No claims become a bonus

Some time in 1997 the former partners of accountancy firm Binder Ham- lyn will discover whether they have to pay a £105 million professional negligence claim.

Law firms are following the case closely as it makes its way from the High Court to the Court of Appeal – bad news for Binder Hamlyn is bad news for the other professions.

Accountants argue that the current situation regarding professional indemnity is untenable. The Institute of Chartered Accountants in England and Wales (ICAEW) and 14 other professional bodies recently wrote to Ian Lang, President of the Board of Trade, urging him to qualify the concept of joint and several liability by introducing 'proportionality'.

Under this proposal, professionals would not have to foot the entire bill for a company collapse for which they were only partly responsible. Instead, they would have to pay a certain percentage of the total damages.

Price Waterhouse partner Graham Ward, chair of the ICAEW's professional liability steering group, believes that a continuation of the status quo will be deeply damaging to professionals, not least lawyers.

“Two things will happen,” he says. “It will become relatively unattractive for companies to receive professional opinions in the UK, compared to those countries where proportional liability is allowed. This is because people in the UK will be much more cautious in what they would opine on.

“There is also the possibility that good people may well decide that they don't want to become partners anymore, or that they want to be partners in territories where the arrangements are different. You could see a professional brain drain.”

One body which chose not to sign the letter to Lang was the Law Society. It does not believe it is in the public interest to water down the concept of joint and several liability.

Although law firm partners give the impression that they are deeply concerned about professional indemnity, they are not panicking.

Lovell White Durrant's head of litigation John Trotter is also chair of the International Bar Association's professional indemnity insurance sub-committee. He says: “Insurance cover for lawyers is more accessible than insurance cover for accountants. The nature of auditing work lays them more open to claims.”

Auditors, unlike solicitors, are vulnerable to a broad range of claims from people who are not their clients. For example, accountancy firms have performed audits of companies which subsequently change hands and then collapse, and the new owners have sued the accountants, claiming they relied on the audited accounts.

Non-clients occasionally sue solicitors but the opportunities to do so are rarer. The common source of this kind of case is the 'disappointed beneficiary' – the person who says their inheritance would have been bigger if the probate solicitors had done their job properly.

Professional indemnity insurance********************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************lth of big corporations.

Claims against UK accountancy firms are usually made in ignorance of their professional indemnity cover. But solicitors who sue each other know exactly the terms of the Solicitors Indemnity Fund (SIF) scheme which provides £1 million of cover for each and every claim made on a firm.

The SIF has seen the number of claims creep up every year. During 1994-95 there were 2.2 per cent more claims reported than the previous year, a vast improvement on 1991-2 when claims rose 33 per cent. Just over 16,300 new files were opened by the SIF in 1994-5.

To ensure law firms are taking all the steps they should to keep claims down, the SIF is introducing a new system of no-claims bonuses and other incentives from 1 September.

A SIF spokesman is philosophical about the ever-upward trend for claims: “It's the usual scenario. In times of economic recession, people look round to recover their money from various sources. And they often go for those they think have deep pockets.”

Lawyers, accountants and other professionals are all considering a range of imaginative ways of keeping the lid on the number of insurance claims.

In the UK, KPMG and some of the other leading accountancy firms are planning to limit their liability by incorporating their audit practices in Jersey, something which will be possible when the Jersey authorities pass new laws in the next few months.

Arthur Andersen is one of the firms not taking this route. It thinks firms should not have to go as far as Jersey to take advantage of user-friendly corporation rules. But it believes this kind of limited liability is not very useful in itself.

A spokesman for the firm explains: “It only protects the personal assets of partners but it doesn't protect the business which could be wiped out in a single claim.”

In the US, professional indemnity is discussed directly between professionals and their clients. Lovells' Trotter says: “One of the first questions asked on a transaction is what your insurance cover is.”

Many contracts for professional advice include a clause restricting negligence claims to a set amount. Trotter believes some UK law firms are considering the possibility of incorporation as a more dramatic way of capping liability.

The leading law firms in the UK top up the insurance cover they get from the SIF by buying more in the commercial market. At a time when the future looks difficult, they may be reassured by the fact that insurance premiums are quite competitive this year.