Legislative Council

LC Paper No. LS 282/98-99

Members may recall that the Legal Service Division made a report on the Amendment Rules which was circulated to Members on 31 August 1999 (LegCo Papers No. LS266 and 267/98-99 refer). To recap, the main object of the Amendment Rules is to exempt the Hong Kong Solicitors Indemnity Fund Limited ("the Company") from providing indemnity in respect of losses arising out of claims which arise from or are connected with the fact that any computer equipment is not Year 2000 compliant.

2. Upon the instructions of Hon James To Kun-sun, we have written to the Law Society of Hong Kong asking for clarification on the extent of coverage of the original insurance policy and the reason for excluding the Company's liability for claims arising from the Y2K problem by means of legislation. The Law Society has now replied as follows:

1. The Professional Indemnity Scheme does not operate as a commercial insurer. It comprises a mutual fund and reinsurance. The Scheme is governed by the Solicitors (Professional Indemnity) Rules ("the Rules") which, when drafted, made no provision for cover in respect of civil liability arising from the Y2K problem.

2. The loss of a client's computer file resulting from the negligence of a principal or an employee of the practice would be covered provided that the indemnified had taken appropriate steps to ensure that the firm's computer systems were Y2K compliant to the extent that the level or timeliness of service available to the clients would not be affected by problems relating to Y2K.

3. Commercial insurers in Hong Kong and internationally who underwrite professional indemnity insurance for solicitors believe that losses caused by or relating to Y2K could be significant. Therefore, they have taken steps to specifically exclude Y2K risks. Moreover, it has always been the policy of insurers to underwrite risks which are fortuitous, i.e. events which are unpredictable rather than inevitable. Y2K is regarded by insurers as a predictable event in that problems relating to it have been widely publicised and are avoidable if appropriate precautions are taken.

4. Since the Fund's insurers underwrite a significant proportion of the Fund's liability and since the Fund must be protected in order to protect the wider interests of the profession and the public, it is absolutely necessary for the Company to reflect the terms and conditions offered by the Fund's insurers in respect of cover for Y2K related losses, i.e. by exempting the Company's liability for claims arising from the Y2K problem to avoid the danger of exposing the Fund to potentially unlimited losses arising from claims relating to Y2K.

5. In view of the fact that the Rules are statutory, the exemption or exclusion has to be implemented by means of legislation. The exclusion provides the Company with a discretion to waive the exclusion if it is satisfied that the indemnified has taken all reasonable steps, as evidenced by completion of a questionnaire to the insurers' satisfaction, to avoid the likelihood of Y2K system failures. Insurers will also take into consideration other provisions of the Rules, as is the normal procedure in handling all claims, before deciding on whether the indemnified is entitled to be indemnified.

3. Mr. To has considered the Law Society's reply and queried why the Company's liability should be excluded on the basis that losses arising from claims relating to Y2K are potentially unlimited. He further queried the justification for exempting the liability of a particular company by means of legislation while other insurance companies in the market are not given similar exemption. In the light of Mr. To's queries, Members may consider setting up a Subcommittee to study the Amendment Rules in detail.

Prepared by

Fung Sau-kuen, Connie
Assistant Legal Adviser
Legislative Council Secretariat
20 September 1999

LS/S/59/98-99