Under insurance affects more than 4 out of 5 Australians, according to a study by Understand Insurance, with 40% of homes insured according to the homeowner’s own valuation. For many, the knock-on effect from inclement weather conditions such as a natural disaster or an unexpected household accident, can deliver even more trauma.

The probability is that the same applies to Australian law firms too. Under-insurance can have dramatic consequences for a law firm just as it can for any business, as it can leave you without enough cover in the event that a claim is made under your professional indemnity policy.

What if one of your clients makes a claim against you?

Just like home insurance under-insurance also arises when a business fails to accurately estimate the value of claims which could be made against it by its customers.

For example, a suburban law firm, dealing primarily with property and commercial law work, may consider that an insured sum of $2 million required by the Law Society/Institute for any claim in negligence would be sufficient.

But consider this scenario – the lawyer provides advice about the sale of a business and associated assets. If the client then makes a claim for $3 million for failure to advise about the tax consequences of the sale of an asset, the lawyer could be out of pocket by a significant sum.

Under-insurance could lead to disputes with your insurer

Another consequence of under-insurance, depending upon the precise policy wording, is that the insurer may still have the right to conduct the defence of any claim made against your firm and your interests and those of your insurer may not always align, particularly if your firm has a significant under-insurance exposure and there is a debate between you and your insurer on the question of liability.

In those circumstances you may want to consider obtaining your own independent legal advice throughout the process. This comes at an additional cost all of which is avoidable if you are properly insured from the outset.

It follows that if there were no issues of under-insurance and with top up cover your professional indemnity issues covered the entire claim, then it is unlikely that you would need to appoint your own lawyers. It also means that the way in which the claim is handled is an entirely different scenario than would be the case if the spectre of bankruptcy or being wiped out financially, loomed large.

Like so many homeowners, lawyers need to take their insurance needs seriously. If the consequences of under-insurance are considered for more than a moment, then their ugly consequences take on a different perspective!