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Countdown to liability cap begins

News

Cite as: (2005) 79(9) LIJ, p. 26

Law firms are advised to prepare themselves to take advantage of the professional standards scheme.

The long-running aim to set up a nationally-consistent professional standards scheme that would allow Victorian solicitors to cap liability has taken a significant step forward.

The Law Institute of Victoria (LIV) has lodged a draft application to set up such a scheme in Victoria, following the formation of a Professional Standards Council (PSC) in July this year.

“This will be the most significant change to the way legal practice has been managed for decades,” LIV CEO John Cain said.

Professional standards legislation was passed by the Victorian government in 2003 in response to Heads of Treasury meetings in 2002 and 2003, which discussed ways of dealing with insurance reform.

“The legislation was passed in 2003, but it was only recently that the government indicated to us that a Professional Standards Council has been established and they are now in a position to receive applications,” Mr Cain said.

Victorian Attorney-General Rob Hulls told the LIJ that the commencement of the scheme was “imminent” following the signing by Victoria of the Professional Standards Agreement in June.

Mr Hulls said the final details of the scheme were currently being finalised between the states.

The LIV lodged its draft application in July and Mr Cain said it was waiting for the PSC to respond to the draft application before lodging the final application.

He said the LIV was in constant discussions with the PSC about the progress of the professional standards scheme and it was hoped to have something in place by the end of the year.

The proposed LIV scheme would cover all LIV members in private practice who hold a current practising certificate and who have appropriate insurance cover.

“The process is that we get the scheme approved through the PSC and then every member of the LIV automatically becomes a member of the scheme unless they opt out,” Mr Cain said.

“If the firm wants the benefit of the cap then it needs to have all its lawyers as members of the LIV.”

LIV members who were part of the scheme would have their liability capped at a predetermined amount, tied to the size of the firm.

Sole practitioners and firms with fewer than three principals would have a cap of $1.5 million. The cap would then increase by $500,000 for each principal up to a maximum of $10 million, with discretion to increase the cap beyond this level on the application of a firm in relation to a particular client, either in all cases or in any specified case or class of case.

The cap would apply to professional liability damages for “pure economic loss” and not to liability arising from death or personal injury.

In return, the LIV members of the scheme would be required to adopt particular standards of professional conduct, undertake ongoing education, submit to a complaints and disciplinary scheme and participate in risk management arrangements.

“These requirements will not be onerous for the legal profession which is highly regulated and already has the requirements sought from the Victorian PSC – such as complaints, discipline and education procedures,” Mr Cain said.

Clients of law firms would benefit from the scheme because it gave them certainty that the lawyer they were dealing with was a member of the professional association, subject to a regulatory regime, engaging in risk management education, undergoing ongoing educational obligations and up to date with all their obligations, he said.

“It also ensures that in the event that there is a problem, there is coverage insurance or business assets to the level of the cap.”

Mr Cain said the LIV would have to satisfy certain requirements to be approved to be part of the scheme.

The PSC would need to be satisfied that the LIV had addressed the following matters:

  • the availability of risk management education presently provided by the LIV and the Legal Practitioners Liability Committee;
  • educational services including compulsory continuing professional development schemes;
  • professional practice and conduct rules in accordance with the Legal Practice Act [and from 1 October, the Legal Profession Act 2004];
  • guidelines for good practice currently provided by the LIV rules and the Legal Practitioners Liability Committee;
  • existing complaints and disciplinary procedures provided by the Legal Practice/Legal Profession Acts;
  • counselling and advisory services provided by the LIV; and
  • the regime of trust account inspections currently undertaken by the LIV.

The Australian Bankers Association (ABA) had previously voiced opposition to the scheme, arguing it was inflexible and set restrictive caps.

But Mr Cain said this concern had been addressed, with the discretion given to professional associations to apply a higher cap for a particular client or for a particular type of work.

The NSW Law Society already has a similar scheme in place and the Western Australian Law Society is seeking approval of a scheme. Other states are expected to follow once they have corresponding legislation.

Mr Cain said if the LIV’s application was successful, he believed the scheme would be well received by the profession.

Each legal firm would need to carefully assess whether they wanted to participate, he said.

“However, for most firms the prospect of being able to limit the firm’s liability within reasonable limits must be an attractive option as it will ensure that its clients have the benefit of an insurance policy to protect them while not exposing the firm to unreasonable risks.”

Understanding the professional standards scheme

The LIV has made a draft application to be part of a professional standards scheme. However, it could take up to six months before the application is approved.
Every LIV member will automatically be part of the scheme unless they opt out, but if member law firms want to take advantage of the liability cap, every lawyer working for them must be an LIV member.
The key components of the proposed Victorian scheme are:
• For solicitors who practise as sole practitioners or in a firm having no more than three principals, the limitation is not less than the amount of professional indemnity cover approved by the Legal Practice Act [and from 1 October, the expected start date, the Legal Profession Act 2004], currently $1.5 million.
• For solicitors who practise in a firm having more than three principals, the insurance cover is not less than the amount of professional indemnity insurance cover approved by the Legal Practice Act/Legal Profession Act and not more than $10 million, being $500,000 multiplied by the number of principals.
• For solicitors who select a higher amount of liability limitations than would otherwise apply, an amount being not less than the limitation otherwise applicable, up to a maximum amount of $50 million.
In return for the right to cap liability, members of the professional association will be required to:
• adopt particular standards of professional conduct;
• undertake ongoing education;
• submit to a complaints and disciplinary scheme; and
• participate in risk management arrangements.

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