Solicitors PI: consultation on successor practice definition

The Solicitors Regulation Authority has opened a consultation on a proposed change to the definition of “successor practice” in the Minimum Terms and Conditions, click here. The SRA’s intention is to alleviate a problem which they currently perceive as an obstacle to the marketing of solicitors’ practices for sale.

The obstacle is that, given the “claims made” basis on which solicitors’ professional indemnity insurance is underwritten, a solicitors’ firm which is interested in, for example, acquiring the practice of a retiring sole practitioner may be very reluctant to do so, as becoming the “successor practice” to the sole practitioner’s business means that it is liable to deal with claims which may surface in the future, leading to a possible deterioration in its own claims record. The Qualifying Insurer of the potential acquirer will inevitably (and quite rightly) be concerned about such a prospect.

The SRA is concerned that this difficulty in disposing of practices has led, instead, to firms being run down and closed in a way which is giving rise to a number of problems, including an increased incidence of claims by clients.

The proposed solution is, therefore, to amend the Minimum Terms and Conditions to provide that the firm being sold may make an election within 30 days following the cessation of its business (i.e. on acquisition by another firm) to activate run-off cover with its existing insurers, who will then deal with any future claims under the run-off policy. The resulting ring fencing will mean that the acquiring firm, and its insurers, will not be liable for future claims.

The corollary of this proposal is that the existing Qualifying Insurer will be liable for six years run-off, often in circumstances where they are unable to collect the run-off premium and face evidential difficulties in seeking to defend claims. Although the principals of firms going into run-off but who are continuing in practice elsewhere are usually able to engineer matters to avoid triggering the “successor practice” provisions, Qualifying Insurers are likely to be issuing a greater number of run-off policies. This, in turn, highlights the need for increased diligence in the assessment of new and continuing risks, particularly given the solvency risks facing firms in the current recession.

The closing date for participation in the successor practice consultation is 12 February 2010.

The consultation on the definition of “successor practice” was launched by the SRA in parallel with its related consultation on the future of the Assigned Risks Pool. For more information on that consultation [click here](http://www.sra.org.uk/sra/consultations/assigned-risks-pool-arp-review-november-2009.page).

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