Rethinking Professional Indemnity Insurance for lawyers

The role of a traditional lawyer is not what it used to be. Lawyers are being asked to provide advice, draft documents or help close deals more quickly than ever before and consider a variety of issues that weren't in the legal landscape 10 years ago.  The expectation which the digital world has created means there is pressure on lawyers to provide immediate responses, and this pressure is conducive to making mistakes. It is for this reason that legal firms should rethink whether their Professional Indemnity Insurance (PII) cover is adequate.

Right across the country, all states and territories require Principals of a law practice to hold valid PII cover. While firms can access this through their own state or territories' professional association, these arrangements often provide cover up to only $2 million for each claim.  This amount of cover is not adequate for most lawyers operating in today's environment, in circumstances where legal costs alone can quickly erode this limit.

Law firms are advising on an environment that is ever evolving. Whether it is the increase in capital raisings, more complex mergers and acquisitions, sophisticated property development transactions or addressing emerging trends such as fintech and the crypto space, the nature of the advice sought is ever more technical.  This is especially the case where some of these transactions are not regulated or contemplated by any legislation. 

Law firms are becoming more entrepreneurial in this fast-paced and stressful environment.  The very nature of the modern law firm is changing. Law firms have moved to digital platforms and hybrid working  and the use of e-discovery has become the norm. Sensitive information is encrypted and stored on cloud-based systems that are vulnerable to hacks and ransomware attacks. Law firms have not been immune to cyber-attacks and such incidents have been reported in the press.

The Australian PII market has been through a great deal of upheaval in recent years with insurers exiting as claims increase in both number and size. This instability is likely to continue for some years to come.

Compounding this problem is that many law firms have viewed PII as a commodity purchase. In doing so, they fail to engage the right insurer who understands their business, how they manage risk and most importantly, make a long-term commitment to their firm. And with some lawyers lacking a full understanding of the true value of PII, they may select inexperienced insurers that are unable to effectively support them when a claim is made.

Given the significant size of transactions that large law firms are involved in on a day-to-day basis, even a small mistake by a lawyer can lead to a huge claim for damages.  A few examples of litigation in Australia involving professional indemnity claims against law firms include: 

• Failure to identify a side deed to a lease during a time sensitive period resulted in significant losses.
• Negligent advice provided to a professional trustee causing its members to suffer significant losses;
• Failure to advise a client to produce a crucial document at a critical time;
• Errors drafted in commercial agreements which prevent compliance; and
• Failure to act with due care and skill in providing advice to its client and to ensure that its client's public offering was not misleading or deceptive, causing the share price to drop. 

• Stability 
  
  The most important consideration is that PII cover is long-tail insurance. The claim may be notified today but there are examples of claims taking over ten years to be settled.
  
  Stability is key in any conversation about PII. You want an insurer that you can have a conversation with about a difficult claim and is able to give you the right advice. This relationship is built like that of any trusted advisor: continued engagement where the advisor understands your business and can tailor their advice to your unique circumstances. It is all too often that we see lawyers trying to explain the intricacies of their business to a claims manager in the middle of a claim.
  
  Firms should also seek insurers that have well-qualified claims people and underwriters they can work with over the long term. The best insurers boast trained lawyers on their teams as these individuals have greater insight into the role of a lawyer and operations within a legal firm. 

• Legal industry insights  
  
  With an ever-changing risk landscape law firms need to partner with a PII insurer that understands their business and their needs. Most importantly, the insurer should have global experience and insights that enables them to identify trends before they emerge locally and can provide these insights.
  
  It is important that the insurer puts its underwriting and claims experts in front of the client and has a two-way conversation. This provides greater understanding of the client's risk management as part of the underwriting process. Equally, it provides feedback about what concerns insurers from a risk perspective and allows the client to use this as an opportunity to receive feedback on their risk management framework. 

• Tailored solutions  
  
  Each firm has a unique risk management framework. It is critical that insurers understand how each risk is addressed and the exposure that is peculiar to that firm. Insurers can then determine what residual risk there is and provide pricing that reflects this risk, as well as convey why the price has been determined. This should provide the law firm with an insight into their risk and confidence in pricing consistency.

For more information about our Professional Indemnity Insurance for Lawyers, please download this fact sheet or contact us.