Should professional indemnity insurance be mandatory?

Paul Castellani of Kennedys assesses a recent IBA report aimed at assisting bar associations and regulatory bodies on professional indemnity insurance issues

Paul Castellani Photo courtesy of Kennedys

The International Bar Association recently published a report on the concept of professional indemnity insurance in the legal profession, the results of work by a subcommittee of the IBA’s Bar Issues Commission and the IBA’s Legal Policy & Research Unit.

The report, entitled ‘IBA International Principles on Professional Indemnity Insurance for the Legal Profession’ highlights the differing regulatory and legal obligations to purchase compulsory professional indemnity insurance and identifies important factors for bar associations to consider when assessing the need for mandated insurance.

England and Wales has one of the most stringent requirements for professional indemnity insurance, with the Solicitors Regulation Authority (SRA) requiring all incorporated firms to purchase at least £3m of insurance per claim on a standard wording from a small selection of insurers, with limited exclusions. This compares with other mature legal markets such as the US, where only two of the 50 states require firms to maintain insurance.

Bar associations and regulators will no doubt consider the particular nuances of their market before providing any recommendations or adopting changes to their current practice. In some markets, there is a greater deference to professionals or a nascent litigation culture meaning that claims are less common or unlikely. The adoption of compulsory professional indemnity insurance may change behaviours – making claims more likely (if a claimant perceives an insurer will pay rather than the professional itself).

The report identifies eight core principles for bar associations and regulators to consider including integrity, competence, risk and maintaining public confidence. The SRA places considerable focus on the latter, with a solicitor being obliged not just to purchase insurance but also reveal its details to clients upon demand.

The IBA report defines their core principles as follows:

1.     Independence – Professional independence is integral to legal practice and it is important that bar associations and regulatory bodies protect lawyers against external pressures that could affect this principle. Requiring lawyers to have insurance can provide clients with assurance that their lawyer will act independently.

2.     Competence – Lawyers must be competent to perform legal services, providing the required level of care, skill and diligence to their clients’ cases. Malpractice insurance can protect lawyers against professional liability claims, but it may not be necessary for such insurance to be mandatory, for example, in fields where the risk of mistakes and exposure for negligent results is low.

3.     Integrity – Lawyers should maintain the highest standard of honesty, integrity and fairness towards clients, the court and colleagues. Acting in accordance with these standards mitigates the risk of fraud allegations, which are excluded in many professional indemnity policies.

4.     Risk – Requiring lawyers to purchase and maintain professional indemnity insurance can mitigate the financial risks they face in cases of cyberattacks and investigations into the handling of client funds. In jurisdictions where insurance is not mandatory, expensive litigation claims could cause firms to become insolvent.

5.     Responsibility – Lawyers have a responsibility to familiarise themselves with local requirements for professional indemnity insurance and any obligations to disclose this information. It is also legal practitioners’ duty to understand insurance-specific terminology to ensure they are purchasing the correct cover for their needs.

6.     Communication – Lawyers should treat client interests as paramount. It is therefore considered good practice in many jurisdictions for lawyers to ensure that they secure adequate insurance cover against claims based on professional negligence or malpractice.

7.     Confidentiality – Attorney-client confidentiality is a core value of the legal profession; lawyers must comply with all legal and ethical requirements related to confidentiality, and this applies to both present and former clients.

8.     Maintaining public confidence – Regardless of professional indemnity insurance status, legal practitioners have a role to play in upholding public confidence in the judiciary. Bar associations and regulatory bodies should emphasise to lawyers the duties owed to their clients to ensure that the public maintains confidence and trust in the legal profession.

We suggest other factors for regulators to consider will include: whether lawyers in a particular jurisdiction routinely handle client money (rather than a notary or escrow agent being commonly used), and whether lawyers are permitted to limit their liability to clients (and the enforceability of such limitations).

Another key factor is the extent to which there is available cover in a particular territory at an affordable price which would not need to be passed on to the client via an increase in rates or fees.  

Our conclusion is change may become client driven. If clients (particularly multinational entities) make it clear that their instructions are conditional upon the lawyer having appropriate insurance in place either generally or on a ‘per project’ basis, that may be the most likely driver of changed insurance behaviours.  

Paul Castellani is a partner at Kennedys in London where he specialises in professional liability.

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