The minimum standards for the level of professional indemnity insurance (PI Insurance) held by law practices are increasing from Tuesday 6 April 2021. These changes follow a review by the New Zealand Law Society | Te Kāhui Ture o Aotearoa.
At present the minimum indemnity limit is whichever is the greater of:
- $1 million per practice; or
- $750,000 per partner.
These rates have been in place since 2008 and their review incorporated an inflationary adjustment to ensure they remain current. The revised minimum indemnity limits, and standards are set out below.
Increased minimum indemnity
Following the review, the minimum indemnity limit will now be whichever is the greater of:
- $1.2 million per practice; or
- $900,000 per partner.
Rule 3.4(b) of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 requires a law practice to disclose its professional indemnity insurance arrangements to its clients. However, the rule provides that this obligation is met if it is disclosed that the practice holds indemnity insurance that meets or exceeds minimum standards from time to time specified by the Law Society. The rule further provides that if a practice is not indemnified this must be disclosed in writing to the client.
The above are not ‘minimum standards’ in the true sense. They are simply standards that must be met to enable a law practice to limit its disclosure to stating that the practice holds PI insurance that meets the minimum standards specified by the Law Society. However, for convenience, they are referred to as minimum standards.
The present requirements will remain in force under which the indemnity limit applies either:
- on an aggregated basis to claims made in the policy period with not less than one automatic reinstatement; or
- on any one claim basis, with no aggregate limit.
The current requirement is that the excess payable by a law practice must not exceed 1% of the indemnity limit.
It is understood that this is causing difficulty for some practices which carry out significant conveyancing or trust work. In such cases, some insurers are requiring the excess to be increased to 2% of the indemnity limit or charging an increased premium if it remains at 1%.
However, a large law practice would normally have an excess of much less than 1%. An excess of 1% for a law practice with cover of $50 million would result in $500,000, whilst an excess of 2% would amount to $1 million.
In the circumstances, it has been decided that the excess requirement is amended so that the excess payable does not exceed the greater of:
- 1% of the indemnity limit; or
The table below shows how this will operate (using the increased minimum indemnity limits). It will have the effect of allowing a practice of not more than two partners to have a higher maximum excess but would not alter the position for practices with three or more partners.
|Partners||Limit||Current maximum excess||Revised maximum excess|
Defence costs cover, Cyber cover and Run-off cover, do not form part of the minimum standard requirements set out above, but are recommended matters for law practices to consider when arranging their PI Insurance.
Cost of increased cover
A law practice which decides to increase its cover to meet the new minimum standards will wish to ascertain the additional cost involved. Each law practice will be individually assessed by its insurer. However, the Law Society is advised that the additional premium for a two-partner law firm which increases its cover from $1.5 million to $1.8 million is likely to be in the 7.5% to 10% range.
Of course, where defence costs, cyber or run-off cover is also arranged, this will involve an additional premium as well.
The above minimum requirements will take effect from and inclusive of Tuesday 6 April 2021. However, PI insurance cover which meets the present minimum standards and is in place at Tuesday 6 April 2021 may remain in force until the annual expiry date. At that time the cover must, if necessary, be extended to meet the above minimum standards, if disclosure is to be avoided.