What is an appropriate limit of indemnity for my Law Firm?

The SRA stipulates the minimum level of PI insurance a firm must hold. For a Partnership this is £2,000,000 and for Limited Company’s, Limited Liability Partnership’s and Alternative Business Structures it is £3,000,000. However, SRA regulations also state that Firms must ensure that their limit of indemnity is “adequate and appropriate” 

So, what is deemed to be an adequate and appropriate level and scope of cover, and what do firms need to consider when assessing their PI exposure?

The first thing to consider is the nature of activities carried out by the firm, and the potential exposure should things go wrong. Weigh up the probable maximum loss for each aspect of work undertaken and whether you have any contractual obligations you need to adhere to. Bear in mind that in the majority of situations, it is unlikely (but not impossible) that your liability would exceed the entire value of the underlying transaction or asset. 

Secondly, analyse the average and maximum amounts of money in your client account. Would your limit of indemnity be sufficient if the funds were to go missing? If the balance is substantially higher than your limit of indemnity, you should consider whether additional cover is required. We would stress that the wording of the excess of loss policy is critical, and it is important that clients have an experienced insurance broker who understands the nuances of the wording. Many Solicitor PI Excess of loss policies do not follow the Minimum Terms and Conditions, and it is commonplace for Insurers to apply a Cyber exclusion. Where there is Cyber exclusion in place, it typically means that cyber-enabled client money losses would not be covered. If these types of losses are of concern, Firms should consider purchasing separate cyber and crime insurance.

Next thing to review would be your past claims history. Is there a trend of large losses and would it be prudent to have the extra safety net of an increased limit?

Analyse your typical client profile. Are you working for large corporate organisations, or clients undertaking high value mergers and acquisitions?  Consider the potential for financial or consequential loss claims such as loss of chance/opportunity, or lost profit. Large commercial deals can go catastrophically wrong and generate huge claims. 

Do you have high net worth individuals or high-profile celebrities / sports personalities? Quantify the amount and value of work undertaken for these individuals.

Another consideration is the potential for claim aggregation. Clause 2.5 of the Minimum Terms and Conditions states multiple claims may be treated as one claim, if they are linked by a unifying factor of some kind:-

2.5 One Claim 

The insurance may provide that, when considering what may be regarded as one Claim for the purposes of the limits contemplated by clauses 2.1 and 2.3: 

(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.

For instance, a firm with a limit of indemnity of £3,000,000 would, in principle, be covered for five separate claims of £3,000,000 each, totalling £15,000,000 in losses. However, if the same negligent advice was made repeatedly and this led to 15 claims of £1,000,000 each, the insurer would only have to pay a maximum of £3,000,000 if the 15 claims were demonstrated to be connected. This would leave the firm liable for the remaining £12,000,000, plus costs and expenses.

Finally, when considering whether your limit of indemnity is “adequate and appropriate”, you should review your exposure to past work and contracts. Professional Indemnity policies are written on a claims made basis which means that it is the policy in force at the time a claim is made that responds, not the policy that was in force when the negligent act or omission giving rise to the claim occurred. This is also important if you have contractually agreed to hold a certain limit of indemnity because if an error comes to light years later, and the Firm has since reduced its limit of indemnity, you may find yourself in breach of contract, as well as breach of SRA regulations.

In summary, Directors and Partners of Law Firms have a responsibility to ensure that their insurance meets the liabilities and requirements of their business. As well as meeting SRA obligations, a suitable limit of indemnity provides peace of mind to management and secures longevity to the business. 

Written by Rebecca Kee

January 2024