Professional advisers are increasingly under threat of court actions for real or alleged negligence. The cost of indemnity insurance is rising in similar leaps and bounds.
A session on how to stop the rot was included in the Law Society's annual conference last weekend. The causes of professional liability claims and how they can be prevented were among the questions to be answered, with contributions from the accounting, surveying and medical professions.
Graham Ward, a partner in Price Waterhouse and chairman of the professional liability steering group of the Institute of Chartered Accountants in England and Wales, says a strong economy required an efficient, well-informed and honestly informed market, which in turn required a strong auditing profession.
'This strength is being sapped by the size and incidence of claims, which it is in the public interest to reduce,' he says. 'We want a fairer system relating to liability. At the moment, the risks and rewards are out of balance.'
In his profession the number of outstanding claims had risen from three in 1982 to more than 500 in 1992, he says. The average amount of those claims had increased 12 and a half times in that period, premiums had increased 37 and a half times, and deductibles (excesses) 27 times.
The ICA is seeking a series of reforms: tax liberalisation for directors' and officers' insurance, lifting of the embargo on companies agreeing limits on auditors' liability, and the 'disapplication' of the principle of joint and several liability on audits. Also, Mr Ward says, public consultation would be appropriate. The ICA is discussing this with the Department of Trade and Industry whether this is possible, and if so in what form.
Auditors can take measures to protect themselves, he says. These include defining with their clients the scope of their professional competence and responsibilities and identifying authorised recipients of their reports.
Michael Pattison, chief executive and secretary general of the Royal Institution of Chartered Surveyors, says professional indemnity insurance had been made compulsory for Rics members in 1981. There is a basic requirement for cover, with surveyors able to shop around for top-up cover. Premiums, he says, were very high. 'It is not unusual for them to be 10 to 15 per cent of gross income. Insurers say that the claims cost the profession the same as they cost the underwriters in terms of uninsured excesses.'
Mr Pattison says a fundamental difficulty was that the terms of insurance demanded 'that at all costs we must deny any wrong'. The dissatisfied client in most cases, however, was looking first for acknowledgement of the fault and an apology, followed by restitution. 'We have tried to tackle this by looking at small claims arbitration. With support from the insurers, the service is building up slowly,' he says. 'There are no simple solutions. But the key to stopping things getting worse is good practice management.'
This view was echoed by Elizabeth Mullins, the head of claims handling at Solicitors' Indemnity Fund. The underlying causes of the high incidence of claims were lack of organisation, both office- wide and personal, and ineffective client communication, she says.
Compulsory indemnity cover has existed for solicitors since 1976. SIF was set up in 1987, but, Ms Mullins says, the philosophy remained consistent: a fair claim settled for a fair sum as quickly as possible. Solicitors are expected to have to contribute more than pounds 200m this year to the fund; 17 years ago, the figure was pounds 6m. 'There has been a huge increase both in incidence and costs,' she says. 'We expect 300 claims every week. There is no possibility for reducing premiums unless the incidence of claims is reduced.'
The profession's role in containing costs lay in dealing with the underlying causes. 'Claims usually spring from the simple and obvious, and could have been avoided in an organised world. Only 10 per cent of claims arise from a lack of knowledge of law - the rest are simple, avoidable errors,' Ms Mullins says. The way to avoid them was commitment to good organisation in the firm, beginning with a process of self-analysis. Issues that needed addressing included staff training - all too often, she says, training was only considered for legal staff - delegation, supervision, office systems and procedures. The acid test was: 'Will it work both for you and for when you are not there?'
The solicitor needed to set realistic expectations for the client. 'We see a lot of professional indemnity claims arising out of unrealistic expectations given by the solicitor. It is good to go the extra mile for your client. The problems arise when you go much further and give golden expectations.'
SIF has a two-strand strategy for 'risk improvement': educating the profession about the main causes of claims and targeting firms with the poorest claims record, enabling them to discuss their problems and offering solutions. And since the beginning of last month, SIF has had the power to pass the name of a particularly difficult practice to the Law Society's monitoring unit. It was not, however, so far sharing that information with the Solicitors' Complaints Bureau. 'We don't want to discourage firms from notifying claims at the earliest possible opportunity,' says Ms Mullins.
'SIF is not complacent about its own task of containing the cost of dealing with reported claims, but it is impossible to foresee any significant reduction in the overall cost unless the number of claims made is reduced.'
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