Risk management

Reducing exposure

One way of reducing exposure to the risk of a claim is to obtain a legal indemnity policy on behalf of a client.

This is becoming more widespread in conveyancing.

There are numerous policies available, such as defective title, restrictive covenant, contaminated land and various others which address common problems in leasehold transactions.However, effecting such policies on behalf of a client does not mean that the risk is completely extinguished.

Ask yourself the following questions.Is the policy really needed? Do not automatically agree if a buyer's solicitor alleges, for example, that the title is defective.

Ask them to state reasons in support, then investigate the title carefully.Contracts were on the point of exchange in the sale of a site for commercial development.

At the last minute, the buyer's solicitors stated that a restrictive covenant indemnity policy was required in relation to an old covenant.

They also sought a price reduction.

The seller's solicitor told his client they had no choice but to accept.

Because of subsequent problems, other solicitors were instructed after completion.

The client raised the point with them - he had not been happy about being forced to accept the reduction and the premium was substantial.

Investigation showed that the covenant was not enforceable.

A claim followed.Also, insurance should be regarded as a last resort.

Is there any other way of remedying the defect - in conveyancing, for example, a deed of variation or a deed of release of the covenant? Insurance does not make the defect go away.Does the policy cover the risk that has been identified? Are you certain the policy will adequately indemnify the client in relation to any claim that may have to be submitted? What are the limits of indemnity? Have you correctly identified whose interest is to be insured? Is the policy capable of assignment? What if any additional fees have to be paid on an assignment?Have you read the policy? If you take out a policy on behalf of the client, read it.

You must advise the client of the terms and conditions.

It is especially important to check the exclusion clauses.Such clauses, if not complied with, may well render the policy void.

If the solicitor has failed to advise the client of the existence of the clause or indeed is responsible through their own actions for invoking the exclusion, this may result in the insurer avoiding the policy.

The client may then turn to your insurers for satisfaction.

In conveyancing cases, does the policy comply with the CML handbook requirements and any additional requirements imposed by the lender?Do not forget that the lender is your client as well, a client whose interests may need protection.While insurance of this type may be a good way of transferring risk, it does not absolve you of your duty of care to your client.

You should exercise reasonable skill when advising on or effecting such a policy.l This column was prepared by the St Paul risk management team