New Zealand Law Society - Insurance disclosure

Insurance disclosure

Obligation to disclose professional indemnity insurance arrangements to clients

While not compulsory for lawyers in New Zealand, many choose to hold Professional Indemnity insurance.

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 (PI insurance) arrangements to its clients, including where PI insurance is not held.

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

When the rule was being drafted, the Law Society was concerned to ensure that the disclosure obligation was not too onerous. Because of this the rule permits limited disclosure where the lawyer’s practice holds PI insurance that meets a minimum standard as specified by the Law Society.

Minimum standard from 6 April 2021

Following a review in 2020, the minimum indemnity limit is whichever is the greater of:

  1. $1.2 million per practice; or
  2. $900,000 for each partner (or in the case of an incorporated law firm, for each lawyer who is a shareholder or director) within the practice.

The indemnity limit applies either:

  1. on an aggregated basis to claims made in the policy period with not less than one automatic reinstatement, or
  2. on any one claim basis with no aggregate limit.

The excess payable must not exceed the greater of 1% of the indemnity limit or $20,000.

PI policies ordinarily operate either on an aggregated basis or an ‘any one claim’ basis. An aggregated basis 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 an indemnity limit 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.

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.

Defence costs

The minimum indemnity limits referred to above are exclusive of defence costs. In 2013, the Supreme Court in BFSL 2007 Ltd v Steigrad held that the effect of s9(1) Law Reform Act 1936 is that the charge available to third party claimants has priority over defence costs in respect of amounts claimable under a costs-inclusive liability insurance policy.

Accordingly, law practices are advised to separately insure against defence costs in addition to their indemnity cover.

Cyber cover

It is recommended that law practices consider insuring against cyber risk. A typical cover of this kind includes losses arising from:

  • computer viruses and hacking
  • loss or theft of a law practice’s data
  • computer crime
  • rectification costs in relation to loss of computer records
  • business interruption arising from a cyber event

Run-off cover

It is recommended that lawyers in various circumstances consider taking out run-off cover to protect them against claims arising after the expiry of their standard cover. These circumstances include the following:

  • Retirement of a lawyer in sole practice.
  • Sale of a law practice.
  • Merger with another law practice.
  • Dissolution of a law practice.
  • A lawyer moving from general practice to that of a barrister.

One type of run-off cover is as follows:

  • A policy period of 12 months renewable annually.
  • Cover is the same as that under the expiring policy, including limits and policy excess.
  • Premium is normally 100% of the expiring policy’s premium in the first year with reductions of approximately 10% each year, subject to there being no claims.

Cover is usually held for periods aggregating six years or for as long as the insured considers that there is a risk.

Why are these changes being made?

The changes are to reflect inflation in New Zealand since mid-2008 when the current minimum requirements came into force.

Do I need to change my insurance?

You will need to assess your current insurance arrangements against the revised ‘minimum standards’ as outlined above. If you do not meet the minimum standards, but still want to continue stating that you meet or exceed the minimum standards set by the Law Society, you will need to amend your insurance. 

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.

Do I need to update my client care information?

You will only need to amend your client care information if you no longer meet the minimum standards and choose not to amend your insurance. In this instance you will need to provide full disclosure of your insurance arrangements.

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.

Will the increased cover affect my premiums?

You will need to contact your insurance provider to ascertain any changes in your premiums. 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.

What does it mean by full disclosure?

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 (i) 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.

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