“… the number of insureds under a practice’s professional indemnity insurance can easily double every fifteen or so years …”
(First published in the Law Society Gazette on 20 August 2009)
Last year a letter dropped though the door of numerous former employees of Merricks LLP, putting them on notice that if certain of the former members had to pay Merricks’ run-off insurance premium of £834,437, they might seek a contribution from Merricks’ former qualified staff. (See The Law Society Gazette of 10 April 2008.) As one affected solicitor pointed out at the time, if employed solicitors are liable to contribute to a run-off premium, all non-solicitor employees (managers, secretaries and other non-legal staff) would also be liable. A professional indemnity policy does not distinguish between fee-earners and non-fee-earners.
When a practice ceases, as Merricks’ did in 2004 (going into administration, and later, in 2006, into liquidation), and if there is no successor practice, and no other steps have been taken to put a run-off policy in place, the insurers of the practice at the date of cessation are required, under the Minimum Terms & Conditions of Professional Indemnity Insurance, to provide professional indemnity cover for a six-year run-off period. The persons insured include all persons who were at any time in the past principals or staff of the practice, or of any practice to which the now ceasing practice was the successor practice (usually following a merger, acquisition or LLP conversion). Indeed, in the case of Merricks, there had been a merger with another practice in 2002.
Notwithstanding that most claims against a practice older than six years, or at most fifteen years, will be statute-barred, there will be exceptions, and even if there were to be a rock-solid limitation defence to any given claim, that would not stop some claimants “having a go”, giving rise to defence costs, some or all of which might be irrecoverable.
Thus, for any one practice, there can be an enormous pool of “alumnae” going back fifteen years or more, who might realistically face claims, and who are indemnified under the run-off policy for all claims first notified during the six-year life of the run-off policy. Even with a modest rate of partner and staff “turnover”, and before taking account of expansion of a practice over time (organically or by merger), the number of insureds under a practice’s professional indemnity insurance can easily double every fifteen or so years, just through people who have left being replaced.
In return for this valuable, all-encompassing, automatic, six-year run-off cover, the insurers are entitled to charge a premium (if, which it invariably does, the final annual policy so provides). This premium is typically 250% of the premium charged for the practice’s final annual policy.
If a practice does not pay the run-off premium, for example because it is insolvent, the insurers are still obliged to provide the run-off cover, and thus to indemnify all insureds against claims brought during the run-off period. The insurers will therefore wish to recover the premium if they can, and will inevitably ask themselves who amongst the insureds is liable to pay it.
One of the principal purposes of trading through an LLP is, of course, to enable the members to avoid liability for trading debts altogether, in the event of the insolvency of the business. If an LLP’s professional indemnity insurance policy did no more than comply with the requirements of the Minimum Terms & Conditions, that policy would cast no contractual liability onto the members or onto any other insured to pay a run-off premium.
However, the Minimum Terms need not be the only terms of the policy. In Jones v St Paul International Insurance Company Limited [2004] EWHC 2209* the LLP’s policy contained a term, “Each insured shall have joint and separate liability in respect of the duties or monies owed to the company under this policy.” Mr Jones, a member of the insured LLP, had sought to set aside a statutory demand served on him by St Paul in respect of an unpaid run-off policy premium, but he had failed to take a point as to whether the LLP in that case had his authority to bind him personally to that provision. On the hearing of the bankruptcy petition, and on appeal against the bankruptcy order, he was not permitted to pursue that issue. But in the judgment on the appeal the Judge discussed the issue (probably obiter), contrasting ordinary partnerships in which partners have ostensible (and indeed statutory) authority to bind one another, with LLPs where it can be argued that there is no ostensible authority (and certainly no statutory authority) vested in the LLP (or in any of the members) to bind members or other insureds to personal liability for any run-off premium (or indeed for any other liability).
The Judge concluded that where, as in Mr Jones’ case, the policy also insured the liabilities of the former practice of the members, which was an ordinary (general) partnership, the LLP would have ostensible authority because the LLP “was under an obligation vis-à-vis its members to insure their liabilities in respect of the [prior] private practice as general partners.”
Contrary to that view, one might argue that:
• An LLP requires no authority from any prior practice to insure itself;
• The fact that participants in prior practices are insured is only a by-product of the requirements of the Minimum Terms – an LLP has no choice but to insure all of its prior practices, including any partnership out of which it may have sprung on conversion;
• Whilst prior practice partners can still bind one another in respect of matters necessary to effect the winding up of the prior practice, they are not acting as partners of the prior practice when (as members in the LLP) they procure that the LLP takes out insurance which the LLP requires in order to practise;
• Insurers should be aware that not every (and in some cases, not any) member (still less every insured) will read every word of the original policy document before the policy is brought into effect, and that those who do read it may not draw the attention of others to the joint liability clause;
• It should only be in very rare and exceptional circumstances that a Court finds that a corporate entity has ostensible authority to bind its officers and/or employees personally to one of its own liabilities, given that the persons concerned have deliberately chosen to practise with limited liability; and
• Personal liability of all insureds is not a requirement of the Minimum Terms.
Therefore, even in cases in which there is a “personal liability of all insureds” clause, and where some or all of the members were in a prior practice partnership, there must be considerable doubt as to whether most such members would be liable for the run-off premium. Members who participated in putting the insurance in place might be liable under the clause and/or have to answer an allegation from the insurer of breach of warranty of authority.
Members who were not in a prior practice partnership (and who did not personally arrange the LLP’s insurance) must be in an even stronger position to mount an argument against personal liability.
All members might well face disciplinary proceedings for having allowed a “policy default” to occur under the Indemnity Insurance Rules (by failing to pay the run-off policy premium within two months of its falling due), though the sanction (even the ultimate sanction) may not reflect in financial terms the extent of the unpaid premium.
Whatever the outcome for individual members, it is difficult to envisage how employees of the LLP could be liable to pay the run-off premium, still less members, partners and employees of prior practices who were never associated with the LLP. It appears to be inconceivable that an LLP and its representatives could have ostensible authority to bind such persons to personal liability.
In a partnership facing the same difficulties, all of the partners would be liable to the insurers for the run-off premium, because of the joint liability for partnership debts imposed by section 5 Partnership Act 1890. Whether salaried partners would be liable might depend on a true construction of the policy of insurance (in particular whether the intention was to contract only with true partners) and on whether the terms on which the “salaried” partners were “employed” were such as to constitute them true partners (see for example Stekel v Ellice [1973] 1 WLR 191).
For professional conduct purposes, persons held out as partners fall within the definition of “Principal” under the Indemnity Insurance Rules, and thus, together with the true partners, they have a professional obligation to avoid “policy default” by paying all professional indemnity insurance premiums. Some might regard that requirement as anomalous, since most salaried partners have no influence whatsoever on the conduct of the practice and, as discussed above, many may have no contractual liability to pay run-off or other premiums.
The position of true employees of a partnership in default, and of its former partners who retired pre-inception of the final insurance year contract, and of partners of its prior practices, is the same as it is in relation to LLPs.
* As reported, this case appears to relate to a limited partnership, but reference to the LLP’s records at Companies House confirms that it was an LLP.
