Stückmann Podcast Episode 34: Identifying and Avoiding Liability Risks for Law Firms – Focus on Professional Law, Professional Indemnity Insurance and ‘Shell’ Firms

That’s what this episode is about

This episode focuses on professional law, liability insurance and sham partnerships – addressing the following questions, amongst others:

• What impact will the 2022 reform of professional regulations have on existing law firms?
• Why do professional practice partnerships need their own compulsory insurance?
• What risks do GbR law firms face without their own insurance cover?
• When does a shared office arrangement become a sham partnership?
• What liability consequences might arise for individual practising professionals?
• What professional disciplinary consequences might arise from breaches of insurance obligations?
• How can law firms review their structure and insurance cover to ensure legal compliance?

Professional practising firms require their own insurance cover

The 2022 reform of professional regulations introduced new rules governing the insurance cover required of law firms. Since then, professional practice companies – and thus also many law firms organised as GbRs – have been required to hold their own financial loss liability insurance.

In practice, however, it is apparent that this requirement has not been implemented everywhere. Many law firms continue to rely on the insurance policies of individual practising lawyers and overlook the fact that the firm itself is subject to the insurance obligation.

In the event of a claim, this can lead to considerable uncertainty and problems with cover.

Liability may affect personal assets

A lack of the necessary insurance cover can have far-reaching consequences. In traditional GbR law firms in particular, the partners are, as a rule, personally and unlimitedly liable for the firm’s liabilities.

Should a major liability claim arise, it is therefore not only the firm’s assets that may be affected. In certain circumstances, the professionals’ private assets may also come under scrutiny. Even though such cases are rare, a single claim is enough to trigger significant financial burdens.

Shared office spaces can quickly turn into a ‘sham partnership’

Many professionals use shared office arrangements as a flexible organisational structure. However, problems arise when the external image gives the impression of a joint practice.

A shared website, a uniform brand identity or unclear letterheads can lead to the firm being legally regarded as a ‘sham partnership’. Although the parties involved may assume they are operating as independent sole practitioners, they may, under certain circumstances, be treated as a professional partnership – with the corresponding liability and insurance obligations.

There may be professional disciplinary consequences

In addition to potential claims for damages, breaches of insurance obligations may also have professional disciplinary consequences. The obligation to take out proper professional indemnity insurance is one of the fundamental requirements of practising as a solicitor.

If, in the context of a liability claim, it is established that the necessary insurance cover is lacking, disciplinary proceedings may also be initiated. It is therefore advisable to regularly review your firm’s structure and existing insurance cover and to address potential risks at an early stage.

Who might find this episode interesting?

• Lawyers in GbR law firms
• Professionals in shared-office arrangements
• Law firm owners and managing partners
• Early-career lawyers setting up their own law firms
• Notaries and inter-professional practising partnerships
• Those responsible for law firm organisation and risk management

Conclusion

The 2022 reform of professional regulations has brought about lasting changes to the requirements for law firms. Long-established law firms and shared-office arrangements, in particular, should check whether their structure and insurance cover comply with the current professional regulations. By seeking clarity at an early stage, firms can avoid liability risks and protect themselves from unpleasant surprises in the event of a claim.