Your Solicitors' PII policy - 10 key points

1. What is a claim?

The definition of a “claim” is contained in the SRA’s Minimum Terms and Conditions (MTCs) that all policies must comply with. It includes:

• “a demand for, or an assertion of a right to, civil compensation or civil damages”
• “an intimation of an intention to seek such compensation or damages”
• an obligation to remedy a breach of the SRA Accounts Rules, except where that obligation arises as a result of the insolvency of a bank or building society holding client funds – or their failure to repay monies on demand. 
   

It is important to remember that all claims as defined above should be the subject of notification. Even if you think that you have a strong defence against the claimant, the matter must still be notified to your insurer.

The obligation to remedy a breach of the SRA Accounts Rules means that the policy should respond as soon as there is a “hole” in the client account. It is not dependent upon an individual making a demand for, or asserting a right to compensation. The exception to this relates to an insurer’s responsibility for any obligation arising as a result of an insolvency or failure on the part of the bank that holds the client account. In those circumstances clients do have the benefit of redress via the Financial Services Compensation Scheme (“FSCS”). For more information on this issue we refer you to the Law Society Practice Note available here:
www.lawsociety.org.uk/support-services/advice/practice-notes/protection-for-client-accounts/
 

2. What is a circumstance?

The MTCs define a circumstance as:

“an incident, occurrence, fact, matter, act or omission which may give rise to a Claim in respect of civil liability.”

It is important to focus attention on the word “may” which offers a lower threshold than “likely”, which is sometimes used in PII policies. It means that it is at least possible that a claim will result – although the risk must be real as opposed to “fanciful”. Determining whether or not you consider there is a circumstance can be more problematic and situations will arise where the existence of a circumstance is in a “grey” area. The Howden claims team deal with these issues all the time and if you are in doubt you should always contact us for discussion. 
 

3. What does the limit of liability cover?

The policy limit will respond to the compensation or damages claimed, including claimant costs. It is important to keep this in mind when you are considering how much cover you want to take. If your defence of a matter is not successful, then claimant costs can be considerable and you want to ensure that the limit you have is sufficient to cover both the damages awarded (inclusive of interest) and the claimant costs.

Another point to note is the issue of rectification costs. These are treated as claim costs, not defence costs, and are therefore included within the limit of indemnity and subject to payment of your excess.
 

4. Is there a limit on defence costs?

Under the MTCs defence costs are separate to your limit of indemnity. They are unlimited, BUT the MTCs do allow insurers to limit their liability for defence costs where the payment made to settle the matter exceeds the sum insured. In that situation defence costs can be limited to “the proportion that the sum insured bears to the total amount paid or payable to dispose of the Claim”.  

By way of example if you only have a £3m limit and a matter is concluded with a claim payment of £4m, then the policy would only cover 75% of the defence costs. You would be uninsured for the remaining 25% of the defence costs as well as £1m of the claim payment. If you have excess layer cover then, subject to the terms and conditions of that policy, it would respond to meet the additional 25% of the defence costs as well as the balance of the claim payment.
 

5. If something goes badly wrong and we have multiple claims in a year will they all be covered?

Solicitors’ PII insurance is written on an “any one claim” basis. If you have a limit of £3m then this means that the policy will respond to any claim up to a maximum of £3m. So, if you have 2 claims in a particular policy year and each require a settlement payment of £2m, then both will be covered in full. 

The only exception to this is where two or more claims fall within the special definition of “one claim” that exists in the MTCs. In the insurance world this is known as the “aggregation clause”. The clause operates to group together, and consider as “one claim”, matters that are sufficiently related to fall within the definition. If you had 50 aggregated claims that settle at £100,000 each, then the total “one claim” for policy purposes would be £5m. If you are only carrying £3m of cover then you will be uninsured for £2m. 

While aggregation is rare in solicitors’ claims it does happen. It is more likely to occur if you are involved in volume or repeat work. If that is the case you should discuss the issue further with us. Consideration should be given to excess layer cover in these circumstances in an effort to avoid uninsured losses above the primary limit. However it is important to ensure that you understand the terms of your excess layer cover and the extent to which it follows, or differs from, the wording of the primary policy.
 

6. What happens if someone in our firm has hidden a mistake and there is a late notification?

Late notification should be avoided if at all possible. If the matter is a “Claim” as defined above, then it must be accepted by the insurer your policy was with at the time the claim was made against you. If the matter is still a “Circumstance” then it will be notified to the insurer on risk at the point of notification – even if it should have been notified under an earlier policy.

So, the good news is that there will always be cover….but beware! Even the gold plated MTCs allow the insurer to seek reimbursement (to the extent that it is “just and equitable”) from an insured if they have been prejudiced and the late notification involves a breach of the policy, a failure to make a fair representation of the risk or dishonesty or fraud. This does not apply to a company or LLP unless the relevant act was committed or condoned by all directors or members. However you still need to beware - if an insurer is uncomfortable or concerned about a firm’s behaviour over a late notification, they have the ultimate sanction of refusing to offer terms at the next renewal.    

7. What should we do when we receive a letter of claim?

The MTCs do not specify any particular policy requirements on this, and you need to read your own policy carefully to understand what your responsibilities are in terms of notification. While the precise language will differ, policies generally require you to notify “as soon as practicable” or “as soon as possible” and notification is an issue that should be considered a priority. 

You should not admit or deny liability without the consent of insurers and many policies include a clause to this effect. The best course is to contact the Howden claims team as soon as you receive a letter of claim. You have 21 days to acknowledge receipt under the terms of the Pre-Action Protocol for Professional Negligence. Most insurers prefer that the letter is not acknowledged immediately, but closer to the 21 day limit. This will maximise the available time (3 months from the date of acknowledgement) to investigate the matter and provide the letter of response.
 

8. We have changed insurers and 1 week into the policy with our new insurer we received a letter of claim. We notified this to our new insurer. They will not accept it because they consider there was “an intimation of claim” before they came on cover. Our old insurer disputes that. Could we be left without cover and what happens while insurers are resolving the issue?

This dispute will arise from time to time. Fortunately you have the comfort of knowing that one of the insurers will have to pick up the claim – it cannot fall between the cracks. While the dispute is resolved, the Participating Insurers Agreement provides (clause 12) that unless there is agreement to the contrary, the insurer who was first notified shall conduct the matter in the meantime. This includes, if appropriate, compromising and paying the claim.

In these circumstances it is always advisable to ensure the insurer who is not dealing with the claim is kept appraised of developments. If they are ultimately found to be responsible for the claim, this will help to avoid an argument that they would have taken a different course of action. The claims team at Howden will always assist with this.
 

9. My broker tells us that the standard MTC policy does not cover work undertaken from an office outside England and Wales, but we cannot see any exclusion in the policy. Is my broker mistaken?

No, your broker is correct. This issue is somewhat “buried” within the definitions to the MTCs. Ultimately it comes down to the definition of “practice” which, for the purposes of  PII, means practice carried on from an office in England or Wales. Some insurers helpfully spell the issue out with a specific exclusion in the policy – others rely on the MTC definitions. 

If you have an overseas office you should always discuss that with us so that we can assist you to arrange an appropriate solution.
 

10. We are sending one of our fee earners to a client to work on a secondment basis for three months. If he or she makes and error while they are there which results in a claim against our client, will our PII policy respond?

Yes. The definition of private legal practice includes “the provision of services as a secondee of the insured firm”. This is further underpinned by the definition of “employee” which includes “any person other than a principal seconded by the insured firm to work elsewhere.”  

If you have any other policy queries please do not hesitate to contact us.

The Howden team has a great deal of experience working with the MTCs and related policies. We are here to help.
 

Written by Jenny Screech – Legal Consultant, Howden PII