Professional Indemnity Insurance considerations when buying or selling a practice

IPA Insolvency Practitioner newsletter, December 2024

Article by Thomas Fahey, Associate, Lockton.

When considering the purchase or sale of an insolvency practice, Professional Indemnity Insurance (PII) is often overlooked in favour of more immediate concerns. However, ensuring your PII arrangements are addressed early in the process is crucial to protecting yourself and maintaining compliance. This guide outlines the key impacts of buying or selling a practice on your PII and provides steps to ensure a smooth transaction.

Understanding Professional Indemnity Insurance

PII protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided, or negligent advice you offered.

PII for insolvency practitioners is underwritten on a claims-made basis. This means a policy must be active at the time a claim is made—even if the work in question was completed years earlier. Because of this, “run-off” cover is essential.

Run-off cover protects practitioners after they cease trading by covering liabilities for past work. The Insolvency Practitioners Association (IPA) requires members to maintain run-off cover for a minimum of two years following cessation of trade. This requirement ensures clients and stakeholders have recourse in the event of any claims.

Buying or selling an insolvency practice

Your approach to PII during a transaction will depend on whether you’re the seller or the buyer. Below, we outline the considerations for each role.

Selling a practice

If you’re selling your practice, consider the following:

1. Run-off cover responsibilities
   • Will you personally maintain the run-off cover post-sale? If so, confirm this with your insurers. Ensure no work is carried out under your name or practice after the agreed run-off date.
   • If the purchasing firm assumes responsibility for run-off cover under their policy, you may need to provide your latest proposal form and claims history. Be cautious, as this arrangement requires trust that the buyer will maintain appropriate cover to avoid exposing you to future risks or IPA compliance breaches.
2. Budgeting for run-off cover
   • The cost of run-off cover can be substantial. Historically, block run-off policies were available, but these are no longer an option. Ensure you have the financial means to pay for the required two-year period, as premium finance options are often unavailable to firms no longer trading.
3. Clear agreements
   • Include explicit terms in the sale agreement regarding who will manage claims and maintain records. This ensures clarity and protects against future disputes.

Buying a practice

If you’re purchasing a practice, consider these factors:

1. Liability for past work
   • Will you be taking on the liabilities of the practice you’re buying? If so, this may affect your premium and how underwriters assess your risk. A poor claims history from the acquired practice could significantly impact your own policy.
   • If you assume past liabilities and a claim arises from previous work, it will affect your firm’s risk profile and potentially increase future premiums.
2. Using the existing trading name
   • If you continue to operate under the acquired firm’s trading name, ensure your policy includes this name moving forward. Insurers may apply a retroactive date to your policy, specifying that any work completed before this date is excluded.
3. Identifying historical issues
   • Implement processes to review past work thoroughly. Failing to address errors may result in claims that could be shared between your insurers and the run-off insurers. This can complicate claims resolution and impact your ongoing operations.

Best practices for a smooth transaction

Whether buying or selling, clear communication and thorough documentation are essential. Here are some key steps to facilitate a seamless process:

1. Agree on responsibility transfer dates
   • Clearly define when responsibilities for liabilities transfer to the purchaser. This is particularly critical if ongoing work spans the completion date of the transaction. Include this in the sale agreement.
2. Maintain access to historic files
   • Ensure both parties have access to historical client records. This allows either party to validate advice or provide documentation in the event of a claim.
3. Learn from real cases
   • In one instance, an error in payroll templates led to incorrect calculations over several years, resulting in multiple claims under the run-off policy.
   • In another case, the sudden passing of a sole practitioner left their family vulnerable to a claim. The run-off insurer managed all communications, alleviating additional stress on the family.

By addressing these considerations early and building them into your planning, you can ensure a smoother transition while protecting yourself and your clients. Whether you’re a seller securing your legacy or a buyer expanding your business, prioritising PII is a vital part of the process.

Please note that guest content does not necessarily represent the views of the IPA.