This year the professional indemnity insurance renewal deadline of 1 October brings significant changes. The minimum limit of indemnity will double to £2m (and increase to £3m for limited-liability partnerships (LLPs)). This increase goes hand-in-hand with an amendment to the minimum terms and conditions (MTC) governing solicitors’ insurance, which is intended to increase the opportunities for the aggregation of claims.
The changes will affect law firms of every size – and those firms involved in personal injury (PI) and conveyancing work should take special note.
But why have the changes come about and what are the implications? And will the new aggregation regime force firms out of business?
The move from the Solicitors Indemnity Fund (SIF) to the commercial market saw a change to the definition of ‘one claim’.
The SIF wording provided that “all claims arising from the same act or omission shall be regarded as one claim”. From 1 September 2000 onwards, however, Clause 2.5 of the MTC also allowed claims arising “from a series of related acts” to be aggregated.
It was assumed (as explained in the Law Society’s ‘Guidance on Aggregation and the Minimum Sum Insured’) that Clause 2.5 would enable insurers to treat multiple claims arising not only from a series of related acts, but also from a series of similar acts, as one claim.
This assumption was thrown into doubt by the House of Lords’ decision in Lloyds TSB General Insurance Holdings Ltd & Ors v Lloyds Bank Group Insurance Co Ltd (2003). Financial advisers had sought to aggregate all their Pension Review mis-selling claims, arguing that these resulted from one “single act or omission” or a “related series of acts or omissions”. The House of Lords, however, disagreed, holding that the term “result from” required that the act or omission, or related series of acts or omissions, must be the proximate cause of the liabilities.
Lord Hoffmann also placed a narrow interpretation on the phrase “related series of acts or omissions”. This required that the acts formed a related series, which together resulted in each of the claims. It was not enough that one act in the series caused one claim, and another caused another claim.
As the Lloyds TSB wording was similar to Clause 2.5, this interpretation provoked concerns that the decision would increase insurers’ exposure to multiple claims attracting multiple limits, increase premiums for law firms and precipitate withdrawals from the market.
Consequently, the Law Society Council reworded the definition of “one claim” as follows:
“(a) all claims against any one or more insured arising from: (i) one act or omission; (ii) one series of related acts or omissions; (iii) the same act or omission in a series of related matters or transactions; (iv) similar acts or omissions in a series of related matters or transactions; and (b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim”.
How does it work?
The clause divides into two parts, either of which can give rise to aggregation. Part (a) focuses on the act or omission causing the claim, while Part (b) focuses on the underlying matter or transaction.
The widest limb, (a) (iv), imposes a double test: are the acts and omissions “similar” and were the matters and transactions “related”?
Identifying acts or omissions that are similar may be straightforward, but the term “related matters or transactions” is more problematic. This phraseology has not been in common market use before. In Lloyds TSB, when considering what “a series of related acts or omissions” was, Lord Hoffmann concluded that a “common causal relationship” was required. However, it is not clear whether the same interpretation is applicable to the term “related matters or transactions”. There is scope for debate; each case will depend on the underlying facts.
For example, if a solicitor misses the limitation deadline in a number of cases where the solicitor acts for clients all backed by the same union, will the claims aggregate?
There is also scope for debate about Part (b). The terms “matter” and “transaction” are not defined. Furthermore, it appears to allow separate claims arising from a single matter or transaction to aggregate. For example, say a solicitor acting on a purchase fails to advise the borrowers how to hold the equity in the property, and subsequently fails to register the lender’s charge within the priority period. Both the borrowers and the lender have distinct claims, but because the claims arise from the same transaction, they should aggregate under Part (b).
Insurers will presumably welcome the changes, having pressed for a wording allowing increased aggregation. However, aggregation can benefit insureds too, enabling them to pay one excess, rather than multiple excesses. The battle lines move depending upon the respective levels of the excess and the limit of indemnity.
Firms involved in PI claims and conveyancing are likely to be most affected by the changes, as this is the type of work in which repeated errors are likely to occur. Those carrying out ‘bespoke’ work, however, may also be affected. If separate claims were to arise in relation to a complex acquisition (one relating to tax advice and another to employment advice), these may fail to be aggregated under Part (b).
Fears have been expressed that the changes will push some law firms out of business. Where claims are aggregated, there is a greater risk that a firm’s limit of indemnity will be exhausted and this may serve to drive some firms under. However, fewer excesses to pay will be good news for most firms.
Solicitors should act now to anticipate the changes and review their firm’s cover carefully to check that it is adequate. Firms that are apprehensive about what the changes may imply for their business may well think hard about converting to LLP status.
Katherine Rees is a partner at Reynolds Porter Chamberlain. She was assited by solicitor Simran Khanna