Professional Indemnity Scheme: An Update

The Professional Indemnity Scheme (“PIS”) has been the professional indemnity provider of law firms in Hong Kong for nearly 30 years. It is governed by the Solicitors (Professional Indemnity) Rules (Cap. 159M) (“PIS Rules”) and is held, managed and administered by the Hong Kong Solicitors Indemnity Fund Limited (“Company”).

The PIS Rules were drafted nearly three decades ago and are in need of revision. The Solicitors (Professional Indemnity) (Amendment) Rules 2016 and Solicitors’ (Practice) (Amendment) Rules 2016 (together “Amendment Rules”) were gazetted on 25 November 2016. The Amendment Rules aim to improve the clarity of the PIS Rules, enhance the operation of the PIS and provide better protection to the public. Salient features of the changes include:

(a) amending the definition of “Practice” (r. 2 of the PIS Rules) to clarify that the business of practising as a solicitor includes “the neutral in any form of alternative dispute resolution procedure; China-Appointed Attesting Officer; or civil celebrant…”;
(b) amending the Senior Counsel Clause (para. 8(1)(c) of Schedule 3 to the PIS Rules) to give the Indemnified and the Company a choice to refer a difference or dispute arising between them regarding the defence or settlement of a claim, to either a Junior or a Senior Counsel for final determination (the “Counsel Clause”). This may result in cost savings as the current PIS Rules only make reference to a Senior Counsel;
(c) clarifying the existing power of the Company or the Law Society to disburse or reimburse out of the fund all expenses and liabilities incurred in the handling of claims and other expenses and liabilities incurred in respect of the fund and the PIS Rules, subject to the Company or the Law Society having acted in good faith (para. 3(d) of Schedule 2 to the PIS Rules);
(d) removing an exclusion (para. 1(2)(c)(x) of Schedule 3 to the PIS Rules) so that Indemnity will be provided even where no Receipt had been issued to the relevant practice because of some default by its principals. This means that subject to the terms and conditions of the PIS Rules, the relevant law firm will still be indemnified even when its principals have failed to pay the PIS contributions. The deletion of this exclusion to the PIS Rules is aimed at safeguarding the public. The Company’s remedy for the law firm’s failure to pay its contribution is to rely on its power to charge interest on overdue contributions (pursuant to para. 5 of Schedule 1 to the PIS Rules) and to pursue each principal of the firm for reimbursement of any payment made by the Company to satisfy the claim against the firm, together with interest (under para.9 of Schedule 3 of the PIS Rules). Members should take note however, that a solicitor’s practising certificate shall be suspended if he/she fails to maintain PIS cover pursuant to r. 6 of the PIS Rules;
(e) clarifying the Company’s discretion to take over the conduct of a claim, which is important in cases where a claim may be made against a sole practitioner who has passed away and no personal representative has been appointed to administer the estate. Unless the Company takes over the conduct of the claim the claimant may go uncompensated.

In addition to these two sets of Amendment Rules, the Board of the Company and the Law Society have also taken note of the rising number of registered foreign lawyers (“RFLs”) practising in Hong Kong. The Law Society does not currently require RFLs, who apply for registration to be employed in a Hong Kong law firm to supply evidence of professional indemnity insurance pursuant to s. 6 of the Foreign Lawyers Registration Rules; on the basis that they are covered by the PIS. The number of RFLs practising in Hong Kong has risen by more than 67 percent over the last 10 years. (from 777 in 2005 to 1,299 in 2015). As at 31 December 2015, 74percent of RFLs are employed in Hong Kong law firms. There is thus an increase in potential exposure to claims arising out of errors or omissions by RFLs in Hong Kong firms. The top three home jurisdictions of RFLs are the United States, England & Wales and mainland China.

Despite the rising number of RFLs practising in Hong Kong law firms, the number of RFLs is not incorporated in the contribution formula and therefore is not reflected in the contributions payable. RFLs are treated no differently to unqualified staff. To remedy this inequity in the PIS contribution calculation, the Council and the Board have resolved to incorporate the number of RFLs into the formula for calculation of PIS contributions and deductibles.

The Board is also considering other proposals to improve the coverage of the PIS, preferably at no additional cost to members. If you have any comments or suggestions, you are most welcome to let me know at president@hklawsoc.org.hk.

Jurisdictions: 

President, The Law Society of Hong Kong