PII procedures for client account deficits
Professional Indemnity Insurance Committee
The purpose of this practice note is to set out the procedures to be followed by solicitor firms in order to trigger their professional indemnity insurance (PII) cover where client moneys have been misappropriated from the client account, other than by reason of fraud or dishonesty of the solicitor firm as the insured, such as cybercrime.
Principals of solicitor firms have a personal liability for any deficit of client moneys. This is the case even where such deficit arises as a result of a fraud committed against the firm, such as cybercrime. It is therefore the responsibility of such principals to reimburse to the client account the amount of client moneys fraudulently taken in order to rectify the deficit.
The terms of the existing professional indemnity insurance minimum terms and conditions cover losses suffered by a solicitor firm in circumstances, such as fraud and cybercrime, where the client suffers a loss as a result of this event, and subsequently makes a request or demand for, or intimates an intention to seek compensation or damages from, a solicitor firm in respect of such loss.
The minimum terms and conditions also cover rectification of a deficit on the client account of a solicitor firm, where such deficit is caused other than by fraud or dishonesty of the solicitor firm, and where the solicitor firm has received a written notification of a requirement to rectify the deficit from the Law Society following an inspection of the firm by the Law Society.
It is understood that solicitor firms may wish to cover any misappropriation of client moneys from the firm’s own funds as soon as possible for reputational reasons, the avoidance of litigation, or otherwise. Solicitor firms should ensure that they do not rectify any deficit caused on the client account due to misappropriation of client moneys lost (other than by reason of fraud or dishonesty of the solicitor firm) in advance of a claim by the client, or receipt of a notification or a requirement to rectify the deficit from the Law Society, as the firm’s PII cover will not be triggered and the firm could be left without cover for the loss.
The procedure for triggering a solicitor firm’s PII cover in the event of loss of client moneys, other than by reason of fraud or dishonesty of the insured, are as follows:
- The solicitor firm should notify the Law Society of the deficit on the client account (not due to fraud or dishonesty of the solicitor firm) due to misappropriation of client moneys immediately on becoming aware of same. The Society may also otherwise become aware of the existence of the deficit.
- The Law Society shall carry out an inspection of the firm and produce an investigation report.
- The matter shall be put before the Law Society’s Regulation of Practice Committee for consideration, with the principals of the firm attending the meeting.
- The Regulation of Practice Committee may direct that an application be made to the High Court for an order requiring the solicitor firm to rectify the deficit on the client account with a stay of 14 days, or such other stay period as the committee deems appropriate.
- The solicitor firm shall be notified of their requirement by letter from the Law Society to rectify the deficit within the stay period, or the Law Society will apply to the High Court for an order for rectification. This letter is defined under the PII regulations as the ‘notification of a requirement to rectify’, which definition also sets out the content of the letter.
- PII cover for the firm is triggered when the ‘notification of a requirement to rectify’ is received by the solicitor firm from the Law Society, whether the solicitor firm then choses to rectify the deficit using their own funds (and recovers from the insurer) or the firm’s insurer rectifies the deficit.
- If the deficit is not rectified by either the firm or the insurer within the stated stay period, the Law Society’s application to the High Court for an order for rectification will proceed.
The following should be noted:
- The PII coverage referred to in this practice note solely refers to deficits on the client account. If non-client moneys are misappropriated from a non-client account, this is not a covered event. Consequential first party expenses, such as PR and client notification costs, are also not covered. Solicitor firms should obtain separate cybercover should they wish to insure against such events.
- Deficits on the client account caused by fraud or dishonesty of the solicitor or firm as the insured are not covered.
- Any misuse of this coverage for the benefit of a solicitor, clients, or third parties is likely to be dealt with through ordinary insurance law principles, such as unjust enrichment and subrogation.