There are basic risks that apply to every business, but certain industries face unique risks in their field. The two main sources of risk for law firms centre on the clients and the legal practitioners (The Hartford ‘Risk Management for Law Firms’ (www.thehartford.com, accessed 02-03-2022)). Law firms face both the common risk of running a business and the unique risks of being legal professionals. Legal practitioners are best protected by a range of policies that cover the business aspect of being a legal practitioner and any potential for error in the practice of law (Clio ‘Protect Your Law Practice: A Guide to Lawyer Insurance’- Sharon Miki (www.clio.com, accessed 02-03-2022)).
Other than your general commercial insurance (office, motor fleet, etcetera), there are four key potential sources of exposure that any law firm should be considering and, at the very least, have an awareness of, viz:
- Fidelity Insurance;
- Professional Indemnity Insurance;
- Cyber liability Insurance; and
- Management liability Insurance.
(JMG Brokers ‘Insurance Solutions for the Legal Profession: Protecting your firm from financial loss and understanding your insurance options’ (www.jmginsurance.co.uk, accessed 02-03-2022)).
Fidelity cover
In terms of s 55 (1) of the of the Legal Practice Act 28 of 2014 (LPA), the Legal Practitioners Fidelity Fund (the Fund) is liable to reimburse persons who suffer pecuniary loss as a result of theft of any money or property entrusted to a trust account practice of a legal practitioner in the course of the practice of an attorney or a trust account advocate. The type of loss covered by the Fund is limited to theft committed by –
- an attorney or a trust account advocate or an employee of the practice;
- an attorney acting as an executor or administrator in the estate of a deceased person, or
- an attorney or his/her employee, who is a trustee of an insolvent estate or any similar capacity.
Typically losses covered by the Fund include theft of money from the deceased or insolvent estates, money held pending the registration of immovable property or settlement in personal injury claims (Legal Practitioners Fidelity Fund (LPFF): ‘Loss covered by the Fund’ (www.fidfund.co.za, accessed 30 – 01-2022)). In Attorneys Fidelity Fund Board of Control v Love (Case No: 170/2020) [2021] ZASCA 44 (14 April 2021) at para 16 the court held that: ‘the type of theft with which this case is concerned is that which has come to be known as misappropriation of trust funds; … [t]he material ingredients of a theft of this nature are the wrongful (in the sense of mens rea) dealing by an attorney with or appropriating to his own use of the moneys which have been “entrusted” to him – in the sense of having been required by the person making over the funds to be placed by the attorney in his trust account and that these remain there until the happening of some known future event’.
Not all the funds or property held in a trust account practice enjoy the protection of the Fund. In Attorneys Fidelity Fund Board of Control v Mettle Property finance (Pty) Ltd [2011] ZASCA 133 at para16, the court held that: “Where money is paid into the trust account of an attorney it does not follow that such money is in fact trust money … [I]f money is simply handed over to an attorney by a debtor who thereby wishes to discharge a debt, and the attorney has a mandate to receive it on behalf of the creditor, it may be difficult to establish an entrustment.”
The liability of the Fund is excluded in respect of any loss suffered by –
- the family member or member of the household of an attorney or trust account advocate who committed the theft;
- a partner or co-director in the trust account practice in which the theft occurs;
- a client who has received a warning about the use or continued use of the legal services of any trust account practice; or
- a client who has entrusted money to an attorney for investment purposes – s 56(1) of the LPA.
The cover provided by the Fund is limited to the amount actually handed over the average or fair value of other property – s 56(2). The amount or value of the loss, or other benefits recoverable from any source other than the Fund, are deductible from the cover provided by the Fund – s 56(3). In terms of s 79(1), the Fund is not obliged to pay any portion of a claim which could reasonably be recovered from any other person liable. In Bouwer v Attorneys Fidelity Fund and Another (88030/2018) [2020] ZAGPPHC 79 (29 January 2020), the court held that: [34] “… the applicant must first exhaust all legal remedies against the practitioner … The Fund’s liability depends upon the practice’s ability to meet its obligations to the third party.”
The purpose of the Fund is to protect the public against theft of trust monies by practitioners or their employees. In Van Zyl v Attorneys Fidelity Fund Board of Control (469/2012) [2017] ZAFSHC 26 (2 February 2017), the court held that: [19] “… Although Attorneys Fidelity Fund is aimed at providing protection to people who suffered loss as a result of theft occurring in the attorney’s normal course of practice, it is impossible for the Fund to be made available to cover all the ills and dishonorable acts of attorneys may get up to…”
In terms of s 19(3) of the Companies Act 71 of 2008, the directors/shareholders are jointly and severally liable, together with the company, for any debts and liabilities of the company as are or were contracted during their respective periods in the practice. Where an attorney misappropriates trust funds, the practice of which he/she was a partner or member of a juristic entity would be liable to refund the client. The fact that the other partners or member of a juristic entity had no knowledge of wrongdoing is of no consequence (see Hewetson v Law Society of the Free State (948/2018) [2020] ZASCA 49.; [2020] 3 All SA 15 (SCA); 2020 (5) SA 86 (5 May 2020). Legal practitioners may consider buying fidelity guarantee cover for the loss of money or property sustained by the practice as a direct result of fraud or theft (Legal Practitioners Indemnity Insurance Fund (LPIIF) NPC: ‘Is your cover adequate?’ (https://lpiif.co.za , accessed 29-01-2022)).
Indemnity cover
The Legal Practitioners Indemnity Insurance Fund (PII) provides professional indemnity cover to the practitioner for breach of mandate or negligence by the practitioner or his staff/employees, which results in losses to third parties (Legal Practitioners Indemnity Insurance Fund (LPIIF) NPC ‘Claims and Policies – FAQ’ (https://lpiif.co.za, accessed 02-03-2022)). The indemnity against the loss for which the PII provides is not unlimited in its scope. In Mettle the court held that: ‘It does not provide indemnification against any kind of loss suffered as a result of any conceivable kind of knavery in which an attorney may indulge in the course of his or her practice’. Instead it is in place to protect attorneys in the event that they are found to be professionally negligent.
In Fourie v Van der Spuy and De Jongh Inc. and Others (65609/2019) [2019] ZAGPPHC 449 (30 August 2019) at para 20 the court held that: ‘An attorney bears a legal duty to deal with the money in her trust account without negligence. It is a term of the mandate that the attorney will exercise the skill, adequate knowledge and diligence expected of an average practicing attorney, may be held liable for negligence even where she committed an error of judgement on matter of discretion if she failed to exercise the required skill, knowledge and diligence.
‘The 2nd Respondent … failed to discharge her fiduciary duty to the Applicant by transacting via e-mail whilst full-well knowing that fraud is prevalent in her profession and not employing any measures to ensure that neither she, nor the Applicant will fall victim to fraud (para 30).
The LPIIF Master Policy (https://lpiif.co.za, accessed 29 – 01-2022)), specifically excludes cybercrime. Claims arising from or in connection with misappropriation and bridging finance related claims are excluded from the Master Policy, unless the bridging finance has been provided for either:
- the payment of transfer duty and costs;
- municipal or other rates and taxes; or
- levies payable to the applicable body corporate or homeowners’ association relating to the immovable property, which is to be transferred.
The PII’s primary purpose is to provide all legal practitioners who are obliged to be in possession of a Fidelity Fund Certificate (FFC) with a primary level of professional indemnity on the date that the cause of action arose (2019 (Apr) DR 3 ‘Do you have insurance for cybercrime?’ (www.derebus.org.za, accessed 29-01-202)). Every practitioner, who is in possession of a FFC, automatically enjoys a certain level of indemnity cover in terms of the LPIIF policy. The limit of indemnity is granted to the practice and not each practitioner individually on an annual aggregate basis and the insurance certificate is issued to a practitioner (Shackleton Risk: ‘Professional Indemnity Insurance for Attorneys’ (www.shackletonrisk.co.za, accessed 29-01-2022)). The LPIF Policy provides a base level of cover, however, most law firms require much more insurance cover than that, and they need to take out additional or “top up” cover (Ivor Heyman ” Misappropriation Of Trust Fund And Personal Indemnity Insurance: A Key Issue For Prospective Partners” (January 28, 2021) (https://mphela.co.za.php, accessed September 13, 2023)). This top-up cover bridges the gap between what is provided by the LPIF and what the law firm actually needs.
PII cover must be at the heart of any considered professional risk insurance program that a law firm must take out and maintain qualifying insurance (JMG Insurance Brokers (op cit). ‘Top-up’ cover is essential to properly manage risk in a law firm. When deciding on appropriate levels of cover, practitioners must be alive to the many risks associated with running a legal practice (ShackletonRisk (op cit)).
Cyber liability cover
Computers and client data are at the heart of day-to-day operations for virtually all modern day law firms (JMG Insurance Brokers (op cit)). Cyber cover typically protects against financial losses flowing from data loss, misuse or damage, computer, network interruptions and media content held by the insured firm resulting in, e.g. business interruption.
Management liability cover
The demands of running a legal practice, and its associated risks, can sometimes seem endless, particularly for those who wish to practice actively while shouldering leadership and management responsibilities (LSJ ONLINE ‘Lawcover’s Lawyers Management Liability Insurance’ (https://lsj.com.au, accessed 02-03-2022)). Directors and Officers insurance provides broad protection for individuals and/or their partnerships against a wide variety of civil and criminal claims and proceedings arising from ‘wrongful acts’, e.g. breaches of directors’ statutory duties; corporate liability claims in the name of the company or entity (JMG Insurance Brokers (op cit)).
Conclusion
In terms of section 80 of the LPA, the Fund is subrogated, to the extent of any payment made by the Fund to a claimant, to all the rights and legal remedies of the claimant against any attorney or any person in relation to whom the claim arose, or in the event of his death or insolvency or other legal disability, against the executor, curator or the trustee of his estate ( see Rand Mutual Assurance Company Ltd v Road Accident Fund (484/2007) [2008] ZASCA 114 (25 September 2008)). Also, the Fund’s right to prosecute for misappropriation of trust funds is expressly provided for by s 63(1) (i) of the LPA.
Legal liability exposures may represent the greatest threat to financial health of law firms (The Hartford (op cit)). Adequate protection from a claim warranted or not, can help ensure financial security, success and longevity (Embroker ‘Law’ (www.embroker.com, accessed 0 2-03-2022)). Insurance is not the be all and end all when it comes to protecting your firm from financial risks (JMG Insurance Brokers (op cit)). Any insurance program should be supported by a robust riskmanagement strategy/regime, itself embedded through a culture driven by training, supervision and risk awareness. Law firms, therefore, need to insulate with an impeccable risk management plan. Special attention given to firm size, speciality or any aspect that analysis shows to have particular exposure with regards to the risk in focus (Embroker (op cit)).
| Please note that our blog posts are informal commentaries on developments in the law at the time of publication and not legal advice. |
