Top tips to ensure you aren’t caught out
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.
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. ACCA requires members to maintain run-off cover for six years once they cease to trade.
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:
Buying a practice
If you are the purchasing firm, factor in the following as part of your considerations:
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 insured’s 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 visit Lockton’s Accountants page, or contact
Catherine Davis, ACCA relationship manager: catherine.davis@lockton.com
Chloe Sweet, vice president, on chloe.sweet@lockton.com
Lockton is ACCA’s recommended broker for professional indemnity insurance.