Risk management for your law firm or consulting firmFinancial loss liability insurance for professions that offer legal and business advice

“If I have a heart attack, I do not go to the family doctor”. This citation comes from a lawyer in a large international law firm – in response to our question, as to why he decided to seek advice and support from MRH Trowe Financial Lines.

The more extensive the liability potential of a law firm, due to its inter-professional and international orientation, the more important competent advice from a specialist broker becomes. Only a specialized consultant, who is familiar with the daily tasks and problems of the legal and business consulting professions, can offer an insurance concept that is individually tailored to the needs of the law firm and that covers the liability scenarios, some of which threaten the financial existence of the firm, in a manner that is commensurate with the risk.

As a matter of priority we discuss the following topics with the law firms we support. Here, together we attempt to determine the liability potential and draw up a comprehensive insurance concept:

• Co-insurance of the imputation of fault when commissioning external service providers and domestic and foreign correspondent firms (substitute cover)
• Co-insurance of accessory liability (e.g. for inter-professional cooperation between lawyers, tax consultants and auditors)
• Review of cover limits for activities with an international dimension (through the parties themselves or through substitutes) in the following areas:
  • Employment with foreign law
  • Advice on foreign law
  • Appearance before foreign courts, government agencies, administrative offices
  • Legal services rendered before foreign courts (place of jurisdiction)
• Cover limits in the area of insolvency law (the catchphrase here is “commercial risks”, e.g. for continuation of a business)
• Limits of coverage for M&A, IPO, and other advisory services
• Existence of a third-party mandate cover for activities on a supervisory board / advisory board, which in addition to the usual clause also offers insurance cover for investment and financing decisions
• First-party damage coverage for costs and expenses in the event of damage to reputation, loss of documents, rescission or termination on the part of the client, professional misconduct on the part of employees, compensation for witnesses, criminal and administrative offences and outstanding claims
• Existence of cyber first-party damage coverage for claims resulting from loss, destruction, alteration or non-availability and misuse of electronic data (including cyber-extortion)
• Existence of integrated fidelity cover

As part of our analysis, we verify whether the statutory requirements for the legal form of the company have been met, in particular with regard to the following coverage components:

• Topic “external impact”: Consideration of the effects of a possible “fictitious partner/fictitious partnership” and possibly required adjustment of the maximisation/annual ceiling
• Co-insurance of personal liability for highly personal mandates (e.g. as insolvency administrator, executor)
• Co-insurance of the partners’/fictitious partners’ own mandates in the economic interest of the law firm

The added value is not just optimisation of the content of the insurance cover, but also the price savings that we achieve in negotiations with risk carriers and through special conditions. With our clientèle, we strive for a long-term, cooperative partnership that goes far beyond that of the usual insurance consulting. As a member of our network of attorneys, you will of course benefit in the form of new client relationships from the recommendations we make to clients in the commercial and industrial sectors, who are seeking advice.

Within the framework of a partnership-based cooperation, we advise not only major international law firms but also medium-sized boutique law firms specialising in selected niche areas of law practice. In particular we number commercial law firms active in the transaction business among our clientèle, as we are one of the few brokers on the German insurance market with a high level of expertise in assisting with corporate and real estate transactions. After a very individual risk analysis and determination of potential liability, we conduct an extensive market survey for you at regular intervals. In a synopsis, we point out alternatives and optimise the insurance cover according to your desires. While at the same time improving the scope of cover, we achieve average premium savings of over 20% for our new customers.

For patent law firms we offer special conditions which, in comparison to conventional cover, offer serious advantages in terms of content and result in an average savings on premiums of 30%. Explicitly, insured means being insured up to the amount of the contractually agreed sum insured, the liability arising from an attribution of fault when foreign correspondent law firms are commissioned (substitute cover). Since substitutes are not vicarious agents, in most concepts this insurance cover is either non-existent, sub-limited or at least not clarified. We hereby close a serious coverage gap that can put the continued existence of the company at risk for globally operating patent law firms.

When the legal form is changed, for example the establishment of a partnership company with limited professional liability or an LLP, we will support you with necessary reorganisation of the insurance cover. To this end, we assist in adapting to the statutory requirements so that “inadequate insurance cover” does not jeopardize the protective cover of the statutory limitation of liability. This avoids a revival of personal liability.

We are at your service quickly and competently at all times for the pitfalls and liability scenarios that arise, for example, from interdisciplinary cooperation between law firms, exposed individual mandates, board activities and activities with an international dimension.

Examples of damage – lawyers

• Failure to comply with time-limits (time-limits for appeals and statements of reasons, late submissions in enforcement proceedings, late submission of all facts and circumstances relevant for a decision)
• Failure to obtain legal advice, incorrect or inadequate legal advice
• Faulty drafting of contracts
• Overlooking tax disadvantages in the preparation of a due diligence as part of a corporate transaction or real estate transaction

Examples of damage – patent attorneys

• Failure to pay fees or late payment of fees
• Forfeiture of a priority claim due to late submission
• Overlooking the expiration of retention periods
• Attribution of fault when foreign correspondent law firms are commissioned
• Unjustified denial of patentability
• Limitation of actions for injunctive relief and claims in the event of infringement of industrial property rights

The job description of a tax consultant is subject to constant change and is becoming more and more extensive. In addition to your classic activities as a tax consultant, you will also take on various services for your clients, such as drawing up private financial plans, taking on fiduciary activities or providing support with payroll accounting. We ensure risk-based coverage, particularly if there are additional liability scenarios:

• Activities with an international dimension
• Monitoring the use of funds
• Investment counselling
• Client service
• Employment of freelancers
• Accessory liability for interprofessional collaboration
• Legal requirements regarding duty to inform (DL-InfoV) and the General Data Protection Regulation (GDPR)
• Cyber risks

Examples of damage – tax consultants

• Failure to comply with a time limit for lodging an appeal
• Late submission of a tax return
• Errors in the accounting system
• Non-utilisation of tax concessions
• Wrong information or advice
• Insufficient clarification
• Failure to comply with the latest legislation

The statutory limitation of liability (liability privilege) of § 323 para. 2 (4) of the German Commercial Code (HGB), which applies to statutory audits, limits the risk to €1 million. Liability is limited to €4 million for the audit of stock corporations, whose shares are admitted to trading on regulated markets.

Consequently the focus of potential liability is not only on the tax consultants, but also on the auditors in the tax consulting activity and structuring of transactions. Compensation claims in the single-digit to double-digit millions are not uncommon here. The mandate structure and the associated high potential for claims mean that more and more law firms are tending towards higher sums insured. We would be happy to advise you with regard to optimisation of your existing financial loss liability insurance. In addition, identify possibilities for increasing the sum insured via excess of loss solutions / layer solutions. We can offer these solutions at attractive premiums on the basis of our special concepts with many risk carriers.

Unlike the situation for the lawyer, lawmakers offers the auditor and tax consultant the possibility of a contractual liability limitation agreement for ordinary negligence and gross negligence. Almost all auditors use the IDW’s General Engagement Terms for German Public Auditors and Public Audit Companies and the IDW’s Liability Limitation Agreement. However, these terms are only effective “insofar as insurance cover exists” in accordance with the statutory provisions.

Different legal requirements apply to the design of insurance cover depending on the legal form (GbR, GmbH, PartG mbB, LLP). The “most rigorous requirements” must be taken into account, particularly in the case of interdisciplinary cooperation. If the insurance cover is “inadequate”, the statutory limitation of liability no longer applies and personal liability occurs. To safeguard you and the liquidity of your law firm in a manner that is appropriate for the mandate structure, we would be pleased to support you in designing a risk-commensurate insurance concept.

In the course of the risk analysis we consider topics such as:

• Your individual focus on tax structuring, company valuations or classic reserved areas of activity
• Your company structure
• External quality control through peer review
• Activities with an international dimension
• Client service
• Investment counselling
• Cooperation, accessory liability arising from interdisciplinary collaboration, etc.

Examples of damage – auditors

• Omissions in conducting an annual audit
• Faulty preparation of expert reports, in particular as part of a due diligence process
• Inadequate restructuring advice and/or expert opinion
• Errors in information, advice and representation in tax matters
• Non-utilization of tax benefits in tax planning consulting
• Non-compliance with new or amended tax regulations
• Late submission of tax returns
• Failure to comply with time limits for legal remedy or appeal due to incorrect time limit notation
• Failure to indicate proper preparation of basic records for accounting mandates
• Failure to report recognisable accounting deficiencies when executing annual financial statement mandates

As a public official, the notary is subject to unlimited liability. Unlike the other professions that are members of a chamber the notary is not able to limit his contractual liability. The late onset of limitation periods (starting from knowledge), as well as high and increasing certification values, require long-term, forward-looking planning of the risk mitigation cover. Due to the infringement principle, the notary must already choose a sum insured today that will be appropriate for the increased asset and real estate values in the event of a compensation claim that may not be lodged until decades in the future. We would be happy to assist you in choosing the appropriate sum insured and the most effective and cost-efficient coverage possible for this exposed long-term damage risk. Particularly in the area of supplemental insurance and excess of loss insurance, we can offer you solutions, which in some cases are as much as 50% lower than the tariff ideas of the insurers.

Insolvency proceedings/self-administration

The primary objective of the insolvency law reform (ESUG) is early restructuring of companies threatened with insolvency. The ESUG facilitates the prerequisites for court-ordered self-administration under the supervision of a trustee, who is also appointed by the court. The associated changes in the Insolvency Code require a corresponding adjustment of the insurance cover. For example, the debtor is granted up to three months, in which to draw up a restructuring plan within the framework of the protective shield procedure pursuant to § 270 InsO – under the supervision of a provisional administrator, free from enforcement measures in self-administration. This can then be implemented as an insolvency plan.

Most insurers offer insurance cover for insolvency proceedings (provisional and final insolvency administration) and self-administration via the firm’s master cover up to a maximum sum insured of €2 million or for a single explicitly designated and described procedure within the scope of property cover.

The concepts of the insurers are very different here. Particularly in the area of master cover, these concepts are subject to various practical restrictions and exclusions (e.g. in the area of commercial risks for the continuation of a business). Therefore, the individual design of the insurance cover in these procedures is highly significant. For temporal downstream risks (e.g. in the case of distribution of assets), insurance cover no longer exists after termination of the insolvency proceedings with cancellation of the property cover set up for this purpose, due to the infringement principle. To ensure that the insolvency administrator is not left out in the cold in this case, we have also found a solution for this coverage gap.

Examples of damage – insolvency administrators

• Insufficient insurance coverage to cover the insolvent company
• Establishment of avoidable bankrupt’s liabilities (e.g. in the event of continuation of operations)
• Failure to raise objection to unfounded claims
• Incorrect valuation of assets held for sale on disposal
• Preferential treatment or disadvantage of individual creditors
• Incorrect, inappropriate legal proceedings, or failure to initiate legal proceedings

Committee of creditors

In the insolvency proceedings, a member of the creditors’ committee, as part of the representation of the interests of the creditors involved, performs various monitoring, control and steering tasks, in particular with regard to the monitoring and support of the insolvency administrator (§ 71 of the Insolvency code (InsO), e.g. with regard to the continuation of companies (§§ 158, 160 InsO) and distribution of the assets involved in the insolvency proceedings (§ 187 InsO).

To cover these liability risks – compared with the usual standard covers – we can offer members of a creditors’ committee the following special conditions and extensions of cover in the form of separate creditors’ committee cover:

• No deductible if there is a claim
• Premium-free inclusion of cover for fidelity losses
• Premium-free extension of foreign cover
• Premium-free cyber coverage
• Defence protection if there is allegation of wilful breach of duty, until such time as the allegation has been legally ascertained
• Costs are not credited against the sum insured
• Premium-free integration of the supervisory board and advisory board clause

Examples of damage – creditors’ committee

• Consent to the implementation of inappropriate measures on the part of the insolvency administrator (continuation or sale of the joint and several debtor’s business, commencement or continuation of proceedings, taking out of loans)
• Insufficient audit of the insolvency administrator’s cash balance
• Inadequate supervision of the business execution of the insolvency administrator
• Approval of a preliminary distribution that is too high or refusal to approve a distribution contrary to duty
• Violation of the obligation to comply with the overall general interest

Executors, curators of the estate, testamentary executors, legal guardians, caretakers, assistance providers, caregivers

Probate judges and guardianship judges are often required to provide proof of appropriate financial loss liability insurance prior to appointment.

Insofar as lawyers, tax consultants and auditors are appointed, insurance cover within the framework of the co-insured activities shall basically consist of their professional indemnity insurance, however with the contractually agreed restrictions that the insured risk entails as lawyer, tax consultant and auditor (exclusion for commercial calculation, speculation or organisational activities – e.g. continuation of a business belonging to the estate, limited foreign coverage, amount of the agreed sum insured for highly personal mandates, etc.). Thus for these occupational groups, an individually designed object cover for the specific case is also an option.

Individuals who do not belong to the professional groups of lawyers, tax consultants and auditors are dependent on separate risk coverage, in any case.

Examples of damage – executors of wills

• Inadequate guardianship of the estate
• Oversight in the identification of heirs
• Allowing inheritance claims to become statute-barred
• Incorrect conduct of a case

Examples of damage – guardians, caregivers, assistance providers, caretakers

• Inappropriate use of assets under management
• Failure to obtain judicial guardianship approval
• Delayed enforcement of a maintenance judgement
• Failure to comply with time-limits for appeal in matters relating to maintenance obligations