Large law firms could cut their professional indemnity insurance (PII) premiums by capping liability in their engagement letters, it was claimed last week.

Fiona Walkinshaw, a partner at City firm Reynolds Porter Chamberlain, told the firm's annual PII seminar that solicitors can limit liability in this way, but rarely do.

She said: 'Most law firms do not seek to cap their liability as they fear it may put them at a competitive disadvantage...

alternatively, they fear it may upset long-standing relationships with their clients.'

But Ms Walkinshaw said engagement letters could agree a specific cap on liability, limit the time clients have to bring a claim, and clarify that the firm would only be responsible for loss resulting directly from any breach of duty.

Although untested by the UK courts, she said such clauses would put the law firm in a better negotiating position with their clients.

She added: 'If setting limits on liability were proved conclusively to reduce the size of damages for negligent work, then insurers might start to reduce the cost of PII premiums to match the risk.'

David Arthur, the head of professional liability at City firm Barlow Lyde & Gilbert, said: 'There is no reason why this should not be debated by the profession.

It is another means by which solicitors could limit their liability and defend themselves against going insolvent, and is different from the limited liability partnership model.'

The minimum terms and conditions prevent solicitors from capping liability at below 1 million.

A spokesman for leading PII insurer The St Paul said larger firms could see the benefit of limiting their liability like this over the longer term.

By Jeremy Fleming