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What Every Young Lawyer and New Law Firm Owners Should Know about Professional Indemnity Insurance &

Professional Indemnity Insurance (“PII”) was made compulsory for every legal practitioner under section 78A of the Legal Profession Act 1976 (“LPA”).  Amendments to the LPA in 1992 enabled the introduction of the Malaysian Bar's mandatory PII Scheme allowing every practicing advocate & solicitor insurance cover under a single and uniform Master Policy, regardless of their claims history.  As mistakes do happen, the PII Scheme ultimately serves to protect the interests of the Bar, its members and the public in the circumstances where professional negligence claims arise.  This article serves to give one a brief outline of the scheme and reference should always be made to the policy documents for that particular year.
 
2019 PII Premium & What it Covers
 
The PII premium, as of 2019, stands at RM1,254 per advocate & solicitor inclusive of contribution to the Malaysian Bar's Self-Insured Fund.  It is important to note that a law firm is under no obligation to pay a legal practitioner’s annual premium unless contracted to do so and thus, it is important to clarify this prior to signing a letter of employment with the firm.
 
The minimum Mandatory Limit of Indemnity under the current policy stands at RM250,000 for a sole proprietor.  For each additional advocate & solicitor, the Mandatory Limit increases RM50,000 subject to a maximum limit of RM2,000,000.  Subject to amounts specified in Clauses 7 and 8 of the Certificate of Insurance (“COI”), the policy also indemnifies the firm of claimant's costs, defence costs and even mitigation costs subject to the firm’s:
  1. providing prior written notice to the Broker during the period of insurance of:
    1. the potential civil liability;
    2. the costs required to mitigate the potential civil liability; and
    3. the probability of an eventual claim made against the firm should the firm fail to take such mitigating action;
  2. complying with the terms and conditions of the insurance applicable to claims;
  3. all mitigatory actions are within the spirit of the Rules & Rulings of the Bar Council; AND
  4. the insurer has expressly consented to the mitigation costs in writing.
 
The Malaysian Bar's PII insures Members as principal holders of the policy (“the insured”) as well as non-members such as employees, the estates and legal representatives of the aforementioned against civil liability from claims arising out of a legitimate legal practice, including pro bono work, undertaken within the jurisdiction and which are first made against the insured during the Period of Insurance.  Subject to the requirements of Clause 11 of the COI, the firm’s PII will indemnify the firm from any claims arising out of misconduct unless the advocate & solicitor or employee was a party to or condoned the misconduct which gave rise to the claim.
 
Making a Notification
 
For some reason you have failed to issue your client's claim within the limitation period or you did not to attend a court hearing - what do you do next?  Don't panic!  Own up to your mistakes!  Inform the partner-in-charge immediately (if the firm is a partnership).
 
The partner (or sole proprietor) is responsible to make a notification to the Broker about the claim (or potential claim) in a written letter containing a brief account of events.  Fax or email the letter to the Broker and proceed to speak with a representative of the Broker to confirm their receipt of the firm’s notification.
 
Be aware of the time limits to make a notification as set out in Clause 12 of the COI:
  1. as soon as reasonably practicable but no later than 60-days of any claim first made against you during the Period of Insurance; or
  1. as soon as practicable but no later than 60-days of any notifiable circumstances of which you first became aware of during the Period of Insurance.
 
What are the Notifiable Circumstances?
 
Notifiable circumstances are any facts, circumstances or events which you reasonably anticipate could give rise to a claim against you in the future.
 
Any actual claim that arises out of the originating cause of the circumstances notified within the 60-day period mentioned above will be treated as if it had been made against you or the firm during the Period of Insurance.
 
Once the notification is received, the Broker will acknowledge receipt by way of a letter, usually within three working days of the notification and provide the firm with a Claims Notification Form which must be completed and returned to the Broker as soon as practicable.  A third-party Claims Administrator, who serves as a liaison between the firm and the Insurer, will then respond with a Letter of Acknowledgment which will explain:
  1. the firm’s rights;
  2. the documents and evidence that are required in support of the notification;
  3. the firm’s obligation to pay the Base Excess; and
  4. explanation about the coverage of the policy, its terms and conditions, as well as the obligations under the COI including:
    1. the firm’s duty to co-operate and provide a full and frank disclosure (Clauses 13 to 15);
    2. the firm’s duty to not admit liability and to not incur unreasonable costs (Clause 16); and
    3. the Insurer's prerogative to take conduct of the claim and to decide whether to proceed with a hearing or to settle out of court (Clauses 17 to 19).
 
What is Base Excess?
 
Base Excess is a monetary amount of which the firm is required to contribute to out of pocket before the Insurer provides indemnity under the PII policy.  The amount depends on the size of the law practice and starts at RM10,000 for a sole proprietor up to a maximum of RM250,000 for firms with more than 48 lawyers.
 
A firm’s Base Excess is governed by Clauses 7 to 10 of the COI.  There is an increased Base Excess for claims arising out of conflicts of interests, conveyance and the dishonesty of a partner.  
 
Considering that there are no claims loading imposed when making a notification, there is no reason not to make a claims notification even if the claim or potential claim is within the firm’s Base Excess.  Failing to do so may be a costly decision as it may require the firm to pay out of the firm’s own pocket for any costs and damages resulting from the unnotified claim.
 
It is crucial that you familiarise yourself with the PII Policy Documents - Master Policy and COI.  Refer https://www.praktis.com.my/pii/policy-documents.  
 
Risk Management
 
Despite the availability of the PII Scheme, negligence claims against you may be detrimental to your bank account (think Base Excess!) and will certainly cause a dent to your reputation as a professional.  As a fledgling advocate & solicitor, there is no better time to incorporate and implement best practices in your professional life.  You should at the very least consider the risk areas which might expose you to liability and identify procedures that leave little room for a malpractice claim.  You should always ensure:
  • Accounts books are up-to-date:  Enter information contemporaneously with regular reviews by external auditors to ensure that your books are accurate.
  • Diary is organised:  Missing key dates, in particular, dates on which the limitation period expires can be costly.  Set-up email calendars to sync all your dates and appointments on your mobile phone and work desktop so there should not be an excuse for missing a deadline!  It would be wise to keep your personal and professional diaries separate as to not clutter them up.
  • Implement a file management system: Keep track of every file and their required tasks.  Keep backups and have proper file disposal processes that comply with Rules and Rulings of the Bar Council, and ensure that the process is capable of protecting your clients’ personal information.
 
The Bar Council PII & Risk Management Department has put together a variety of practice tools including guides for practice management, specific practice area checklists and a free newsletter titled Jurisk! which highlight common risks in legal practice and suggests ways to minimise them.  Although one cannot take a one-size-fits-all approach to risk management, these tools will undoubtedly be useful in guiding you to develop and incorporate comprehensive yet achievable risk management procedures in your practice.  These procedures may even be the fine line between you having to make a notification of a claim or otherwise.
 
If you require further clarification, contact Bar Council PII and Risk Management Department at 03-2032 4511.