business.
What are some of the risks PI insurance covers?
Generally speaking, PI insurance provides protection and broad financial support for solicitors when they are faced with third party claims for:
• errors and omissions;
• breaches of professional duty (including negligence & breach of contract);
• breaches of the Fair Trading Act 1986;
• libel, slander and other defamation issues; and/or
• loss of documents.
Most 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 such an allegation.
The cost of defending a claim can escalate to levels that could threaten your practice, and many firms are simply not equipped to meet these costs without a PI insurance policy.
Below are some claims examples in common areas of practice:
• Conflict of interest – A solicitor acted for both sides of a lease transaction. The solicitor was aware that the lessor was owned by two directors of Company A, and that the four other directors of Company A did not know this. Company A was the lessee. When the facts emerged, High Court proceedings were issued. There was no answer to the conflict of interest allegation. The claim settled at mediation at a total cost to the insurers of over $1.2 million.
• Conveyancing – A firm acted for the vendor of a valuable house where the vendor had entered into a very unfavourable agreement (prior to obtaining legal advice), which effectively left the vendor unsecured for much of the purchase price. The insured firm was joined as a third party to a claim by the vendor against the real estate agent. The claim against the firm was successfully defended through a lengthy High Court hearing, at a cost to the insurers of over $500,000.
• Trusts – A law firm’s trustee company was a trustee of a family trust which commenced litigation. This was ultimately unsuccessful and resulted in an adverse costs judgment against it. The trust was impecunious, so the trustee company was left to meet the costs judgment. The firm’s PI policy responded to this claim, as well as to the NZLS complaints that followed. The insurers have paid over $170,000 in relation to this claim to date.
Are there any new trends in PI of which firms should be aware?
The environment in which solicitors conduct their business is constantly evolving. Two recent trends stand out though – “litigation funders”, and emerging risks associated with data security.
Although it has traditionally been met with caution, litigation funding by a third party “litigation funder” is on the increase in New Zealand. This increase may well reflect trends in Australia (where class actions that 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 widen, thereby 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 and firms rely increasingly on computer networks and systems to hold sensitive data about themselves and their clients, we are starting to see a significant rise in the number and scale of cyber attacks and data breaches. Law firms should be aware that the risk of a cyber attack or cyber extortion is real, but it is insurable.
Ryan Clark is the National Manager – Liability at NZI Insurance. Mr Clark has worked in liability in both New Zealand and London and is currently the Chair of the Insurance Council of New Zealand Liability Standing Committee. For more information on some of the topics covered in this article, please visit www.nzi.co.nz or www.nzicyber.co.nz.