The subject of succession planning is one that law firms are spending a lot of time considering, so just be aware of the implications on your PII cover, writes Jake Fox

The subject of succession planning within law firms is something that is increasingly interesting professional indemnity insurers, particularly those that insure a large number of smaller firms. You may or may not be aware that the Insurance Act 2015 requires any insurance policyholder to disclose any material information to insurers. In our opinion, this would include any succession plans that you are making for your firm. So, having a clear plan for the future of your firm is not just about protecting your future; it may also be an important factor in continuing to secure competitive professional indemnity insurance (PII).

So, what is your succession plan and how do you present that to insurers? Do you have the right people within your firm that are prepared to take the business on? Are you looking to acquire or indeed be acquired? Or are you simply looking to wind down and purchase run-off cover?

If you are looking to promote from within your firm, your insurers will want to understand that the next generation of partners are fully equipped to run your firm. You may wish to give some thought to the following.

  • The potential new leaders of your firm may well be good lawyers, but what are you and they doing to ensure that they will run a good business?
  • What will you do to ensure a smooth transition?
  • How are you communicating any change to key staff and clients to protect the future of the firm?

This is all relevant to your PII insurer.

If you are looking to acquire another firm, then you will need to decide whether or not you are willing to become the successor practice, thereby accepting the acquired firm’s historical liabilities. Whether or not you become the successor practice, we would urge you to engage with your current PII insurer early on in the process. Undertake thorough due diligence that deals not only with the current firm, but also what the firm was like in the past. Actions to consider include the following.

  • Ask to audit some closed files as well as open files.
  • Ask to see their historical PII proposal forms to establish if they were doing any different work types in the past. This is particularly relevant in respect of conveyancing.
  • Establish whether or not the firm is a successor practice itself. If it was, undertake an audit of the files from any prior firms, too.
  • Ask to see their current PII details as well as full insurer claims summaries for at least the last six years.
  • Does their current premium look too high? If so, why? If they have been insured by an unrated insurer, this may raise concerns, particularly if they have claims not yet settled by a now insolvent insurer. If you become the successor practice, could you be liable for these claims?

If you have no intention of becoming the successor practice, would you be willing to contribute to the acquired firm’s run-off premium? This may make the acquisition more palatable for both your PII insurer and the firm you are looking to acquire.

If you are looking to be acquired, then can you confidently say that your house is in order?

  • Will the acquiring firm’s insurer view your firm as an attractive risk?
  • Can you confidently present your historical liabilities to interested parties and explain your PII claims record?
  • If you have had claims issues in the past, have you put processes in place to mitigate against recurrence in the future?

Are you prepared to discuss putting your PII policy into run-off to help enable the acquisition? If so, are you aware of the costs involved? Typically, run-off premiums are charged at 250 per cent to 350 per cent of the annual premium and offer cover for six years.

Finally, if you are considering an orderly closure of your business and you are looking at run-off insurance, explain this to your insurer in plenty of time. Reassure them that you have the money available to pay the premium. If your fee income is reducing over a period of time, explain the long-term plan, to avoid your insurers jumping to the wrong conclusion. Most insurers want to avoid issuing run-off policies if they can, because most run-off policies tend to be for firms closing in difficult circumstances. If your firm is simply winding down towards an orderly closure, then explain this in plenty of time.

We know that the subject of succession planning is one that law firms are spending a lot of time considering, so just be aware of the implications on your PII cover.