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.
Following a review in 2020, the minimum indemnity limit is whichever is the greater of:
The indemnity limit applies either:
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.
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.
It is recommended that law practices consider insuring against cyber risk. A typical cover of this kind includes losses arising from:
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:
One type of run-off cover is as follows:
Cover is usually held for periods aggregating six years or for as long as the insured considers that there is a risk.
The changes are to reflect inflation in New Zealand since mid-2008 when the current minimum requirements came into force.
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.
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.
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.