Professional Indemnity Insurance : Malpractice insurance demand increases

Demand rising for Professional Indemnity Insurance covers in India……

A culture of suing lawyers is not prevalent,” says the general counsel of a large Indian bank about what clients can do if lawyers advise them badly. A partner at a large Indian law firm puts it more bluntly: “No one has ever sued a lawyer (for malpractice in India).”

Nevertheless, larger Indian law firms have in recent years begun taking malpractice insurance cover for tens of millions of dollars, following mild pressure from foreign clients. The insurance companies have been happy to oblige with products to fill the niche.

“The crossroads was Satyam,” explains Akshay Chudasama, Mumbai-based partner and executive committee member at J. Sagar Associates (JSA), speculating that as PricewaterhouseCoopers (PwC) faced a potential liability for its role in the accounting scandal at Satyam Computer Services Ltd in early 2009, foreign companies began to think about the issue.

Growing niche: Gaurav D. Garg, chief executive officer and managing director of Tata AIG, says there has been an increase in interest in insurance that protects lawyers from liability.

According to Chudasama, only six years ago, it was “very much the exception” for any clients to ask whether Indian law firms had liability insurance. “I think the trend of large multinational clients asking for it more and more has happened over the last two or three years.”

Rabindra Jhunjhunwala, Mumbai-based partner of Khaitan and Co., says that while his firm has had professional indemnity insurance for many years, even before it had set up an office in Mumbai years ago, the whole “Satyam-PwC issue may have resulted in some firms rethinking”.

“Not every client asks for it, but some clients ask for it,” explains Mohit Saraf, senior partner at Luthra and Luthra.

Chudasama adds: “In a sense, what the large US companies are insisting on is that you have some cover and increasingly you find that they’re not willing to live with zero liability in the engagement letters.”

“Normal engagement letters of most firms have clauses in here that pretty much restrict the liability for professional negligence in respect of the fees (received by the firm), so (companies are) getting more and more aggressive on those clauses and more and more you get asked about the amount of insurance cover that you have,” he said.

“In some sophisticated pitching, there have been instances where the question is ‘Listen, do you guys have indemnity insurance?’,” Jhunjhunwala said. “More sophisticated clients—say the banks for instance—they would have some sort of internal requirement to ask this question and that’s why.”

And sometimes, it’s as simple as a form with one field on insurance cover.

Four years ago, MV Kini and Co. ran into such a box on a form from a US client, says managing partner Ravi Kini. In response, rather than leaving the box blank, the firm signed up for insurance with New India Assurance Co. Ltd and has renewed its policy every year. Many smaller firms spoken to for this article do not have any insurance.

A few years ago, insurance companies did not pay much attention to products for lawyers, says one Mumbai-based senior partner at a top law firm. This has changed and in addition to government-run insurers, private ones such as Chennai-headquartered Cholamandalam MS General Insurance Co. Ltd (Luthra and Luthra and JSA), Tata AIG General Insurance Co. Ltd (Khaitan and Co.) and others are offering lawyers cover.

Gaurav D. Garg, chief executive officer and managing director of Tata AIG, confirms that there has been an increase in interest in insurance that protects lawyers from liability for “negligent acts, errors and omissions in the performance of professional services for clients”.

Cover for lawyers comes in all shapes and sizes, Garg said, ranging from Rs25-50 lakh, going all the way up to Rs50 crore, depending on the type and size of practice. This tallies broadly with the range of figures disclosed informally by law firms, although all declined to confirm their premiums and cover on the record. A partner at one of India’s largest law firms says the partnership has a cover of up to $50 million (Rs255 crore), while another similar-sized firm’s partner says its cover is closer to the $10 million mark.

Typical cover for a law firm, estimates Saraf, would be somewhere between 5% and 25% of the topline revenue of the law firm. India’s largest law firms have an estimated revenue of Rs250-500 crore.
The premium paid by two major law firms with different insurers range from 0.5% and 0.9% of their total cover amount, or around $100,000 per year for $10 million cover. Many new law firms are signing up and others are increasing their cover year-by-year as their exposure grows, says one senior insurance company executive.

“Stakes in the last 10 years have increased substantially and now the market is offering meaningful products,” explains one law firm partner, who did not want to be named. While policies, particularly by government-owned insurers, have been around for a while, many were not very “robust”, he says. “There were lots of ifs and buts in the fine print.”

Nevertheless, compared with other insurable sectors, the legal market remains small.

“Till date, it’s interesting to note that for JSA, we haven’t had a single claim and my sense is that there are very, very few claims (across the market),” says Chudasama. “I doubt there has been any Indian firm that has been taken to court for a claim,” states another partner, and one adds on the topic of insurance that “to a large extent you are just paying the premium”.

There are several hurdles to suing lawyers in India. Apart from having to battle them on their home turf, other lawyers may not be willing to fight a case against their colleagues, say two partners.

“It’s a headache (for clients), the way litigation drags on in the courts. Who wants to take another law firm to court?” says one of them. “I am not sure there’s going to be much joy at the end of the process.”

“I don’t think it’s impossible, but given the amount of time and the process, traditionally whenever you’ve had a problem with a lawyer it’s a Bar Council complaint that’s been filed, and that’s been the cost-effective remedy to date,” explains Chudasama. “But I think the time is coming when clients say: ‘That’s great, but it doesn’t solve my problem (of recovering my losses)’.”

“While it may not be possible to recall a specific claim by a lawyer, lawyers are well aware that there can be instances of claims from clients dissatisfied with the outcome of an expensive and lengthy litigation,” says Tata AIG’s Garg.

Clients who thought they did not get the right legal advice or care from their lawyers would “not hesitate to recover their loss from the professionals they hold responsible”, Garg says.

Chudasama agrees. “At some level, it’s theoretical but I think it’s a matter of time before a claim will be made.”

There is also the possibility of an Indian law firm getting dragged to a US or non-Indian court, says one senior partner. Indian law firms, however, aggressively negotiate wide exclusions in their engagements related to whether they can be held liable in forums outside India, says a general counsel with a global Indian company. But an insurance company insider notes that exclusions can buckle under the arguments of an aggressive US lawyer for instance. In contrast with foreign clients and perhaps reflecting greater understanding of local market realities, Indian clients never ask their lawyers for professional indemnity insurance, say all lawyers interviewed for this story.

“Law firms are not even willing to sign indemnities, and some of them are not even willing to sign confidentiality (undertakings),” complains one Mumbai-based in-house counsel with a multinational about the bargaining power of top-tier corporate law firms.

Law firm insurance has still not taken hold, although it would add value and credibility, he says, despite enforcement difficulties. For the time being, insurance may largely boil down to perceptions or branding.

“If you were a firm of a size or that had been around for some time, how would you possibly say you don’t have it,” argues Jhunjhunwala. “It’s bit of a ridiculous stand to take that ‘fortunately we haven’t been faced with a claim, therefore we don’t have insurance’.”

“That doesn’t seem like a good selling point when you’re trying to pitch for work to a client. And it would look unnerving to a foreign firm about what kind of professional firm you are and what kind of risk consciousness you have.”

Ironically, the risk still appears to be near zero for those charging the money—insurers and law firms—due to the vagaries of the Indian legal system and profession. Clients, on the other hand, are usually left holding the short end of the stick and have to pay for the privilege, too. Then again, all it really takes is just one successful case.

Courtesy: http://www.livemint.com/2012/03/22233009/Malpractice-insurance-catches.html

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