The PI consequences of selling or merging a firm are usually the last thing on the partners’ minds and the first thing that goes wrong after completion.
A professional practice sale is not just a corporate transaction. It is a regulatory event that triggers specific rules on successor practice, run-off cover, and the transfer (or non-transfer) of historical liabilities. Get the analysis right and the PI burden lands where the parties intend. Get it wrong and the vendor pays for run-off they did not need to buy while the purchaser inherits a liability they did not price into the deal — or worse, neither party has cover and an old claim lands in the gap. This guide sets out how the PI analysis should run on a partnership merger or practice sale, with particular focus on SRA-regulated firms but with principles that apply to any minimum-terms profession.
The first technical question on any sale or merger of a regulated firm is whether the transaction creates a “successor practice” within the meaning of the regulator’s indemnity insurance rules. The SRA Indemnity Insurance Rules define succession by reference to whether a new practice carries on the work, holds out as the continuation, takes the client files, or in substance continues the old practice’s business. The analysis is fact-specific and the regulator’s definition is purposive — labels in the sale agreement do not determine the answer.
Where there is successor practice, the purchaser’s PI policy automatically picks up the vendor’s historical work. The vendor does not need to buy six-year run-off because the cover continues into the purchaser’s MTC layer. This is the desirable outcome for most consensual mergers and acquisitions.
Where there is no successor practice — typically a pure asset sale of selected files or a dissolution rather than a continuation — the vendor must purchase run-off cover under the MTC. Run-off premium is set as a multiple of the firm’s last annual premium, payable on cessation, and runs for six years. SIFL’s arrangements pick up some longer-tail exposures, but the six-year cost sits with the closing firm.
The corporate form of the transaction also matters. A share sale of an incorporated practice (Ltd or LLP) transfers ownership of the legal entity and, in principle, the entity’s historical liabilities continue in the entity. The buyer steps into the company’s shoes. An asset sale transfers selected assets (typically goodwill, client files, certain employment contracts, work-in-progress) but leaves legacy liabilities with the seller’s legal entity. The PI consequence is markedly different. A share sale typically does not require run-off because the entity continues; an asset sale typically does require run-off because the original entity is closing.
The Transfer of Undertakings (Protection of Employment) Regulations 2006 will usually apply to the staff side of an asset sale, but TUPE has limited direct impact on the PI analysis other than confirming the transfer of work and personnel that supports a successor practice finding.
The MTC’s successor practice clauses operate automatically. Where the conditions are satisfied, the purchaser’s policy attaches to claims arising from the vendor’s historical work, regardless of when that work was performed. The vendor’s expired insurer continues to bear liability for claims notified up to the date of succession, but new notifications after that date land with the purchaser’s insurer.
The purchaser’s insurer is entitled to know what it is taking on. The duty of fair presentation under Insurance Act 2015 section 3 applies at the purchaser’s renewal following the acquisition (and at inception if the acquisition triggers a new placement). The purchaser must disclose the historical fee income, claims history, and notification record of the acquired firm as material circumstances. Failure to do so may give the insurer remedies for breach under section 8.
Where the transaction is structured to avoid successor practice — for example by leaving the vendor’s old entity in place to run off its own historical work — the vendor’s policy continues for the period of insurance and the vendor purchases run-off on cessation. The vendor is responsible for managing notifications throughout the run-off period.
On a share sale, the buyer’s due diligence should focus on the PI policy in place, the notification register, any open circumstances, the run-off provisions, and the consequences under change-of-control clauses in the existing policy. Most PI policies require notification of a change of control, and some markets reserve the right to amend terms or premiums on a change. The deal documentation should warrant that all notifications are up to date and that no circumstance is known and unnotified.
On an asset sale, the documentation should record the parties’ agreement on which firm will respond to which historical liabilities, and the vendor’s commitment to buy run-off should be a closing condition. The purchaser should obtain a copy of the run-off cover note as a condition of completion.
Consider a hypothetical SRA-regulated firm, A&Co (six partners, fee income £4m), being acquired by a larger regional firm, B LLP (twenty partners, fee income £18m). A&Co’s principals will retire on completion; B LLP will take all client files, all staff, and the office lease, and will hold out as carrying on the work.
The transaction is structured as an asset sale of A&Co’s business and goodwill to B LLP. On the face of the documentation, A&Co is closing.
The PI analysis: this is a successor practice. B LLP carries on the work, takes the files, takes the staff, and holds out as the continuation. The SRA Indemnity Insurance Rules’ successor practice definition is satisfied. A&Co does not need to buy six-year run-off; B LLP’s MTC layer attaches to A&Co’s historical work automatically.
Had A&Co bought run-off “in case” — at, say, 2.5 times its last annual premium of £140,000, or £350,000 — the cost would have been wasted. The partners’ completion proceeds would have been reduced by that amount unnecessarily.
B LLP, on its next renewal, discloses the acquisition, the £4m of acquired fee income (largely commercial property and litigation), A&Co’s claims record, and any open notifications. Its renewal premium increases to reflect the larger book but the placement holds.
Three years later, a claim emerges from a 2019 commercial property file handled by A&Co. The claim is notified to B LLP’s current insurer. Because the work falls within B LLP’s MTC successor practice cover, the policy responds. Defence is run by B LLP’s panel.
The PI tasks on a sale or merger should be sequenced rather than reactive.
Apex’s view: We see firms buy run-off they did not need almost as often as we see firms fail to buy run-off they did. The successor practice analysis is technical, time-sensitive, and worth six figures of premium either way. Bring your broker into the deal at heads of terms, not at completion. The same goes for change-of-control notifications — the policy wording usually has a clear path, but the wording rewards the firm that reads it before the announcement, not after.
Apex Insurance Brokers serves UK professional services firms and commercial businesses. Call 0117 325 0027, email hello@apexinsurancebrokers.co.uk, or request a quotation.
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