Run-off insurance for solicitors
Published: Tuesday, 13 July 2021
You need to plan carefully if you are thinking of closing or selling your business
It’s easy to think that when we retire, that is ‘it’- we finish our working lives and sail off into the sunset! Unfortunately, liability for legal work completed in the past does not end there and limitation periods will still apply even after you have finished working, or your business has ceased trading. Cover needs to be in place, as defined by the SRA Minimum Terms and Conditions for Professional Indemnity insurance, in case there is a future claim arising from past actions.
For many who work in larger firms, where the business will continue to exist, this protection is provided by the ongoing policy of the firm. For those in smaller firms such as sole practitioners or small partnerships, a good deal of thought and planning needs to go into ensuring that affordable cover is in place.
How does run-off cover work?
An SRA compliant PII policy has provisions within it that should your firm close, the policy will automatically convert to provide run-off cover for a period of six years.
How much does run-off cost?
Insurers charge for this, and it is likely that the premium will be calculated at a multiple that will be somewhere between two to three and a half times the annual premium. This amount will usually be written into your policy wording so make sure that you read the small print and understand the costs involved at the outset. Typically this is paid upfront as a lump sum before the business closes.
Where can I buy run-off cover?
To clarify, unlike your annual policy, run-off cover cannot be bought from any insurer. Your PI policy is automatically converted when your insurer is informed that you are no longer trading.
Risk management and planning is key to avoid nasty surprises
The date of retirement or cessation of the firm should be thought about and planned for many years in advance and if it is likely that you will be opting for closure rather than sale, then clearly it is sensible to plan for the run-off premium payment so that it does not come as a shock or surprise. As run-off premium is calculated as a multiple of your current premium, managing your business through good risk management, claims avoidance and income planning will help to keep costs down when the time comes.
Selling your business?
Run-off not only plays a key part in retirement and closure, it also has a significant impact should you wish to sell your business. In that situation the key question of whether the new firm will become a ‘successor’ practice will be raised. This is where the liabilities for the past work of the acquired firm are covered under the policy of the ongoing practice. From the seller’s point of view this is good news as the issue of separate run-off provisions does not arise.
However, it may well be that Brokers and Insurers will advise against this as the acquiring firm could be taking on responsibility for work carried out when they had no control over working practices. I have seen many firms run into just such difficulties that have mortally wounded a well-run firm through no fault of their own, other than a willingness to accept these liabilities.
Within the SRA wording is the provision for you to take elective run-off cover. This is where, as described above, a firm can elect to convert their current policy to run-off by the payment of the premium already stipulated in the policy conditions. This will only be activated if the premium is paid and, if it were not, any successor practice would still acquire responsibility for claims arising from past work by default. So, a paid-for run-off policy becomes a key component in the successful sale and acquisition of legal firms.
Cover after 6 years? What’s happening with SIF?
Finally, the question of what will happen after the initial six years of run-off cover has expired is something that has been coming to the fore in recent years. The Law Society estimates that 11% of claims arise between 6 and 15 years after a business has closed. Currently any such cover is provided by SIF – the Solicitors Indemnity Fund. This was due to come to an end in 2021 however this has now been extended to 2022 as the SRA look for a solution. The Law Society have written a helpful article (see the link below) on the closure of SIF and how to maximize your chance of obtaining post run-off cover in 2022 should this become necessary.