In this article, Vedashree Kurukuri, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on professional liability insurance for lawyers

Introduction

Ivamy who is an authority in insurance law has defined a contract of insurance as a “contract whereby one person called the insurer undertakes in return for the agreed consideration called the premium, to pay to the other person called the assured, a sum of money or its equivalent on the happening of a specified event”. Insurance may be classified into two types; general insurance and life insurance. Life insurance refers to insuring the life of an individual. In most instances, it acts as a protection and as a mode of investment which is primarily dependent on the happening or the non-happening of the specified event. The unique feature of life insurance is that it doesn’t involve the principle of indemnity which forms the crux of all other forms of insurance. General insurance refers to all other forms of insurances which include fire insurance, marine insurance, professional liability insurance etc.

What is professional liability insurance?

Professional liability insurance is also known as professional indemnity insurance or errors and omissions insurance. This insurance covers the insured with respect to any action that may arise due to negligence, malpractice, errors or omissions that arise during the performance of their professional duties. The professional liability insurance only covers any civil liability that a professional may incur. It does not include a claim arising out of criminal liability. Professional negligence or misconduct may lead to bodily injuries (generally includes medical practitioners) or financial loss (generally included chartered accountant, lawyers etc.,) or both bodily injury and financial loss (generally covers architects).

The cover provided by the insurers against professional liability includes the legal costs and expenses for the purpose of trial and any amount of civil damages or settlement that may have been awarded against the professional. Indian law doesn’t provide any specific statute to regulate the various aspects of professional liability insurance.

Professional Liability Insurance in India

The professional liability insurance is not very popular in India. Neither the Insurance Act nor the specific professional practice rules of various professions mandate taking this insurance cover. It is left to the will of the individual or the service provider to take out the policy. While most medical practitioners and medical establishments necessarily opt for such an insurance cover due to the high number cases of medical negligence that arise, the same does not apply to lawyers and law firms because they hardly witness any cases of negligence being filed against them and hence are not prone to taking professional liability insurance. The United Kingdom makes it necessary for solicitors to take out and maintain professional indemnity from the 1st October 2013. This is due to the high number of cases that are filed against the lawyers, it also acts as a means of securing the position of the client and not just the lawyer. The same is not the position in India as there is no such mandate that needs to be followed the lawyers.

Professional Liability Insurance Policy Coverage

There are no rules or regulation to govern the extent of the coverage that may be provided by the insurers. Most of the insurers specify in their policy the extent of liability that they are willing to cover. The extent of coverage may be summarised to include the following:

• The legal liability which a professional may incur due to any financial loss that the client may have suffered due to the breach of professional duty or negligence by the lawyers.
• The policy also covers law firms as they are in the business of providing professional legal services. It is nowhere mandated that either legal professionals or law firms must take out a professional liability insurance.
• The policy cover extends to group insurances in certain cases. A law firm may take a group Professional liability insurance against all its employees in order to facilitate any claim that may arise against the firm due to the action of any one or more of its employees.
• The insurance claim amount is inclusive of the costs, fees and expenses incurred in defending the insured and any amount of compensation, damages or settlement that is awarded to the insured.

Exclusions

Like any other policies, Professional liability insurance policies also provide for certain exclusion which would not be covered by the policy. The following are the most common exclusions:

• If the claim has arisen due to any criminal act or an act which has been done in violation of any law. This means to say that any criminal act leading to the claim or any criminal liability that arises will not be covered by the insurer.
• If the breach of professional duty is due to rending of such services while under the influence of intoxicants or narcotics.
• Third-party public liability is not covered under professional liability as it has separate policies for the same.
• Those claims which arise because of infringement of intellectual property rights of the client.
• If the claim is due to willful or intentional non-compliance with any legal requirements which are essential to have been complied with.
• The liability covered does not include fines, penalties, punitive and exemplary damages.
• Pure financial loss in terms of loss of goodwill or loss of market.
• War and nuclear perils.

Who comes within the meaning of a professional?

In order to understand who can take such an insurance, it is necessary to understand who is a professional for the purpose of insurance. The term “professional” has not been defined by any statute currently in force. The Oxford Reference Dictionary defines a professional as:

1. relating to or belonging to a profession,
2. engaged in an activity as a paid job rather than an amateur,
3. Competent,
4. a professional person,
5. A person who is very skilled in a particular activity.

This means that any person who is an expert or skilled in a field or practising a certain profession would come within the purview of the term “professional”. This definition is very broad and makes it difficult to identify the specific categories of people who can be referred to as professionals for the purpose of professional liability insurance. In common parlance, doctors, chartered accountants, lawyers, architects are understood to mean professionals.

Professional liability insurance is provided by various private insurance companies. Analysing the policies, the term “professional” can be understood to include “architects, engineers, doctors, lawyers, chartered accountants, and medical practitioners, and services such as medical establishments, information technology companies, financial institutions, media companies, law firms and such other professional service providers.”

The absence of a proper definition for the term “professional” creates ambiguity making it difficult to limit the scope of professional liability insurance and who can avail the same. Though the individual policies provide the categories of people who are covered, it varies from one insurer to another. This is detrimental to those categories of professionals who are not provided with the option to avail the same due to non-recognition of them to be professionals. It is essential that the term “professional” is defined at least for the purpose of insurance in order to prevent any ambiguity and to ensure that no profession is left out from being covered under the professional liability insurance.

Action against professional misconduct

Professional misconduct refers to those actions which are outside the purview of the services, pieces of advice rendered by the professionals and also includes such acts which are illegal and immoral.

Let’s take the example of lawyers

It is not a common practice by lawyers and law firms in India to take out a professional liability insurance. One of the main reason for this being the lack of awareness. Not all lawyers or law firms are aware that professional liability insurance exists, at the same time the clients are not aware of the option to sue their lawyers or the law firms for breach of professional duty or negligence. There have hardly been any cases where the clients have sued their lawyers or law firm for providing negligent services. The question that arises here is where should a client approach in case of deficiency of service by the lawyers or law firms?

The Advocates Act, 1961 provides for an aggrieved person to file a complaint against an advocate before the disciplinary committee of the State Bar Council or the Committee to take a Suo Moto action. This leads to carrying out disciplinary proceedings against the advocate who is accused of being guilty of professional neglect or misconduct as the case may be. This doesn’t provide any remedy for the aggrieved person as it primarily deals with the conduct of the advocate.

The other possible remedy could be to approach the consumer redressal forum. The purpose of enacting the Consumer Protection Act, 1986 is to ensure speedy redressal of consumer disputes. The question whether the services provided by lawyers falls within the purview of “service” and whether the client are “consumers” for the purpose of the act has been answered in positive by the National Consumer Redressal forum in the case of D.K.Gandhi v. M.Mathias. The case was initially filled in the state dispute redressal forum where it was held that the services provided by lawyers are by means of a unilateral agreement which is the power of attorney and hence the service cannot be challenged in the Consumer forums. An appeal was made to the National Consumer redressal forum which held that the decision of the state forum was erroneous and concluded that the services provided by lawyers fall well within the ambit of the consumer disputes and hence may be challenged in the consumer forums. This led to the filing of an SLP with the supreme court which allowed the petitions and ordered a stay on the order of the National Consumer redressal forum. As a result, the current position is unclear as to where the services provided by a lawyer can be challenged for professional misconduct. This makes it necessary to settle the position either by means of a statue or by means of rules which are specific to the regulation of claims against professional services of lawyers.

Source of Security

India is a developing country which is growing very rapidly. Ever since the liberalisation of the foreign investments in the Indian market, the number of foreign players has also increased. The legal profession does not have a provision for foreigners to practice but these foreign players have taken the role of a client for many lawyers and law firms. The scope of the profession has crossed the boundaries of the domestic law. Many law firms deal with domestic and foreign clients. The foreign individuals and firms are not new to the concept of suing their lawyers. In fact, it is mandatory in many countries for the legal professionals to take out and maintain a professional liability insurance. This had to led to many foreign clients asking their representing law firms to take a professional liability insurance. It showcases to the client, the ability to pay in case of an award of damages or compensation being issued against the firm.  The Professional Liability Insurance acts as a security to the clients as well as the legal professionals, even more so in cases where the amount of liability is high. Even one bad lawsuit against the law firm can affect the rest of the cases they handle and negatively impacts its reputation. The clients would be more confident about the firm when they are insured against professional liability. The limited instances of cases being filed against the legal professionals should not become a reason for them to not take an insurance cover against professional liability.

Suggestions

Life insurance, marine insurance and fire insurance have specific legislations which have been enacted for their regulation. The growth in the insurance sector and the economic development has led to the increase in the importance of professional liability insurance. It is necessary that a legislation or certain rules must be made in order to regulate professional liability insurance. They must focus on defining the term “Professional” in order to negate any ambiguity and also to identify the specific categories of people who would be covered by the insurance. It must be made mandatory to take out a professional liability insurance at least if a lawyer or the law firms deal with cases whose value exceeds a certain amount. One other aspect that must be clarified is which forum can the aggrieved party approach in order to file a suit against a lawyer or the law firm.

Conclusion

The economic development is a combined result of growth in all sectors including the insurance sector. Professional liability insurance for lawyers is still very uncommon. Its relevance is not limited to the legal professionals but also is a protection for their clients. It does contain the aspect of financial security to both the parties because the insurance coverage claim that arises in case of civil liabilities, extending to the legal costs and any damages, compensation or settlement amount that must be paid by the legal professional. With the increase in the foreign players in the market, individual cases are worth large numbers. In cases where the suit is filed against a lawyer or a law firm by clients who claim to have had a financial loss amounting to millions, it would lead them to bankruptcy if not covered by professional liability insurance. It would further lead to a loss of reputation and also adversely affect the other clients. Without the coverage of professional liability insurance, neither the law firm is financially safe, nor the clients have any assurance of recovering their loss when a suit has been filled. Hence, in the current scenario, it is important that a regulation is made for professional liability insurance and the that it is made mandatory for lawyers and law firms to take out the insurance.