Limiting your liability can be a useful tool to control your exposure in the event of a claim and deciding on the appropriate level of professional indemnity cover for your firm. However, it can be difficult to get this right and you need to be confident that the limitation will be valid and enforceable should it be challenged.
The CLC Professional Indemnity Insurance Code (PIIC) requires firms to have adequate insurance for the work that you do. There is a minimum insurance requirement, currently set at GBP2m, but you should consider whether that is sufficient for your purposes, given the nature of your clients and your practice.
The PIIC makes it clear that, where you do limit your liability to clients, that limit must not be below the minimum insurance requirement.
If you seek to exclude or limit liability, you do so only to the extent that such exclusion or limitation is above the minimum level of cover afforded by CLC-approved professional indemnity insurance; you must obtain the written informed consent of the Client and the consent of the CLC for such exclusion or limitation to be effective. (CoC P3p)
The view is that to do so defeats the underlying public protection objective of the minimum level of cover. Equally, simply limiting liability for every instruction at GBP2m regardless of the nature of the matter in question, may risk the limit being judged as unreasonable, where the underlying transaction is for a significantly higher value.
Consider your client obligations
Any cap on liability you seek to impose should:
- be fair and reasonable in the particular circumstances of the client and the case
- reflect the balance of power and knowledge between you and your client
- consider the best interests of that client and must be communicated to the client in a way that they can understand the impact.
This is not just a matter of good practice, or regulatory compliance, but also reflects the wider legislative protections in place for clients.
Legislative protections for clients – where limitations of liability may be ineffective
The nature of protections afforded to the client in law depends on whether they are an individual or a business entity. While business clients have the protection of the Unfair Contract Terms Act 1977, individual consumers are protected by the Consumer Rights Act 2015. Under the Consumers Rights Act, restrictions on liability will not be enforceable if the court determines that they are not ‘fair’ – regardless of whether the client agreed to them or not.
We are aware that many firms simply put in place a blanket cap on liability on every single matter. Conveyancers will find themselves in a weaker position where a limitation on liability is just routine.
What you can do
To minimise the risk of a successful challenge, limitations of liability that the firm puts in place should:
- be appropriate to the nature of the work
- reflect the relevant terms in your professional indemnity policy
- be fair and reasonable.
To be considered fair and reasonable:
- do not exclude liability entirely
- do not impose a generic cap on liability across all your business; it should be proportionate to the nature of the particular transaction and the potential loss your client could suffer
- discuss the cap with your client or flag it clearly in a covering letter. Ensure that any limitation of liability is clearly flagged, and in a separate, standalone clause – simply putting it into your engagement letter or terms of business without discussion increases the chance that it will be judged unenforceable.
General risk management guidance
- Before considering taking on a transaction that may exceed the firm’s current PII cover, you need to carry out a full client and matter risk assessment to ascertain what, if any, additional insurance cover is necessary. Consider whether it is a one-off transaction, or whether the fees and any subsequent work will compensate for the number of years (probably at least six) that you will need to buy the additional cover.
- Document any negotiations and/or challenges concerning a limitation of liability clause. Particularly where a proposed limit is significantly different from the total matter value or potential risk exposure, and/or where you are seeking to limit your liability at a level below your total level of PII cover (where you hold PII cover above the minimum GBP2m requirement). It is important that you detail the rationale, considering why it is fair and reasonable in the context of the particular client.
- Consider your balance sheet - i.e. if a claim were to arise and it was beyond your limit of indemnity, how much cash could you afford to lose?
- Where possible, your client should be given sufficient time to consider the matter and/or take legal advice.
Important note
Limitation of liability clauses can be complex and their effectiveness and suitability will depend on circumstances. The information provided in this document is for general informational purposes only. It is provided in good faith and does not constitute legal, tax, investment or any other advice. No representation or warranty of any kind, express or implied, as to the content, accuracy, adequacy, validity, reliability or completeness of any information, is provided and to the fullest extent permissible by applicable law, all such representations or warranties and all liability in respect of actions taken or not taken based on any or all of the information provided, are disclaimed. The content is not intended and should not be used as a substitute for taking appropriate advice.
If you would like to discuss any points covered in this article, or anything connected to your PII policy, please get in touch.
