The importance of misappropriation of Trust Fund and Professional Indemnity Insurance for attorneys in South Africa

There has been an increasing prevalence of misappropriation (theft) of funds from attorneys’ trust accounts in these difficult economic times. Stories of attorneys who cannot account for trust funds abound; and the Law Societies are inundated with complaints.  This highlights the importance of Misappropriation of Trust Fund coverand Professional Indemnity Insurance for attorneys.

Many attorneys erroneously believe that in the event of a theft from their trust fund account, the Attorneys Insurance Indemnity Fund (AIIF) will cover them. In fact, the AIIF is not in place to protect attorneys after thefts from their trust fund accounts; instead it is in place to protect attorneys in the event that they are found to be professionally negligent. A quick glimpse at the AIIF website will reveal that, depending on the number of partners in a particular firm, an attorney’s firm has automatic cover of  between R1 562 500 to R 3 125 000 Professional Indemnity Insurance cover per year.

Attorneys often deal with large sums of money and in most cases; this is their clients’ money, and not their own. Attorneys are only permitted to transfer funds from their trust accounts to their business accounts for payment of their fees once they have fulfilled their mandates, or have interim billing arrangements in place with their clients.

In a recently reported case an attorney was found to have misappropriated trust funds by transferring huge sums of money from his firm’s trust account into his firm’s business account before fulfilling his mandate.  He was also found to have failed to pay over certain monies due to clients after transactions had been were concluded. In a case like this, the law firm of which the attorney was a partner would be liable to refund the client. The fact that the other partners had no knowledge of the wrongdoing is of no consequence. Where a client has suffered loss through the theft by an attorney or his employee, the client will have his claim settled by the Fidelity Fund, but the Fidelity Fund will have a right of recourse against the attorney. It is therefore essential that  law firms should have adequate MTF.

PI is intended to cover attorneys whose negligent acts or omissions during the course of carrying out work for a client, leads to the client suffering damages.  As mentioned, the  AIIF provides a base level of cover of between R1 562 500 to R3 125 000. Most law firms require much more insurance cover that that provided by the AIIF; and they take out additional or “top up” cover.   This top-up cover bridges the gap between what is provided by the AIIF and what the attorney’s firm actually needs. Some clients, particularly banks, insist on a minimum level of insurance before entrusting work to law firms. This top-up cover is essential to properly manage risk in a law firm.  Prudent attorneys will think very carefully about their PI needs and will do what is necessary to ensure that their firms are not ruined by claims against which the firm is inadequately insured. The best way to ensure comprehensive, all-embracing, risk cover and to minimize risk is to take out adequate Professional Indemnity cover

When deciding on appropriate levels of cover, practitioners need to be alive to the many risks associated with running a legal practice.

Please contact Michael Damant of Shackleton Risk Management on 011-784 5373 or at michael@srisk.co.za to discuss your MTF; PI and other legal insurance needs.