LLPs and PII – frequently asked questions
Professional indemnity insurance implications of a practice being established as, or converted to, a limited liability partnership
The possibility of establishing or converting to an LLP has prompted many to consider whether, in relation to the practice’s Professional Indemnity Insurance (‘PII’), there may be a cost benefit. Would operating as an LLP justify the practice reducing the level of PII maintained by the practice? Would there be a reduced rate of PII premiums? The PII implications of operating as an LLP are considered by reference to these and other questions.
Does the Master Policy cover LLPs?
Yes. As long as the LLP complies with the relevant Rules and has been recognised by the Society. Do I need different professional insurance cover if I am a member of an LLP?
No, the Master Policy provides the compulsory cover (currently £1,250,000) for all solicitors in private practice in Scotland whether the solicitors’ practice is established as a sole practitioner practice; ‘regular’ partnership; incorporated practice or LLP.
Any additional (‘Top-Up’) cover is arranged in the same way for an LLP practice as it is for any other format of practice.
Does each member/employee of an LLP need their own Master Policy cover?
No. An LLP’s Master Policy cover is for the benefit of the LLP itself and for the benefit of its members and former members. The cover will also apply to all the practice’s employees, past and present. Does an LLP need to have a higher limit of PII cover than a ‘regular’ Partnership?
No. In England and Wales, LLPs are required to have a higher level of compulsory cover. However, there is currently no differential between LLPs and regular partnerships in Scotland. All practices have the same level of compulsory cover (£1,250,000) under the Master Policy irrespective of the way the practice is constituted.
It has been suggested that some commercial clients of practices which convert to LLP might seek to require cover to be increased to reflect the fact that they will have no recourse to the personal assets of all the members.
Could we reduce the level of our PII cover if we convert to LLP?
It is not permitted/possible to have less than the compulsory level of cover (currently £1,250,000) under the Master Policy. The level of any cover in excess of the compulsory Master Policy cover is always a matter for the practice itself. However, the exposure of the practice is unchanged by conversion to LLP and conversion leaves the personal assets of a ‘negligent member’ exposed notwithstanding the practice’s LLP status. That would tend to suggest that cover ought to be maintained at the practice’s pre-conversion level of cover.
In certain circumstances, commercial clients may specify the minimum level of cover to be maintained as well as the period for which cover is to be maintained at that level. Do we get a reduction in premiums for converting to LLP?
All solicitors in private practice are required to have cover under the Master Policy for the standard Limit of Indemnity (£1,250,000) no matter how the practice is constituted. The level of a practice’s Master Policy premiums is determined by reference to the number of ‘principals’ in the practice, the number of staff in the practice, the level of the practice’s self-insured amount and the practice’s Master Policy claims record.
If the practice arranges additional (‘Top-Up’) cover over and above their Master Policy cover, premiums will tend to be dictated by the level of cover, the level of the practice’s fee income and any relevant claims experience.
The exposure of the practice itself, and the exposure of the practice’s insurers, is unaltered by conversion to LLP. There is currently considered to be no basis for reducing the rate of premiums payable by LLP practices.
Will our premiums increase if we convert to LLP?
Unless any of the rating factors (mentioned above) change at the same time as the practice converts to LLP, then there is no reason for there being any change in the level of the practice’s premiums.
If we convert to LLP, are there any formalities involved/additional forms to complete?
Whenever there is a change in the constitution of the practice (e.g. merger, de-merger, dissolution, conversion to LLP), the Master Policy insurers need to be advised, via Marsh, and it may be that a Master Policy proposal form requires to be completed in respect of the new/continuing practice(s). At the very least, there needs to be clear agreement as to the basis of continuing Master Policy cover (and Top-Up cover, if required) for the practice’s pre-conversion work – either on the basis of ‘Run-Off Cover’ or on the basis of the LLP’s continuing cover.
We converted to LLP to give more transparency. Can we disclose our insurance arrangements/ limits to clients?
There is no problem so far as the Master Policy insurers are concerned.
If the practice has arranged additional (‘Top Up’) cover, such enquiries might be answered by stating that the practice has cover for ‘at least £x’ (being a figure lower than the actual limit of indemnity).
If clients worry that they are dealing with a limited liability organisation, what do we need to show them to prove we have Professional Indemnity Insurance?
The Master Policy Schedule of Insurance issued to each practice on renewal of cover (in October/November each year) is evidence of the practice’s Master Policy cover which can be exhibited/copied to clients or prospective clients. If the practice has additional (‘Top Up’) cover, an Evidence of Insurance/Cover document may be obtained from the practice’s brokers.
I have heard about D&O cover – is it necessary for members of an LLP to have this?
When a practice converts to an LLP, the members assume certain responsibilities and potential liabilities that do not apply to principals of a ‘regular’ partnership. These may arise out of the requirement to maintain accounting records; submit annual returns; appoint auditors etc.
In the event of a breach, the members of an LLP face similar sanctions to the Directors of limited companies and these risks are not covered under the Master Policy. These risks are more suited to Directors & Officers Liability Insurance (‘D & O cover’). Although, as yet, this type of cover may not be available for LLPs, certain insurers are understood to be developing suitable policies.
What happens if the LLP breaks up – do members still require to buy run-off cover?
If a practice breaks up or de-merges, there are different ways in which continuing cover can be arranged under the Master Policy for the practice’s past work. Run-Off cover is only one of the ways of arranging this continuing cover.
The critical point about Master Policy cover (and Professional Indemnity Insurance generally) is that it operates on a ‘claims-made’ basis. That means that the cover which is relevant is the cover which is current at the date any claim is first intimated and not the cover current at the date of occurrence of the alleged error or omission giving rise to the claim.
The members of the practice may agree that the professional liabilities will be assumed, for PII purposes, as the responsibility of one or more continuing practices. Otherwise, for the purposes of the Master Policy, the ceased practice is treated as going into ‘Run-Off’ and future protection under the Master Policy is on the basis of ‘Run-Off Cover’ for which there may be a charge depending on the record of the ceased practice.
Before deciding on and documenting the arrangements, it makes sense to discuss the options and implications with Marsh.
How long do members need to buy run-off cover for?
If the continuing Master Policy cover for a ceased practice is on the basis of ‘Run-Off Cover’, that cover will continue for as long as the Master Policy continues on its current terms.
This applies only to cover under the Master Policy. If the (former) members consider that they need continuing cover for a higher limit of indemnity than provided under the Master Policy, then additional cover (‘Run-Off Top-Up Cover’) will require to be arranged on an annual basis for as long as it is considered there remains a risk of claims in excess of the cover provided by the Master Policy.
The information in this page is (a) intended to provide guidance on matters of practical risk management and not on issues of law, (b) necessarily of a generalised nature and (c) not intended to endorse or recommend any particular product or service; It is not specific to any practice or to any individual and should not be relied on as advice or as stating the correct legal position. Alistair Sim is a Director in the Professional and Financial Risks Division at Marsh UK Limited.