Two sets of amendments to the Solicitors (Professional Indemnity) Rules (“PIS Rules”) have been gazetted and are scheduled to take effect within 2019, subject to negative vetting by LegCo. They relate to an increase in the indemnity limit of the Professional Indemnity Scheme (“PIS”) and an amendment to the PIS contribution formula and deductible calculations so that registered foreign lawyers (“RFLs”) employed by a Hong Kong law firm will be accounted for in the same manner as an assistant solicitor or consultant practising in a Hong Kong law firm.
PIS Indemnity Limit
In general terms, the purpose of the PIS is to provide indemnity against loss arising from claims in respect of any civil liability incurred by a solicitor in connection with his/her practice. The PIS covers all Hong Kong law firms.
The existing PIS indemnity limit of HK$10 million per claim has been in place since 1994. After careful consideration of factors such as the rise in property values over the last twenty years, PIS claims statistics, the financial position of the Hong Kong Solicitors Indemnity Fund (“Fund”) and the compulsory professional indemnity limits in overseas jurisdictions, the PIS indemnity limit was proposed to be increased to HK$20 million per claim, effective from the 2019/2020 indemnity year, ie from 1 October 2019.
The formula for calculating PIS contributions payable by law firms will remain unchanged. The increased limit of indemnity will not result in an increase of PIS contributions and the cost of providing the additional cover will be borne by the Fund.
Some firms with a relatively smaller scale of operation may not currently purchase top-up professional indemnity insurance in the commercial market. This increase in the indemnity limit will therefore provide additional protection to the public.
Hong Kong LLPs
For those Hong Kong law firms that operate in the form of limited liability partnerships (“LLPs”), they are required under the Legal Practitioners Ordinance to have in existence, in addition to the indemnity which the LLPs are entitled under the PIS, a policy of insurance which provides indemnity up to an amount not less than HK$10 million in respect of any single claim. With the increase of the PIS indemnity limit, the threshold that triggers the requirement on LLPs to take out an additional professional indemnity policy will be moved further up, and this may result in premium savings for the LLPs.
RFLs are required under the Foreign Lawyers Registration Rules to maintain a policy of insurance which provides indemnity, in respect of services rendered by him/her while practising as a foreign lawyer, in a manner and to the extent similar to the indemnity provided to a solicitor under the PIS. The increase of the PIS indemnity limit to HK$20 million per claim will indirectly increase the level of indemnity required of foreign lawyers and foreign law firms and provide better protection to the public.
Practice Direction M
The Law Society’s Practice Direction M sets out the advisory guidelines for solicitors to limit their liability for non-contentious business subject to certain conditions. One of the conditions is that the limitation of liability must not be below the minimum level of cover required by the PIS Rules. There is a concern that the existing retainers may contain limitation clauses that, on the basis of the current statutory PIS indemnity limit, cap a law firm’s liability to HK$10 million per claim. An increase of the statutory PIS indemnity limit may bring these firms in breach of Practice Direction M. Paragraph 1(b) of Practice Direction M will therefore be amended, from 1 October 2019, to clarify that the condition refers to the requirement in the PIS Rules that is in force on the date the limitation of liability is agreed.
PIS Contribution Formula
The number of RFLs employed by Hong Kong law firms (and covered under the PIS) has grown by over 156 percent from 450 in 2003 to 1,151 in 2018. As of 31 December 2018, the top three home jurisdictions of RFLs are USA, England and Wales and Mainland China.
Further, in view of the growing trend of solicitors expanding their multi-jurisdictional practices, it is anticipated that the number of RFLs practising in Hong Kong law firms will continue to increase. The areas of practice of RFLs are also very diverse. They may range from conveyancing transactions in the PRC to large scale overseas listing of companies in the US.
There is thus a need to account for RFLs as qualified members of staff of a firm (as opposed to unqualified staff under the existing PIS contribution formula and calculations) so that their risk exposure to the PIS may be properly reflected in the PIS contributions and deductibles payable by their firms.
The Law Society has therefore proposed that the PIS Rules be amended so that with effect from 1 July 2019, RFLs employed by a Hong Kong law firm will be accounted for in the PIS contribution formula and deductible calculations in the same manner as an assistant solicitor or consultant practising in a Hong Kong law firm. Circulars to members will be issued on the above amendments after negative vetting by LegCo.