StopLoss A Publication of LawCover also available at www.lawcover.com.au May 2007 PP241082/00014 CONVEYANCING CLAIMS REMAIN HIGH, IDENTITY FRAUD ON THE INCREASE C laims arising out of conveyancing have consistently contributed a significant cost to LawCover claims. Recent examples of allegations made advice and document errors. Prudent risk management steps are: Define your retainer in your cost where claims have been settled are: agreement and fee disclosure; Solicitor acting for Vendor Advise the client of any risks if certain steps are not taken or Failure to include correct attachments to contract for sale certain enquiries made; Failure to issue a notice to complete and issuing Keep written records of your an invalid notice to complete advice and the client’s instructions; by Claire Edwards, Failure to insert conditions in contract for sale in Use check lists and have a system Chief Claims Solicitor accordance with client’s instruction of regular file reviews; Drafting errors in contract for sale Review your precedent letters and documents regularly; Undertake appropriate CLE and send support staff Solicitor acting for Purchaser on CLE and training courses; Failure to advise of grounds for rescission of contract Do not undertake work in areas where you do not Failure to undertake correct searches feel confident that you have the requisite knowledge Failure to advise on zoning restrictions or expertise unless you are prepared to spend the time researching the area; and Failure to rescind the contract within the agreed cooling off period Consider referring out some specialist areas, for example GST. Failure to advise of the existence and effect of notices from council regarding rectification work required The 2005/2006 policy year has seen a reduction in the cost Failure to advise purchasers that the property was of personal injury claims. This could be due to the reduction heritage listed prior to exchange of contracts in claims arising out of the legislative changes to the workers’ compensation regime in November 2001 as this comes to The majority of claims arise as a result of poor an end and the decrease in personal injury litigation. communications, in particular, failure to give adequate continued on back page NO CLAIMS LOADINGS ON NOTIFICATIONS H istorically, LawCover has applied claims discounts and loadings to premiums based on a sum of the total dollar value placed by panel solicitors on all claims and a more favourable claims history for the firm. It is essential that firms do not avoid notifying claims or circumstances through fear of gaining a claims loading. notifications over the relevant five year period. While it has Accordingly, LawCover has changed its policy on claims been rare for a dollar value to be placed on notifications, loadings so that the notification of circumstances will it has been possible for a firm’s claims loading to be not contribute to or generate a claims loading for a influenced by a notification when it is clear that the notified firm, nor will it impact on a firm’s no-claim bonus. circumstance will lead to a claim of significant cost. Even notifying a claim of modest proportions may not LawCover encourages the early notification of LawCover Pty Ltd have an impact on your no-claim bonus. ABN 48 003 326 618 circumstances by firms. This allows for early AFSL No: 236051 intervention which, in our experience, results in an If you are considering notifying a circumstance or a LawCover Plus Pty Ltd earlier and more cost-effective resolution, and hence claim, you can speak to a claims solicitor on 9264 8855. ABN 87 082 830 751 AFSL No: 236052 Conveyancing claims remain high, identity fraud on the increase 1 LawCover Insurance Pty Ltd ABN 15 095 082 509 In this edition… No claims loadings on notifications 1 Level 12, 580 George Street Why independent contractors are not covered by your PII policy 2 Sydney NSW 2000 Australia Top Up Insurance and the Limitation of Liability Scheme 3 DX 11527 Sydney Downtown Telephone (02) 9264 8855 2007/2008 PII Premiums 3 Facsimile (02) 9264 8844 Claims statistics update 4 www.lawcover.com.au WHY INDEPENDENT CONTRACTORS ARE NOT COVERED BY YOUR PII POLICY Consultants Sole Practitioners Taking Leave Many solicitors identify themselves as When a sole practitioner takes a leave of absence some of their consultants with firms; a consultant who is an options regarding maintaining their practice include: employee of a firm within the definition in the 1. Closing the practice during their absence. Whilst this would not be Policy will be covered. An independent economically viable for extended breaks it may be a consideration contractor with the title consultant, generally for a long weekend or whilst the courts are closed over Christmas. speaking, will not. 2. Engaging a locum. Where the sole principal of a firm requests a Accordingly if a claim arises out of the services locum to manage their firm during a period of absence, many by Stuart Westgarth, Underwriter, provided by an independent contractor, the principals believe that their policy will indemnify the locum against Insurance & Business contractor would not be able to claim under any claim that may arise out of the locum’s actions. LawCover’s view Development the firm’s policy. If the independent contractor is that a locum is not an employee of the firm, but rather the locum has not maintained their own Professional Indemnity Insurance is an independent contractor and accordingly is required to maintain policy, not only are they potentially in breach of their practicing their own PII policy. certificate but they could find themselves being held personally liable for their actions with no protection from an insurance policy. 3. Employing a solicitor on a short-term basis. Care should be taken when considering potential solicitors to manage your firm High Court Ruling – Vicarious Liability & Independent during your absence. If a claim arises out of the actions of your Contractors employee during your absence you are vicariously liable for those The High Court of Australia revisited the issue of vicarious actions. The potential financial ramifications of this include the liability and independent contractors when it handed down its payment of your excess and potential claims loadings to future decision on Sweeney v Boylan Nominees Pty Limited (2006) HCA 19 in Professional Indemnity Insurance premiums. May 2006. LawCover recognises that everyone needs to take a break from work each year. However, solicitors managing their own businesses should The facts of the case are that the door to a refrigerator had recently make preparations well in advance. Where a locum is going to be been reported as loose by the operators of a BP service station to engaged, the principal of the firm should obtain a copy of the locum’s Boylan Nominees Pty Limited (Boylan) being the owners of the Professional Indemnity Insurance policy to ensure cover will be in refrigerator. Boylan in turn had requested Mr Comninos, a place for his clients should a claim arise out of the locum’s activities. mechanic, who occasionally did work for them to attend the service station and repair the door. Mr Comninos attended the service station, Gross Fee Income (GFI) and Independent Contractors effected some repairs, showed them to the operators and left. When a firm is completing the LawCover Premium Rating Later that same day, Mrs Sweeney attended the service station and Information Form to enable LawCover to calculate the premium for suffered injuries to her head, neck and hand when the door to the renewal of the firm’s Professional Indemnity Insurance premiums, it is refrigerator broke. important that the firm read the entire definition of GFI. Payments to independent contractors can be deducted from a firm’s GFI, and Mrs Sweeney successfully sued Boylan in the District Court of the independent contractor should then include in their GFI any NSW. Her case against the owners and operators of the BP Service fees paid to them by the firm for their services. Accordingly, there is Station was dismissed. Boylan took the matter to the NSW Court of no double counting of any fees provided to LawCover. Appeal which overturned the District Court decision. The Court of Appeal held that Boylan was not vicariously liable for the negligence Conclusion of the mechanic. Sweeney was granted special leave to appeal to the The High Court decision in Sweeney v Boylan Nominees Pty Limited in High Court. May 2006 assists in clarifying that a firm will not be liable for the By majority, the High Court affirmed the distinction between employees, actions of an independent contractor who provides services to the for whose conduct the employer will generally be vicariously liable, firm and/or its clients but not as an agent of the firm. However, the and independent contractors, for whose conduct the person High Court does refer to other cases where a principal was found engaging the contractor will generally not be vicariously liable. The liable for the acts of an independent contractor where the majority noted in their decision at paragraph 26, “But the wider independent contractor was acting as the principal’s agent (properly proposition that underpinned the argument of the appellant in this so called) and where the conduct of which complaint was made was case, that if A “represents” B, B is vicariously liable for the conduct conduct undertaken in the course of, and for the purpose of, of A, is a proposition of such generality that it goes well beyond the executing that agency. bounds set by notions of control (with old, and now imperfect The Law Society of NSW classifies solicitors as either principals or analogies of servitude) or set by notions of course of employment.” non-principals. The registration of a solicitor as a non-principal at a The High Court of Australia upheld the Court of Appeal’s decision firm does not mean that the solicitor is considered by law to be an by a 5 – 1 majority. The High Court confirmed that Boylan was not employee of the firm. Where a solicitor or firm requires clarification vicariously liable for the actions of Mr Comninos as it had engaged as to their cover in the event of a claim, they should complete the Mr Comninos as an independent contractor who maintained his consultant’s checklist available for download from LawCover’s own business and he was not an employee or, importantly, an agent website: www.lawcover.com.au and fax the completed form to of Boylan. LawCover on 02 9264 8332. TOP UP INSURANCE AND THE LIMITATION OF LIABILITY SCHEME S ection 406 of the Legal Profession Act 2004 requires that every solicitor in New South Wales must have professional indemnity Multiple Claims The limitation applies to each claim and not all claims arising out of a single event. The Professional Standards Act 1994 provides that an insurance coverage in order to obtain a practising action brought by two or more claimants relating to the same act or certificate. LawCover Insurance provides omission constitutes more than one claim for the purposes of the practitioners with their compulsory $1.5 Scheme, unless the interest of the claimants is a joint interest. million primary layer of professional However, the aggregation clause of the LawCover policy is broader indemnity insurance which is inclusive of than the aggregation provisions under the scheme; defence costs. This is the minimum by Janice Purvis, Risk requirement and LawCover can arrange up to “...a single claim means: Services Manager an additional $18.5 million of cover inclusive (a) all claims by one or more claimants that arise from the same of defence costs. Professional indemnity insurance is an important act or omission; weapon in our risk management arsenal. As such, when organizing (b) all claims by one or more claimants that arise from one or the necessary insurance for a legal practice, careful consideration more related acts or omissions; needs to be given to ensure the appropriate coverage is in place. (c) all claims by one or more claimants that arise from one or more acts or omissions in a number of related matters or It is therefore also necessary for practitioners to assess whether their transactions; or particular firm requires additional Top Up Insurance above the (d) all claims by one or more claimants that arise from one $1.5 million primary layer. This will obviously involve an assessment matter or transaction.” of their clients and matters in order to understand any additional exposure to the firm. There is potential for a practitioner to be liable for multiple claims under the scheme but to have the benefit of only one limit of indemnity under Another important aspect to obtaining appropriate protection for the the policy. Again, a practitioner will be personally liable for any gap. practitioner is the New South Wales Law Society Solicitors’ Limitation of Liability Scheme under the Professional Standards Act 1994. Exclusions The primary aim of the practitioners joining this scheme is to limit The Scheme does not apply to a claim made under the Trade Practices Act the liability of their firms, but more particularly to prevent exposure or other Commonwealth legislation. Solicitors are sometimes sued with respect to a practitioner’s personal assets. It is of paramount for a breach of Section 52 of the Trade Practices Act (misleading or importance to all practitioners that their financial well being, and that deceptive conduct). This liability does not have the benefit of the of their families, is not exposed to any claim arising out of their Solicitors’ Scheme. business pursuits. It is advisable that every practitioner re-evaluate and reassess their professional indemnity coverage each year. An amendment was made to the Trade Practices Act by the Treasury Legislation Amendment (Professional Standards) Act 2004 to bring Section Some major aspects of the scheme which may affect a member firm 52 claims within the Professional Standards Law of the State but only and lead to the consideration of additional insurance coverage over in relation to a scheme that was prescribed by the regulations at the and above your compulsory $1.5 million are: time of the contravention. The New South Wales Law Society Solicitors’ Scheme has not yet been prescribed. Liability Limitation Your firm’s limitation under the Scheme may be greater than This article does not address all the issues that may be relevant to $1.5 million. Damages are capped at different levels depending on your firm with respect to the interaction between the Solicitors’ the number of principals, though it is open to a firm to request that Limitation of Liability Scheme and the LawCover Compulsory a higher cap apply. Also note that the cap is determined by the Professional Indemnity Insurance Policy. number of principals in the firm when the act or omission giving I recommend that all practitioners give this careful consideration rise to the claim occurred, which may be many years before the and obtain appropriate advice on the insurance cover for their firm. claim is made. Defence Costs Clause 3.2 of the Scheme (when read in conjunction with the Act) 2007/2008 PII PREMIUMS limits the liability of a person in a law practice with three or fewer LawCover is pleased to announce that there will be an overall principals (being 96 percent of NSW law firms) at $1.5 million per reduction of two percent in Compulsory Professional claim inclusive of interest and claimant’s costs. Indemnity Insurance premiums for NSW firms for the year The 2007/2008 LawCover Compulsory Professional Indemnity commencing 1 July 2007, due largely to a continuing stable Insurance Policy provides cover of $1.5 million inclusive of interest and claims environment. claimant’s costs and inclusive of defence costs. Insurance which covers defence costs in addition to the indemnity limit of ($1.5 million) has More than half of all firms will see a decrease in their not been available to Australian solicitors or their firms for many premium. Any premium increases will be a result of either years. It follows that a practitioner will be personally liable for any increased Gross Fee Income (GFI) or, for a small number gap created by the expenditure of the defence costs of a claim and may of firms, a deterioration in their claims experience. have to use their own resources to meet verdicts unless they obtain Twenty-nine percent of all NSW firms have increased Top Up cover for the gap should they face a large claim. their GFI by more than 10 percent in the past year. CONVEYANCING CLAIMS REMAIN HIGH, IDENTITY FRAUD ON THE INCREASE CONTINUED However, the 2005/2006 policy year has seen an increase in the for not advising his 69-year-old client independently of her son- number and significance of claims involving commercial borrowing in-law when she was mortgaging her home for his benefit. It was and mortgages. With the downturn in the NSW housing market, held the solicitor knew that at the time of the loan, the son-in- rises in interest rates, and the increase in identity fraud, LawCover law’s last financial venture had failed and that he owned no assets. is seeing a return of claims against solicitors acting for borrowers Allegations against solicitors acting for lenders are commonly or lenders, and against solicitors who provide advice to third concerned with the failure to investigate and advise on the parties who mortgage their property for the benefit of a friend adequacy of security, or the failure to register securities. Recently, or relative who is taking out a loan for commercial purposes. LawCover settled a claim for a substantial sum where the The most common claim against a solicitor acting for a borrower solicitor had failed to lodge a caveat on behalf of his lender is a failure to provide a proper explanation of the loan/mortgage client. The client lost priority and there was evidence that had the documentation, and failure to warn of the risks of entering into caveat been lodged the loan would have been repaid in full. the transaction. The key risk management tool is for solicitors to LawCover is also seeing an increase in claims arising out of document the advice given and, particularly, the length of time identity and Certificate of Title fraud. I urge practitioners to read spent with the client explaining the documentation. Solicitors can the letter sent by the President of the Law Society on 10 January gain some comfort from the 1996 NSW Court of Appeal 2007 to all practitioners in respect of counterfeit Certificates of decision of Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398 Title and identification fraud. which held that a solicitor acting on a mortgage is under no duty to inform the client about the financial prospects of the It is essential that solicitors establish who their clients are, and transaction even if the transaction involves an obvious financial that they meet with them personally in a conference, rather than risk to the client. However rule 45 of the Solicitors’ Rules relying on instructions from agents or brokers. LawCover has requires a solicitor to refer a client for independent financial recent experience of two claims that illustrate this point. In the advice if the client has any questions about any financial aspects first, the solicitor did not meet or speak with his lender clients of the transaction. Such a referral should always be made in high before the transaction was completed, but instead relied on a risk transactions, for example, where the loan is short term and broker communicating with the clients. In the second, a fraud the interest rate is high. was perpetrated because a solicitor accepted that a person who attended his office was acting as agent for registered proprietors If you are asked to give independent legal advice to a third party of land who had lost their title deeds. mortgagor it is essential that the advice is not given in the presence of the person who is benefiting from the loan (even if that Finally, solicitors should never declare that they have witnessed a person is a close relative) or the broker who is organising the loan in person signing a document in front of them when the person is order to guard against the possibility of improper influence being not in their presence. Not only is such conduct negligent, but the exerted. In the 1999 NSW Court of Appeal decision of Gellert v courts have found that such conduct entitles LawCover to refuse to Bellamy (1999) NSWCA 123 the solicitor was found to be negligent indemnify the solicitor where the claim arises from such conduct. 2005/2006 Total Incurred Percentage of Claims Statistics Update Area of Law as at 28 February 2007 The claim statistics in the pie charts (below and right) show Probate & Wills 3% the cost of claims by area of law for the 2004/2005 policy Matrimonial Other 1% year (1 July 2004 to 30 June 2005) and the 2005/2006 policy Other Litigation 1% Commercial 7% 22% 2004/2005 Total Incurred Percentage of Out of Time Other 0% Sale & Purchase Area of Law as at 28 February 2007 of Business Probate & Wills Personal Injury, 2% Matrimonial 2% including Out of Other Time 1% 18% 2% Commercial Other Litigation Sale & Purchase of 8% 6% Business Out of Time Other 7% 1% Conveyancing 22% Mortgages 17% Leases 7% year (1 July 2005 to 30 June 2006) as at 28 February 2007. The total incurred is the anticipated cost of each claim which includes claim Personal Injury, Conveyancing payment, claimant’s costs and defence costs. Once the claim has including 23% resolved the total incurred is the actual cost of resolving the Out of Time 34% Mortgages Leases claim. For example, as at 28 February 2007, almost three quarters 10% 6% of the claims in the 2004/2005 policy year have been finalised. Stop Loss is prepared for the general information of clients and staff of LawCover. The material presented is not intended to provide legal, insurance or risk management advice. Readers should seek professional advice before relying or acting upon the information conveyed in Stop Loss.