This is a question we often get asked because in some professional indemnity insurance contracts there seems to be a clause that states that if you are considering the disposal of your firm, you are in the process of selling it or planning to fundamentally alter it you need to notify your insurers. Because solicitors quite rightly want to adhere to the terms of their contract, quite a few partners query at what stage they need to notify their insurers that they are looking for a sale.
Vague Advice
I am afraid that our advice on this is going to be a bit wishy-washy because whilst one could question why a professional indemnity insurance broker needs to know about a sale of a law firm prior to it going through as it is really none of their business, some of these clauses are worded in a way that mean there almost seems to be an obligation to notify in these circumstances.
The most common way for buyers to acquire a law firm is to either join as partners if it’s a partnership or directors if it’s a limited company and then for the sellers to simply resign and the buyers carry on. This then gives continuity to the practice, which has not closed down and the buyers have not become a successor practice because the practice still exists and is trading still.
Unless there is something particularly bad about the buyers then in theory the insurance should remain much the same because nothing will have changed, other than there will be new owners. Naturally if the types of work change or new works coming through, or there are new fee earners joining, then this will substantially alter the terms of the professional indemnity insurance policy and the potential risk, but if the practice is carrying on in the same areas of law, the location is the same and there is no further risk, then there is little to worry any professional indemnity insurance brokers because everything is the same and they still get paid their money every year.
However, things never seem to work out quite so smoothly as that, and unfortunately the insurance industry has its talons well and truly into the solicitors profession. There seems to be a plan by insurers to charge an extra fee at any point they see the opportunity to do so.. I suspect that the clause in relation to notifying them if you are thinking of a sale simply relates to a chance to charge more money for the privilege of the brokers considering the fact that you are considering a sale.
So whilst we cannot advise you to go against any contractual terms you may have, we think you need to question why a PII broker would need to know that you are thinking about a sale and how on earth they would ever know about a potential sale prior to it actually occurring if you are just in discussions with potential buyers. You will need to make your own judgement call.
I’m pretty sure I know what I would do in the circumstances but I think it does have to be an individual decision.
There do not appear to be the same issues arising for accountants in relation to professional indemnity insurance.
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