Professional indemnity insurance. All for one and one for all

The recent £110 million award against accountancy firm Binder Hamlyn has predictably led to calls for changes to limit the personal liability of partners as individuals.

Limited liability partnerships have been suggested as one solution (The Lawyer, 19 December 1995) and even contractual limitations on liability are being discussed.

However, the danger is that these concerns will deflect partners' attentions from the main issue - the liability of the partnership as a whole.

A change in partnership status does not affect the likelihood of a claim being made against a firm, or the size of that claim. Even if individual partners keep their shirts on their backs, the firm faces the potential loss of all its assets.

Lawyers have experienced a significant growth in the value of claims against them over the past 20 years and the professional firm, by virtue of its stability and longevity, attracts more than its fair share of actions. Consequently, the demand for professional indemnity insurance has soared since the Law Society became the first professional body to introduce mandatory cover for its members in 1976.

It is well known that the mandatory £1 million protection demanded by the Law Society of its members and provided through the Solicitors' Indemnity Fund is the bare minimum necessary and suitable only for the smallest firms. Practices with more than two or three partners will almost certainly require additional cover through the commercial insurance market.

Selecting the right amount of cover to carry is always difficult. As a rough rule of thumb, legal partnerships should expect to require professional indemnity cover of at least 3.5 times fee income. But this is only a guide and the appropriate amount will depend on many other factors.

Law firms generally elect to carry much higher levels of insurance cover than other professionals and the award against Binder Hamlyn and several other cases have prompted many firms to review their current indemnity limits and seek additional cover, either now or at the next renewal date.

The London insurance market remains a world centre for this class of business, but there is a limited amount of cover available to meet the growing demand and this section of the market has seen some violent capacity swings in the past.

This means that the cost of renewing professional indemnity cover can come as a shock, as prices swing wildly from one year to the next. But a professional broker should be able to smooth many of the fluctuations by careful planning.

So far, the Binder Hamlyn judgment does not appear to have affected capacity. In fact, there are signs that capacity is increasing.

Nevertheless, the maximum amount of cover remains at around £200 million. While this may seem high to some, the larger firms purchasing at this level will be well aware how small it is when compared to the sums involved in the work they are handling.

Probably only the top 10 firms in the country now cover themselves to such a high limit, although several more should perhaps consider extending their protection to this sort of level.

As the market becomes more sophisticated, the maximum amount of cover that can be obtained and the corresponding premiums are not the only issues which need to be considered. What is coming to the fore is the gap in cover that can be created by underwriters' resistance to provide for claims made through the US courts.

When law firms renew their professional indemnity insurance they must ensure that, in covering themselves against actions in different jurisdictions, there is no danger of "holes" being created between the classes of action excluded from one policy but included in another. If the insurance arranger fails to plug all the exclusions they could find themselves fatally exposed.

When partners arrange protection for their personal assets they should also check that their firm's existing cover is watertight and sufficient to protect them from the ravages of the increasingly litigious market. Another Binder Hamlyn is just around the corner.