In most states, including Victoria, NSW, and South Australia, the minimum insurance coverage required by practising solicitors is $2 million and is usually arranged through their state-based insurance scheme.

However, when this isn’t sufficient, an additional “top-up” insurance policy is required.

The higher coverage that top-up insurance provides is a no-brainer for larger law firms, which typically work on bigger, more complex, and higher-value matters. Indeed, higher limits are usually a specific requirement of their contractual agreements with corporate clients.

On the other hand, small and medium-sized firms may be unsure if top-up insurance is required, and, if it is, what’s an appropriate level of coverage?

Is it time to top up?

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Of course, whether top-up insurance is right for your firm comes back to your unique circumstances, but there are some considerations to weigh up.

Firstly, what areas of law are you practising in, and are they prone to high-value litigation?

The law firms typically most exposed to high-value litigation are those practising in corporate advisory (M&A), property and property development, complex tax and wills and estates.

That’s because the advice is complex, and underlying transaction values are high. Any negligent advice can lead to client losses well more than the compulsory $2 million limit.

Secondly, what’s the profile of your client base?

The scope and nature of your clients can impact your risk profile, so this must also be considered. A private property developer is likely to be more litigious than a charitable organisation, for example.

Thirdly, do you offer add-on services that sit outside traditional “legal services”. This could include services like general consulting, which aren’t included in most state compulsory insurance schemes that cover the provision of legal services.

In these instances, top-up insurance can be extended to provide a broader scope of cover and include “drop down” cover for claims arising from non-legal services.

Getting your top-up policy right

If you’ve determined that you do require top-up insurance, there are two key elements that you should consider as part of your policy.

The first is aligning your top-up insurance policy with your compulsory primary PI insurance policy.

If there is a disconnect between these policies, this may mean you can make a claim with the former but not the latter.

A common example in Australia is cyber cover within the professional indemnity policy.

Many of the state-based schemes may provide cover for claims of professional negligence resulting from cyber; however, your top-up insurance may expressly exclude these claims.

Secondly, it’s typically best if your top-up policy includes a “direct” reinstatement of the policy limit.

In some instances, top-up insurance policies specify a “round-the-clock” reinstatement.

This means the policy limit will only be reinstated once the full limit of the top-up insurance tower has been eroded on an aggregated basis. This would conflict with primary and, potentially, other top-up policies if multiple insurers are required.

On the other hand, a direct reinstatement will mean your policy will be reinstated for each new claim, and typically will reinstate as many times as required in the policy period.

This provides an additional layer of protection throughout the policy period and is important for lawyers who face higher risks of multiple claims.

Why more law firms are choosing to top up

At the coalface, we are seeing a consistent trend of claims made against small and mid-tier law firms that are costing more than the compulsory $2 million limit.

For wills and estate law firms, for example, it’s becoming increasingly common to see estates where claims relating to the will surpass the minimum insurance threshold. This may not have been the case when the will was originally drafted.

Furthermore, it’s prudent to remember that PI insurance and top-up cover include both defence and settlement of claims.

So, when considering policy limits, lawyers should be aware that defence costs will erode the limit remaining for settlements.

Finally, a common misconception is that negligent advice is the main source of negligence claims.

However, in our experience this ranks lower to claims caused by lack of attention to detail, failure to properly manage clients’ expectations, or taking instructions from misleading clients.

All these factors need to be considered when assessing whether the minimum PI compulsory coverage is sufficient for your firm.

Will Laundy is the director of Pillar Brokerage.