Instructed on a big deal? Need additional PII cover?

A client has just called to instruct you on the purchase of a commercial property. The purchase price is £6 million.

You have looked after this client for years, but they have never instructed you on such a significant transaction. You are very keen to act for them, but your firm only has the standard £3m compulsory Professional Indemnity Insurance (PII) cover. What should you do?

Think carefully before you accept instructions

First and foremost, it is important to consider this issue and all the potential implications before you accept instructions. You do not want to find yourself in the uncomfortable situation of having started work on the transaction and then enduring sleepless nights when you realise there is no practical PII solution and the client will not agree to cap your liability. Whilst increasing your PII might be an option, underwriters may be uncomfortable about increasing the limit mid-transaction. Don’t agree to take the work on until you have considered the issues discussed below.

What is the regulatory position?

Always ensure that you understand your professional obligations, starting with clause 7 of the SRA Principles under which you have an overriding obligation to act in the best interests of your client.

More specifically, clause 3.1 of the SRA Indemnity Insurance Rules requires your firm to have “adequate and appropriate cover in respect of current or past practice taking into account any alternative arrangements the body or its clients may make.”

When assessing whether your cover is “adequate and appropriate”, start by considering what the maximum loss could be if something goes wrong. Could it be the full value of the underlying property, or something less, or even more? It is important to consider this broadly and it will vary depending on the work area and the nature of the transaction. In the example above, will the full £6m be held in your client account at any point? What if the funds were unwittingly intercepted by a fraudster? Given the potential for such a scenario, the prudent approach would be to arrange an increase in cover. For further discussion regarding the issue of “adequate and appropriate cover”, including some case studies, we refer you to the SRA’s Guidance Note available here.

Can the firm get additional PII cover to cover the transaction on a one-off basis?

This question is often asked by law firms when they receive instructions on a matter where the value involved is beyond their current limit of indemnity, but there is no PII market that offers cover to solicitors for a one-off transaction. While it might seem a straightforward solution, it is not an option that is available to respond to this scenario.

Can the firm purchase an excess layer policy?

The firm could consider purchasing an excess layer (sometimes referred to as top-up) policy. In the example outlined above, a firm might want to consider purchasing an additional £3m of cover that would be placed in excess of their existing £3m compulsory cover. This excess layer cover would apply to all work that the firm undertakes and potentially opens the way for the firm to consider accepting instructions for other high-value work, making this additional spend more viable.

However, there is a very important point to consider about this option. Like your primary policy, excess layer cover is written on a “claims made” basis. This means that the policy only provides cover for claims made, or circumstances notified, during the term of the policy. The firm will therefore need to continue to purchase the excess layer policy for as long as you consider it will be exposed to a potential claim. At a minimum, this is likely to be the standard limitation period of 6 years, but it could of course be longer if there is potential for a date of knowledge argument to extend limitation up to the 15 year longstop[1]. The cumulative cost of ongoing cover could quickly exceed any benefit to be derived by the firm from undertaking the transaction.

If you do decide to purchase additional cover, then you should also be prepared to provide details of the reasoning behind the request and some narrative of the expertise within the firm to handle a transaction at this level.

What about limiting liability?

Limiting your liability is also an option, but it can be difficult to get this right. There are various regulatory requirements in relation to capping liability and the client will be protected by general consumer law designed to ensure that the terms of any contract for service are not unfair.

For more information on this we again refer you to the SRA’s Guidance Note entitled “Adequate and appropriate indemnity insurance” available here. At Howden we have also previously published a useful article on limiting liability, available here.

Client is happy to proceed knowing we only have £3m cover?

If you do not have adequate cover, then you need to discuss the position with your client before you proceed.  There is then the conundrum of what to do if the client says that while they won’t agree to a cap on liability, they have every confidence in the quality of your work and are comfortable to proceed knowing you only have £3m of cover.

We would urge caution in such a scenario. Firstly, you must be satisfied that it is in the best interests of the client for you to go ahead in these circumstances[2] and you must ensure that you have provided them with the relevant information in a way that they can understand[3]. Even then, if something does go wrong, there are no guarantees that the client will walk away from any losses that exceed your compulsory £3m limit. The client might pursue the firm for its uninsured loss, which could lead to an insolvency, necessitating the closure of your firm. Is it worth the risk?

Referral to another firm

Sometimes the best solution is to decline the work and suggest that the client should instruct another firm. If the cost of securing additional PII cover is too high, and the risks involved in capping liability or simply proceeding are too great, then this is the prudent option. Some firms fear losing the client in these circumstances, but the converse can be true. Being open with your client can go a long way to securing long-term, future loyalty.