Guidance note: acting on matters that exceed the law firm’s professional indemnity limit

Calum MacLean, risk manager at Miller Insurance Services, offers in-depth insight on whether law firm should proceed, seek additional cover for or decline matters that exceed the firm’s professional indemnity limit

One of the most common questions we receive is whether a firm can increase its PI limit to undertake a larger transaction. This note helps firms assess whether it is appropriate to accept or continue acting on a matter where the transaction, claim or asset value exceeds their current professional indemnity (PI) limit.

The value of the matter is a trigger, not the answer

Deciding what level of cover is required for a high-value matter is not straightforward. A large headline value does not necessarily reflect the firm’s potential negligence exposure but will form part of the risk assessment. Similarly, a lower-value or series of connected matters may give rise to significant liability where an error results in the loss of a material right, claim or benefit.

There is no requirement for a firm to maintain PI insurance at the level of its largest matter but the Solicitor’s Regulation Authority (SRA) expects firms to analysis their risks and ensure that their cover is adequate and appropriate for the work undertaken. The firm should be able to demonstrate that it has made a reasonable and rational assessment of the risk and deemed the level of insurance adequate.

The central question is therefore not simply: “What is the transaction worth?” It is: “What could the firm realistically be sued for if it made a serious error in carrying out its defined role?”

As an example, a £20 million matter does not automatically require £20 million of PI cover, but it should prompt a documented assessment of the firm’s realistic exposure. The outcome may result in a decision that an increase is not required: that the existing limit is adequate, or a more modest increase is appropriate – there is no right answer provided the risk has been considered and can be evidenced.

Assess the maximum credible loss

The firm’s matter risk assessment should identify the realistic worst-case loss to the client arising from negligence. This should include:

• The nature and scope of the work and whether it’s within the expertise of the fee earner;
• Whether it’s routine advice within the firms established risk framework;
• complex, novel or specialist issues;
• The consequences of making a mistake i.e. what is the total amount you could be sued for;
• Possible rectification;
• Any other parties or law firms responsible for aspects of the proposed work;
• likely claimant costs including interest;
• Whether there are multiple clients, lenders, beneficiaries or other parties who might bring claims;

A total loss is relatively unusual, but it cannot be disregarded. The assessment should identify credible scenarios rather than assume that the worst outcome is impossible.

Assets may reduce risk, but do not eliminate it

Where tangible assets are involved, the potential loss may be easier to assess. Property, shares, or other identifiable assets will often retain some value, even if a transaction goes wrong. This can mean that the realistic loss is less than the gross transaction value. However, the existence of assets is only one part of the analysis. The firm should consider whether the assets are identifiable, properly valued, saleable and capable of being recovered or realised. It should also consider title defects, competing claims, security arrangements, insolvency, market movements, fraud, enforcement delays and any loss of value resulting from the firm’s error.

Assets may therefore be a significant mitigating factor, but they should not be treated as an automatic cap on liability.

Client and matter risk assessment

Before accepting the instruction, the responsible partner should complete and document full risk assessment. This should include:

• Who is the client, are they well know to the firm and if not, why have they chosen to use the firm.
• Does the client have access to independent valuation, tax, financial or specialist advice?
• Are the client’s expectations realistic and clearly understood?
• What is the exact nature of the work?
• What is the value of the transaction, asset or claim?
• What is the firm’s defined scope of responsibility?
• Are there complex legal, factual, jurisdictional, tax, regulatory or technical issues?
• Will the firm hold client money, give undertakings, release funds or control completion?
• Is there heightened fraud, cyber, identity verification, sanctions or anti money laundering risk?
• Are there urgent deadlines or time pressure?
• Does the fee earner have suitable experience, and is appropriate supervision available?

Insurance

Once the firm has assessed the maximum credible loss, it should consider whether its existing PI policy is sufficient. The cost and availability of additional cover will depend on the nature of the work, the client, the risk profile and the insurer’s appetite but usually excess layer cover will be available and your broker should be able to provide indicative premium to enable you to factor in the additional costs into your cost benefit analysis.

Client communication and liability limits

Limiting liability may be an appropriate risk management step and is certainly seen as best practice amongst the legal profession.  However, it should not be viewed as a substitute for adequate insurance, competent advice or proper supervision.

The firm should have an open and honest discussion with the client about the scope of work, responsibilities, material risks and, where appropriate, the firm’s insurance position and any proposed liability limit. This should be dealt with in clear correspondence and not buried within a standard retainer.

Any discussion, agreement or client decision should be recorded on file.

Reviewing cover after completion

It is rare that cover is increased for a particular matter but rather the increased limit applies to all work undertaken by the firm.  Therefore, reducing the firm’s level of insurance can be a complex exercise.

Relevant factors include whether the matter completed successfully, whether any concerns or complaints arose, the client relationship, whether the transaction remains live, and whether the relevant asset has subsequently been sold, transferred or otherwise ceased to present a meaningful exposure. Any decision to reduce the limit should be documented and based on a fresh assessment, including the relevant limitation period, of the remaining risk.

 Conclusion

Where a matter exceeds a firm’s PI limit, the key is not simply the value of the transaction but the firm’s realistic exposure if something goes wrong. A documented, proportionate assessment of the work and client, will help the firm make an informed decision about whether to proceed, seek additional cover, limit its role or decline the instruction.

It is often helpful to discuss these matters with a specialist Solicitors’ PI broker. At Miller we can provide objective advice informed by claims experience across other firms and an understanding of current insurer appetite, policy terms and the availability and cost of excess-layer cover. This can help the firm evaluate its options and make a decision that is commercially sensible as well as appropriately risk managed.