There are lots of aspects to consider when you're thinking about buying or selling a practice. As a result, Professional Indemnity Insurance (PII) can often end up as one of the last things on your list – but that doesn't mean it's not important.
Below, we've provided some guidance to help you understand the potential impact of any purchase or sale on your PII. We've also listed some steps that you can take to ensure a smooth transaction.
Understanding Professional Indemnity Insurance (PII)
First of all, it's important to understand the basis of the cover itself.
Unlike many insurance covers, PII is underwritten on a claims-made basis. Simply put, that means in order to have recourse to insurers, you must have a live PII policy in force at the time a claim is made. It is irrelevant whether you held a live policy at the time you completed the work in question.
For this reason, firms are required to take out 'run-off' cover. This exists to protect firms once they cease to trade, by covering their past liabilities in the event of any claims. The ACCA requires members to maintain run-off cover for 6 years once they cease to trade.
Buying or selling a practice
When it comes to a purchase or sale, how exactly your cover responds will depend on whether you're the purchaser or the seller. In each case, below are some areas that should be considered, and how best they should be approached:
Selling a practice
If you are selling your practice, be sure to consider the following…
- Will you be responsible for maintaining the run-off cover once the sale goes through? If so, ensure you discuss this with your insurers, and do not carry out any work after the run-off date agreed upon. ACCA requirements are for run-off to be maintained for 6 years.
- If you're not responsible for maintaining run-off, is the purchasing firm going to be responsible for covering your run-off under their policy moving forwards? If so, you will likely need to provide them with your last completed proposal form and claims history. But consider the potential pitfalls of this approach. For instance, how will you ensure that the purchasing firm continue to maintain cover for the appropriate period – either to avoid you becoming exposed in the event of a claim, or falling in breach of the ACCA regulations?
- How will you pay for the run-off cover? Historically, some providers have offered block run-off policies, however this is no longer available. As a result, budgeting for the premiums can become more complicated. Premium finance options are also often unavailable to firms who have ceased to trade, so you should ensure you have means to pay for the cover for the six-year period.
Purchasing a practice
If you are the purchasing firm, factor in the following as part of your considerations…
- Will you be responsible for covering the past liabilities of the firm you are buying once the purchase goes through? If so, this is likely to impact on your premium and the rating approach that your underwriters take. For example, if the firm you are purchasing has a poor claims history, this will impact upon your policy as a whole. Similarly, if you take on the past exposures under your policy and a large claim subsequently arises from work completed by the firm you purchased, this claim will impact your risk profile moving forwards.
- If you are not responsible for the past exposures but are planning to use the existing trading name of the firm you are purchasing for any period of time, you should ensure this is included within your own policy moving forwards. Your insurers will likely look to apply a retroactive date to the policy for the new firm, which will confirm that no work completed prior to the date in question will be covered.
- What processes will you need to put in place to review and pick up on any potential problems from past work completed by the purchased firm? If there is an error in past work that is not picked up, and is then replicated in the future, you may find that any claims are split between your insurers and the run-off insurers.
Best practice for a smooth transaction
Regardless of whether you are the purchaser or the seller, what is important for both parties is for responsibilities to be appropriately understood and agreed upon.
Both parties should agree on the date from which responsibility transfers to the purchaser, particularly if completion of work straddles the completion date. It is sensible to build this into the sale agreement – we are often notified of new claims during the first year of run off, brought to light when a fresh pair of eyes reviews past work. In one case, a client picked up on a template error for payroll calculations which spanned several years, including incorrect holiday pay and pension calculations. This resulted in six claim notifications being made under the run-off policy.
In the case of another client, the sole trader had passed away suddenly, resulting in a claimant actively trying to pursue a claim against the insureds family. As you can imagine, this added immensely to the family's distress. In this case, run-off insurers managed all communications with the claimant to relieve the family of further upset and conclude the claim.
Each party should also ensure that the other relevant parties have access to historic files. This ensures that, should a claim arise, they will be able to validate the advice given or provide copy documents or communications.
For further information, please contact:
Catherine Davis, ACCA Relationship Manager
E: catherine.davis@lockton.com
Chloe Sweet, Vice President