The definition of what constitutes a “Successor Practice” in the Minimum Terms and Conditions of Professional Indemnity Insurance for solicitors (“the Successor Practice definition”) exists in order to determine which insurer covers claims against firms which have merged, been taken over, or have otherwise joined with another firm. The way in which the Successor Practice definition operates will be of particular interest to firms and their insurers at the time of renewal; becoming a successor practice can lead to significant liability for claims, and insurers will want to know precisely what they are being asked to insure before confirming cover.
It is in everyone’s interests for the Successor Practice definition to be as clear and as certain as possible. In some cases, it is obvious both (1) that there is a successor practice, and (2) which firm that is. Unfortunately, though, there are scenarios where the definition is not as clear as it could be, or inconsistent results are produced. This can lead to uncertainty for law firms and their insurers (as well as potential claimants), and disputes as to which policy responds to specific claims. This can cause unnecessary expense and delay when claims present themselves.
“Holding out” – the most straightforward scenario (or is it?)
If Firm B has “held itself out” as a successor to Firm A, it will automatically fall under the Successor Practice definition and going forwards, claims against Firm A will be covered by the insurers of Firm B, assuming those claims otherwise fall within the terms of Firm B’s policy. Where Firm B has sought to hold itself out as successor practice to Firm A, by adding details of Firm A to its notepaper, issuing press releases and so on, this arrangement is straightforward and leads to a predictable result. In this scenario Firm B falls squarely within the Successor Practice definition, and can make appropriate provisions regarding the potential liabilities of Firm A (such as obtaining indemnities from Firm A’s former partners).
Things become less straightforward when Firm B takes on some of the elements of Firm A (clients, former partners, staff etc) but does not herald the change with publicity, changes to the notepaper or other fanfare. Firm B may try to keep the transition “under the radar” to try and avoid falling within the Successor Practice definition, and to avoid picking up claims arising out of Firm A’s business. But the definition covers holding out either “expressly or by implication”. It is regularly argued against Firm B in these situations, commonly with success, that despite its best efforts, Firm B has held itself out as successor of Firm A. Slip ups typically happen on Firm B’s website; it can be difficult to cater for the arrival of fee earners without saying who they are and where they have come from. Holding out can potentially also occur in the agreement between Firm A and Firm B itself.
An inconsistent result
Where there has been no holding out, the definition determines when Firm B will be a successor practice to Firm A in any event. It distinguishes between Firm A as a sole practitioner, a “Recognised Body” (LLP) or a partnership. This is another area where disputes may arise. Where Firm A is a partnership and the majority of partners have become principals of Firm B’s owner, Firm B will be a successor practice. Further, Firm B will be a successor practice to Firm A where one or more partners of Firm A have become principals of Firm B’s owner and either:
- Firm B uses Firm A’s name or substantially incorporates A’s name (or a substantial part of it); or
- Firm B is carried on from Firm A’s premises; or
- The owner of Firm B acquired the goodwill and/or assets of Firm A; or
- The owner of Firm B assumed the liabilities of Firm A; or
- The majority of Firm A’s staff became employees of Firm B.
This makes sense as these options cover scenarios where Firm B has taken over a significant aspect of Firm A. The successor practice definition was intended to create a successor practice where possible, and its operation in relation to partnerships demonstrates this.
One would expect the definition as it relates to an LLP to follow the provisions relating to partnerships. However, where Firm A is an LLP and there has been no holding out, Firm B will only be its successor practice if Firm A’s owner (i.e. the LLP itself) becomes a principal of Firm B’s owner. This is much more limited than the provisions relating to partnerships. It does not include scenarios where members have transferred along with significant aspects of “Firm A LLP”, such as its staff, premises or goodwill. It is unlikely to cover firms which have taken steps to fall outside the successor practice definition. The definition was intended to create Successor Practices where possible but, in relation to LLPs, this does not always happen.
This inconsistency can cause confusion in claims against “Firm A LLP” where Firm B has taken over, for example, its premises/employees/goodwill, as it may be assumed at first that Firm B is a successor practice whereas, if there has been no holding out and the LLP itself is not a principal of Firm B’s owner it will not be.
The Minimum Terms have recently been amended to allow Firm A to purchase run-off cover from its existing insurers, rather than Firm B (as successor practice) taking on its liabilities. This will add certainty in such situations, assuming it is used.
- If there has been holding out there will be a successor practice
- Firms can hold out without realising it
- The definition as it applies to LLPs can be restrictive and care in determination is required