Got it covered?
5 September 2005
The professional indemnity renewal season has arrived. Solicitors are now required to obtain minimum cover of £2m for the policy period commencing on 1 October this year (£3m for LLPs) and there have been significant revisions to the provisions relating to the aggregation of claims, which will need to be factored into the buying decision. In light of these changes and the increasing emphasis on risk management by many firms and their insurers, there are several recent decisions which are significant in terms of solicitors' exposure to claims.
In Pickersgill v Riley the Privy Council confirmed that a solicitor's duty is ordinarily limited to that which they were expressly asked to undertake rather than extending to being a general business adviser. Similarly, the Court of Appeal in John Mowlem Construction plc v Neil F Jones & Co held that a solicitor was not under a duty to advise their client to notify their insurers of a potential claim.
Many practitioners feared that the House of Lords' decision in Chester v Afshar was a fundamental departure from the usual approach to causation. However, those concerns have been abated by White v Paul Davison & Taylor, in which the Court of Appeal confirmed the traditional approach to causation (excluding medical negligence cases), namely that the claimant must show a causal link between the act or omission and the alleged loss.
Further reassurance is provided by the Appeal Court's decision in Beary v Pall Mall Investments, which concerned an independent financial adviser (IFA). The court concluded that the usual principles of causation should apply, rather than those expounded in Chester.
Also noteworthy is Dixon v Clement Jones, in which the Court of Appeal decided, in relation to lost litigation cases, that one must look at the chance of a settlement being achieved, rather than what the court's decision in the underlying claim would have been. This is an unsettling decision for lawyers and their insurers, as it suggests that, provided the underlying claim had some prospect of a negotiated settlement, an award will be made.
The leading authority on limitation is Forster v Outred & Co, which held that the cause of action accrued at the date of the execution of a mortgage, notwithstanding that it was not evident at that stage that any loss would be suffered. Although that approach was followed in Daniels v Thompson, the Court of Appeal distinguished Forster in Law Society v Sephton & ors and, perhaps surprisingly, concluded that the Law Society's cause of action against an accountant, with regard to sums paid by the Compensation Fund in respect of embezzled client funds, accrued on the date it paid the monies rather than on the date of knowledge of the dishonest acts. This arguably inconsistent decision is being appealed to the House of Lords.
In the meantime, comfort can be taken from a very recent first instance decision in which the court confirmed, in determining as a preliminary issue whether or not a claim against solicitors could proceed, that time started to run from the date of knowledge.
Claims against solicitors arise from widely varying underlying facts. However, reported cases are only a small proportion of claims brought and may not therefore accurately indicate current trends. During the period when the Solicitors' Indemnity Fund (SIF) was writing business, the statistics in its annual reports showed that conveyancing, personal injury, litigation and commercial work were consistently the largest categories of claims, with conveyancing (particularly residential) attracting the largest number of claims and commercial claims contributing significantly to the overall sums paid.
Since the open market started in 2000, we do not have the same composite statistics. However, information obtained from new market insurers appears to replicate the SIF experience to the extent that domestic property acquisitions still account for the largest number of claims and commercial remains the top category by total cost of claims. Some insurers have recorded a marked increase in the number of personal injury and commercial claims, but the total value of claims has remained relatively constant apart from in respect of property claims.
One positive development recorded by some insurers is that the Civil Procedure Rules and Pre-Action Protocols appear to be reducing the number of litigation-based claims. However, we are seeing a significant increase in the number of claims arising out of frauds, from 'simple' mortgage fraud to complex and high-value international scams, which is a worrying, if unsurprising, trend.
Every year we see more claims with a potential to exceed £1m, so the increase to £2m is timely given that the bulk of firms still buy no excess layer insurance. Our experience is that during the past few years, smaller commercial firms have been moving their level of cover up from as little as £20m to £50m or more. Larger firms invariably purchase cover in excess of £100m and the very biggest get significantly more than that. In the present climate this makes good business sense.
Causes of claims and how to avoid them
The principal causes of claims can be categorised broadly as: administrative failings; poor communication; and inadequate vetting of new clients. However, external events, such as the introduction in 2007 of the Home Information Pack for domestic property sales, also lead to additional claims being made.
Reducing the risk of claims being made is essential. In relation to administrative failings, including missed time limits and delay, a simple solution is an effective diary and review system. Similarly, communication difficulties can be reduced by ensuring that a comprehensive engagement letter is agreed at the outset, defining the roles and responsibilities of each party. Too often there is scant regard paid to noting down instructions and then agreeing the extent of the retainer. With regard to new clients, the recent money laundering legislation should force all firms to put in place composite vetting procedures, thereby avoiding acceptance of unsuitable clients or conflicting instructions.
An overreaching strategy is essential; firms should put in place comprehensive risk management procedures and identify a specific senior individual to take control of the firm's policy. The risk manager should identify areas where the firm is most exposed. For example, commercial claims often arise out of sloppy drafting and therefore consideration should be given as to whether increased supervision could assist.
Firms with offices in other jurisdictions should ensure that their risk management strategies are reviewed and implemented in the light of local practice. It is all too easy to overlook small offices that are perceived to be relatively low risk. They can attract difficult - and expensive - claims as easily as any other.
An increasing number of firms are converting to LLP status and/or introducing liability 'caps'. But although both can be effective ways of limiting liability, it must be remembered that they will not prevent claims being made.
Richard Harrison is a partner and Gaby Kaiser a senior associate in the professional liability and commercial litigation department ar Barlow Lyde & Gilbert