How PI insurance impacts succession planning

17 March 2017

The requirement for solicitors to purchase and maintain Professional Indemnity Insurance (PII) has a major bearing on decisions that firms and their partners take in relation to succession planning and retirement. In this article we explore how professional indemnity insurance impacts on various succession planning options.

We would strongly suggest that firms considering succession planning options should consult their broker or insurer at an early stage so that informed decisions can be made in light of the impact that professional indemnity requirements will have.

Retiring - Existing firm to continue

The Solicitors Regulation Authority (SRA) professional indemnity rules require that the continuing firm provides cover to former partners and in the event of their death their estate. Thus on retiring a partner remains covered for any liabilities falling to be met by that retired partner arising out of the private legal practice of the firm. 

Should the firm subsequently close then it will be required to purchase six years run off cover that meets the requirements of the minimum terms and conditions for solicitors professional indemnity which of course will still provide cover in respect of any former partner. 

Currently the minimum terms and conditions require that a firm purchases cover with a limit of indemnity of at least GBP 2 million for sole practitioners and partnerships and GBP 3 million for incorporated practices and Alternative Business Structures (ABS). Firms are of course free to purchase a higher limit and indeed regulatory outcome 7.13 requires that firms make an assessment of what indemnity limit is appropriate for that practice and purchases cover at that level. 

It is important to remember that solicitors professional indemnity policies are written on a claims made basis which means that it is the policy in force at the time that a claim is made (or circumstance first notified) that pays not the policy in force at the time that the work was done.

For this reason, where the indemnity limit is in excess of the mandatory minimum, when retiring it would be prudent for the retiring partner to make an agreement with the continuing firm that it will maintain an indemnity limit going forward at the current level. 

Many solicitors professional indemnity policies carry an excess which in many cases benefit from an aggregate cap but some may not. The continuing firm and the retiring partner will need to agree whether or not the retiring partner will meet or contribute to any excess in relation to any claims for which the retiring partner has a liability. The retiring partner will also need to remember that in the future the firm may opt to increase the excess and thus it would be prudent for them to agree a maximum amount.

Of the practice - Requirements

Where a firm closes with no successor practice then SRA indemnity insurance rules require that the firm purchase six years run off cover. 

Further, the Participating Insurer Agreement (PIA) requires that the insurer on risk at the time a firm closes must provide six years run off cover even if the firm is unable to meet the premium. 

Having said that insurers must provide cover even where the premium has not been paid this should not be considered as an option by firms or their partners.

Non-payment of the premium is a disciplinary matter and may affect the ability of the former partners of the closed firm to maintain a practicing certificate. Further the participating insurer’s agreement requires insurers to notify SRA where premiums have not been paid. 

Where a firm has not paid the premium due if this firm is a partnership the insurers could and certainly have been known to seek recovery of outstanding premiums from the individual partners. Of course many practices benefit from limited liability however this is not necessarily a protection as we have seen policies that contain conditions making the principals of firms benefiting from limited liability personally liable for outstanding premiums.

Download Risk Focus

For further information, please contact James Frost, Associate on +44 (0)121 626 7841 or email james_frost@jltgroup.com