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Insurance disclosure

Obligation to disclose professional indemnity insurance arrangements to clients

The professional indemnity (PI) insurance disclosure requirement is in Rule 3.4(b) of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (the Rules of Conduct and Client Care). The rule provides that where a lawyer is engaged by a client, the lawyer must provide details of the PI insurance held by the lawyer’s practice. If the practice does not hold any insurance that fact needs to be disclosed.

The rule’s purpose is to enhance client care. Clients are able to engage solicitors with the comfort of knowing that in the event that something goes wrong, and the lawyer is at fault, there may be insurance available to meet a claim.

When the rule was being drafted, the Law Society was concerned to ensure that the disclosure obligation was not too onerous. Because of the Law Society’s efforts, the rule, in its final form, as approved by Cabinet and signed off by the Governor-General, permits limited disclosure where the lawyer’s practice holds PI insurance that meets a minimum standard specified by the Law Society.

The Law Society determined the minimum standard before the Rules came into force and published that standard in July 2008. Limited disclosure is permitted where the practice is insured and in relation to the policy held:

(a) The indemnity limit is the greater of $1 million per practice or $0.75 million for each partner (or in the case of an incorporated law firm, for each lawyer who is a shareholder or director) within the practice.

(b)  The indemnity limit applies either:

(i)  on an aggregated basis to claims made in the policy period with not less than one automatic reinstatement, or

(ii)  on any one claim basis with no aggregate limit.

(c) The excess payable does not exceed 1% of the indemnity limit.

PI policies ordinarily operate either on aggregated basis or an ‘any one claim’ basis. The former policy type responds to multiple claims made in a policy period provided the aggregate value of those claims does not exceed the indemnity limit. An ‘any one claim’ policy responds, to the extent of the indemnity limit, in respect of each separate claim made in the policy period.

The purpose of part (b) of the standard is to ensure that – for disclosure purposes – the insurance held is capable of covering more than one large claim made in a policy period. The Law Society’s position is that where a policy operates on an aggregated basis, full disclosure is required unless the indemnity limit will be automatically reinstated at least once in the policy period (which is common). With this type of policy, individual claims are each subject to the indemnity limit but the aggregate of multiple claims is not limited in this way.

It is important for lawyers to appreciate that they must make full disclosure where the indemnity limit provided for in the policy held by the practice does not satisfy the requirements of part (a) of the standard. Some lawyers have mistakenly regarded that requirement as satisfied where the indemnity limit is less than the minimum but when multiplied by the number of automatic reinstatements available the resulting figure is equal to or greater than the minimum required.

By way of illustration a lawyer in sole practice with $700,000 of cover provided by a policy which operates in the aggregate and with one automatic reinstatement must make full disclosure.

Where full disclosure is required, the Law Society considers the lawyer needs to disclose that no insurance is held or (where there is a policy) the name of the insurer(s), the indemnity limit, whether the indemnity limit applies to each claim, and the excess payable.

Last updated on the 24th June 2016