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We are frequently asked by clients how they should set their limit of liability in their letters of engagement. Whilst we as insurance brokers are not legally qualified to say how such wordings might be interpreted in law, there is evidence that such agreements are being taken into account at court provided they demonstrate the following characteristics:

• that they are commensurate with any exposure;
• that they are fair in that both sides are free to negotiate the limit under the unfair contract terms legislation (a large firm cannot be seen to take unfair advantage of a smaller organisation and impose an unrealistically small limit);
• that any limit must be clearly referred to in any negotiations.

For any limit to be accepted the scope of work must be clear and complete, the premise of any agreement purporting to limit liability should be what you have agreed to do, and for work that is out of the ordinary (special work) this is probably easier to address, but as the standard letter of engagement is often a automated process, it can be difficult to find a limit that is suitable for the majority of work that is carried out.

First consideration
Our starting point as an insurance broker is probably very different to that of the average accountant, and is based on experience where clients have had claims that exceed the limit of indemnity purchased; unlike commercial liabilities, professional liabilities remain personal and cannot be limited by guarantee. To protect the personal position of all parties (not just the instructing partner), it can be useful to get other partners to corroborate the limit of indemnity purchased under your professional indemnity cover.

Second consideration
Will any limitation (provided upheld) allow us as brokers to negotiate the purchase of cover in the future (will we get renewal terms) thereby offering long term protection to the business?

Things to consider when selecting a limit
The first question regarding why a particular limit has been selected isn’t to do with the fees they pay. Some suggest ten times fee as a standard, but this could be open to challenge: what if the claim covered multiple years, does it apply to all the work billed or just the particular job in question? There is no direct relation between what a claim could cost or the fees charged, but there is a possible link to the asset base of the clients and their ability to pursue a substantial claim. As a rule you should consider a limit sufficient to satisfy the majority of contemplated claims (regardless of fault) as allegations can be costly to defend.

ACCA’s insurance requirements are well documented; however, they represent the minimum cover that should be purchased, not the maximum you can be held liable for. As a tool in negotiating a limitation clause it can prove helpful to challenge why – if it’s deemed adequate for the ACCA compliance – it wouldn’t be appropriate to select as a limit by agreement.

We recommend that partners and staff are aware of whatever automatic limit you chose to agree, ask fee earners to review the limit if they are asked to undertake ‘special work’ and at all times make sure what you are doing is actually covered by the letter of engagement otherwise there will be no agreement on limitation.

Lastly, include the words ‘inclusive of costs’ to further cap the potential claim as the legal costs often exceed any alleged loss from a client. If you are unsure then consult a solicitor or legal representative; if you have a policy obtained via Lockton’s scheme for ACCA members, you have access to our legal helpline where a solicitor will be able to advise.

Karen Brown – chartered insurance broker, vice president, Lockton Companies LLP.

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