5 focus areas for Australian law firms

5 focus areas for Australian law firms | Preparing for PI insurance renewal in 2025

Introduction

As the 30 June 2025 insurance renewal period approaches, Australian law firms should be prepared to address several critical areas that insurers are likely to focus on in a dynamically evolving legal risk landscape. 

By understanding and proactively addressing these focal points, law firms can not only better mitigate risks and secure the most favourable insurance terms but also foster stronger client relationships by demonstrating a commitment to effective risk management.

1. Embracing AI: Navigating the risks and rewards

With law firms making significant investments in Artificial Intelligence (AI) to drive efficiencies, it’s becoming a key area of interest for insurers. AI is being increasingly integrated into tasks such as document review, research on case law and legislation and managing data. Naturally, insurers are concerned about the potential risks that ensue. These include inaccuracies, data breaches, and biases inherent in AI systems. 

During insurance renewals, insurers may ask law firms about their policies and controls around AI use, particularly in light of the recent NSW Supreme Court ruling on generative AI in legal proceedings. They may request details on how the firm ensures compliance with court directives, such as preventing AI-generated content in affidavits, witness statements, and expert reports. Additionally, insurers may inquire about internal AI governance, including training for legal staff, disclosure policies for AI-assisted work, and safeguards to prevent the submission of inaccurate or fabricated AI-generated information. Given the potential risks of professional indemnity claims arising from AI-related errors or misrepresentations, firms may also need to demonstrate their approach to verifying AI-assisted legal research and drafting.

Insurers may have questions about how law firms are implementing AI governance frameworks and conducting regular audits to ensure ethical and effective use of AI. They might also be interested in the training provided to staff on AI usage and the protocols established to maintain human oversight. By showcasing their proactive measures and successes in AI integration, law firms can reassure insurers of their commitment to responsible AI use.

2. Fortifying cyber defences: Staying ahead of threats

Cybersecurity remains a paramount concern for insurers. Law firms are prime targets for cyber threats such as ransomware, phishing, and data breaches due to the sensitive information they handle.

Insurers will closely examine a firm's cybersecurity measures to ensure they are adequate. They may ask about the advanced cybersecurity protocols in place, the frequency of vulnerability assessments, and the ongoing employee training programs designed to enhance cyber resilience. Insurers might also seek information on the incident response plans firms have developed to mitigate the impact of potential cyber attacks.

3. Navigating regulatory waters: Staying compliant in a changing landscape

Australian law firms, whether national or internationally connected, face increasing scrutiny from insurers regarding their Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) compliance. Insurers may ask about client due diligence (CDD), beneficial ownership verification, and screening for politically exposed persons (PEPs). They may also review how firms manage high-risk transactions, report suspicious activity, and train staff on financial crime risks. Even firms without multinational clients can be affected if they facilitate large transactions, operate trust accounts, or engage in high-risk practice areas. A clear risk management framework and robust compliance policies can help firms secure favourable insurance terms.

Insurers will likely query how firms are proactively addressing these regulatory and compliance changes. This includes ensuring thorough documentation, providing continuous training for staff involved in compliance activities, and conducting regular reviews and updates to compliance policies. Internal audits to ensure adherence to legal standards are also of interest. Demonstrating a forward-thinking approach to regulatory compliance can build trust with insurers and clients alike.

4. Prioritising mental health: Creating a supportive work environment

The mental health and wellbeing of legal professionals are increasingly important to insurers. The high-stress nature of legal work can lead to burnout and errors, affecting overall productivity and increasing the likelihood of claims.

Insurers may be keen to know about the measures law firms are taking to promote a healthy work-life balance, offer access to mental health resources, and foster a supportive workplace culture. They might also turn their attention to provisions for mental health days, counselling services, and the creation of an open environment where employees feel comfortable discussing their mental health concerns.

Additionally, recent high court rulings have broadened employer liability for psychiatric injuries. In the case of Elisha v Vision Australia Ltd [2024] HCA 50, the High Court ruled that employers can be held liable for psychiatric injuries resulting from breaches of employment contracts. Insurers will likely want to know how firms are addressing psychosocial hazards in the workplace and ensuring that disciplinary procedures and other employment practices do not contribute to mental health issues.

5. Expanding horizons: Balancing growth with independence

Many law firms are expanding their services into consulting and advisory areas, offering clients a broader range of services. This expansion can include services such as crisis management, regulatory compliance consulting, and strategic advisory.

Insurers may inquire about how firms are balancing their expansion with maintaining independence and avoiding conflicts of interest. They might be interested in the scope of the consulting services offered and the transparency maintained with clients. Firms expanding into these areas need to clearly define the boundaries of their consulting services to avoid any potential conflicts with their legal practice. Insurers will also be focused on how firms ensure that their consulting services do not compromise their core legal services or create ethical dilemmas.

The risks associated with expansion can include professional negligence, conflicts of interest, and potential breaches of client confidentiality. Insurers will want to know how firms are managing these risks to prevent professional indemnity claims and ensure compliance with legal and ethical standards. By demonstrating a well-thought-out strategy for expansion, firms can reassure insurers that they are capable of managing growth while maintaining high standards of service and compliance.

Conclusion

By focusing on these key areas, Australian law firms can better prepare for the insurance renewal period and demonstrate to insurers that they are effectively managing risks. Proactive measures in AI governance, cybersecurity, regulatory compliance, mental health, and client relationship management will not only enhance a firm's operational resilience but also contribute to securing favourable insurance terms.