Scenario
An existing practice with four (4) partners fragments into two (2) new practices, with two (2) partners going into each new practice.
This results in three separate liabilities;
- Those of the previously existing practice for prior activities (past liabilities);
- Those of the respective two new practices for ongoing activities (future liabilities)
Solutions
Addressing the relevant insurance requirements in this situation can be quite complex and there are a number of different solutions available. It is important to chose the solution which best suits your individual requirements.
1. Best Practice Solution – Stand alone Run Off Cover
The previously existing practice maintains a separate, stand alone Run Off Cover policy while the two (2) new practices take out their own separate policies with Retroactive Cover that takes effect from the inception date of their respective policies.
Run Off Cover and Retroactive Cover are concepts that arise from the ‘Claims Made Basis’ nature of Professional Indemnity Insurance policies.
A ‘Claims Made Basis’ policy dictates that you must have a policy in place at the time a Claim is made against you, rather than the time the alleged act, error or omission is committed.
Therefore, the Professional Indemnity Insurance policy in place at the time a Claim is made against you, is the policy that will respond to that Claim, rather than a policy in place at the time of the alleged act, error or omission.
Due to the possible length of exposure arising from a long span career of professional activities, it is recommended that ‘Run Off Cover’ be taken out for a period of seven (7) years to equal the current Statute of Limitations.
To avoid intermitted price increases and the possibility of market instabilities, we would recommend this be taken out as a seven (7) year ‘multi-year’ policy.
2. Alternative Solutions – Previous Business Extension
The two (2) new practices each take out an individual Professional Indemnity Insurance policy which incorporates a ‘Previous Business Extension’.
This Extension provides cover for the previous business activities of each Partner conducted while at their previous practice.
The benefits of this solution include ownership and control of the liabilities of both the prior and ongoing activities under the one Policy.
The danger of this solution is the possibility of ‘dual insurance’ where the past liabilities of the prior practice are covered under BOTH of the respective policies taken out by the two (2) new practices.
In an effort to address issues of ‘dual insurance’, the following alternative solution can be considered;
3. Alternative Solutions – Run Off Cover Insured Entity
The previously existing practice can be included as an Insured Entity under one of the policies taken out by one of the new practices.
The problem with this solution is that all liabilities arising from the past activities of the previously existing practice are now included under the policy of only one of the new practices going forward.
Firstly, this will generally result in the premium costs of these past liabilities being levied at only one of the practices going forward.
Secondly, the liabilities of the past activities vesting with only one of the new practices can also result in disputes relating to deductible payments in the event of a Claim.
Tags: Indemnity Insurance, Professional Indemnity, Professional Indemnity Insurance, Retroactive Cover, Run Off Cover
