New Zealand Law Society - Questions and Answers – Professional indemnity insurance consultation
As the Independent Review identified, New Zealand is out of step with comparable international legal regulatory frameworks because lawyers here are currently not required to hold Professional Indemnity insurance (PI insurance). The absence of this requirement creates risks for consumers, who may not be able to recoup losses caused by a lawyer, and for lawyers themselves. The Law Society is consulting on this issue because compulsory PI insurance would strengthen consumer protection, improve public confidence in the profession, and align us with international practice.
Section 99 of the Lawyers and Conveyancers Act 2006 provides for the ability to set rules around PI insurance, including the potential to require all lawyers or classes of lawyers to hold PI insurance. The Law Society was required to formally review the Indemnity Rules (enacted 1 August 2008) two years after they came into force. At that stage the review recommended no change, but the Law Society has kept the PI insurance settings under review since the they were enacted.
Currently, lawyers in Aotearoa New Zealand are not required to have PI insurance but must disclose information about their insurance arrangements to their clients when they are engaged. This includes telling the client if the lawyer is covered by PI insurance cover that meets minimum disclosure standards specified by the Law Society, holds insurance that is less than the minimum standards or if the lawyer does not hold PI insurance. The purpose of this requirement is to ensure that clients are fully informed about a lawyer’s insurance arrangements before deciding whether to engage them.
Yes. Most comparable legal jurisdictions such as England and Wales, Ireland, Scotland, and all Australian states and territories require lawyers or law firms to hold PI insurance. While the details differ, the underlying rationale is the same: protecting clients and maintaining high professional standards.
A compulsory PI insurance requirement could affect the public’s access to legal advice if some lawyers are unable to obtain insurance and, as a result, cease practising. This risk is greatest if it leads to fewer lawyers operating in particular practice areas or serving specific communities. We have no evidence or data to indicate this would be widespread. We are seeking feedback from insurers also about potentially exempting categories of lawyers from the requirement.
Compulsory PI insurance reduces the risk that a client suffers financial loss because a lawyer cannot meet a claim for negligence. Without insurance, clients may not be compensated even when the lawyer is at fault. Compulsory cover ensures a basic level of financial protection is always available. It can also ensure that lawyers may be protected if they cause loss to a client.
Under an open market model, insurers would make their own decisions about who to insure and would not be required to insure every applicant.
If an approved pool model is adopted, insurers within the pool would still determine who they are prepared to cover. However, consideration would need to be given to whether a mechanism would be introduced to ensure all applicants can obtain cover. Factors relevant to this include feasibility within the New Zealand market, the likelihood of higher premiums to cover increased costs to insurers, and any costs incurred by the Law Society for administering this mechanism.
Three broad options are outlined:
The consultation seeks feedback from the profession and the public on which model is preferable and why.
The consultation document does not propose a specific minimum amount of cover to be required. It notes that New Zealand’s current minimum standards for disclosure are lower than comparable jurisdictions and asks whether:
Any change to the minimum standards for disclosure would be separate from the decision about compulsory insurance.
Feedback is being sought on whether compulsory policies should include cover for:
Different jurisdictions take different approaches, so input from the profession will help shape what is appropriate for Aotearoa New Zealand.
It is proposed that it would apply to lawyers who are approved to practise on their own account, including:
Employed lawyers who are covered by their employer’s PI insurance policy would be exempt from the requirement. In-house lawyers would also be exempt because their employer (client) can choose how to manage its risk appropriately. Based on the most recent Snapshot of the profession, these two groups comprise approximately 65% of lawyers in Aotearoa New Zealand. This means that the proposed requirement would apply to approximately 35% of lawyers who hold the responsibility of operating a legal practice.
The Law Society is aware that many lawyers already hold or are covered by a PI insurance policy. Although we do not know exactly how many lawyers are not currently covered, we anticipate that the group that will be directly affected by a compulsory requirement will be reasonably small relative to the profession as a whole. We are also seeking feedback on whether other groups within the profession should be exempt from the requirement and on what basis.
Although the cohort of lawyers who may be directly affected by the compulsory requirement may be small, as discussed above, the Law Society considers it important to consult on this issue given the risks for consumers, who may not be able to recoup losses caused by a lawyer, and for lawyers themselves.
Possibly. The consultation document asks for feedback on whether any other groups should be exempt from the compulsory requirement and on what basis. This could include lawyers in low-risk practice areas or those already covered under another regulatory scheme.
No. As above, employed lawyers and in-house lawyers would be exempt from the requirement. A lawyer practising on their own account does not need to take out an individual policy if their firm’s PI insurance covers them and meets any minimum terms and conditions that are set. There is no need for individual partners or directors to hold separate personal policies.
As discussed above, approximately 65% of lawyers would likely be exempt from the requirement because they are covered by an employer’s PI insurance policy or, in the case of in-house lawyers, their employer client’s risk mitigation measures. Of those lawyers who could be subject to the compulsory requirement, we anticipate that many lawyers already hold PI insurance themselves or are covered by a PI insurance policy held by their law practice. For these groups of lawyers, costs will not increase providing the PI insurance policy meets any minimum terms and conditions that may be set.
For lawyers who currently do not hold PI insurance and are not exempt, costs of practice are likely to increase. We acknowledge that this may be a burden that some law practices are unable to sustain.
One of the matters under consideration as part of this consultation is whether an insurer of last resort mechanism would be required (insurer of last resort means a backup insurance option that provides cover if no other insurer will). If no “insurer of last resort” mechanism is introduced, a failure to obtain insurance could mean that you would no longer be able to practise.
Any adoption of the scheme would have an appropriate transition period to give lawyers time to obtain insurance.
If a compulsory insurance requirement is introduced, the impact of affordability will depend on how the insurance model is designed. Measures such as an insurer of last resort could help some lawyers obtain insurance if they cannot obtain it through the market. However, if insurance premiums are high, some lawyers may still face financial pressure. In those cases, lawyers may need to explore options such as staged cover, changes to their practice model, or financing arrangements with banks or other lenders.
Feedback can be provided via the consultation survey. Respondents can answer as many or as few questions as they wish.
A summary of the feedback will be published, but individual contributors will not be identified. The Law Society will then determine the next steps and communicate decisions to the profession.
Yes. The Law Society may increase or decrease (or leave unchanged) the minimum standards for disclosure regardless of whether compulsory PI insurance is introduced. The consultation seeks views on the minimum standards for disclosure alongside the compulsory insurance proposal.
Changes would need to be made to the Indemnity Rules and likely to the Rules of Conduct and Client Care. Non-compliance would be addressed through existing professional conduct processes, such as complaints or fitness to practise assessments.