The LLP factor

Lea, Lime & Pickering – Take 1

Lea, Lime & Pickering, a five partner firm, was set up in 1983 by the current senior partner, Harry Lime along with Mike Pickering and the now retired Vernon Lea. The three junior partners, Arnold, Barbara and Cherie were assumed in 1991, 1997 and 1999 respectively.

At the beginning of 2006, a summons is served alleging negligence on the part of the firm in a commercial property transaction that Vernon handled in 1995. The summons names Vernon, Harry, Mike and Arnold, as the partners of the firm at the time of the alleged negligence.

Vernon, now retired and living part of the year in Spain, is particularly alarmed – partly because it is his file and his alleged error that has given rise to the claim; partly because the sum sued for is a figure well in excess of the level of cover that he remembers the firm having at the time of the transaction.

Ultimately, the claim is settled at a figure of £450,000. The claim is met by the Master Policy insurers. Although this is a substantial claim, it is fully covered by the Master Policy. Contrary to Vernon’s understanding, it is the cover in place at the date the claim is intimated to the firm that is relevant, not the historic cover in place when the error occurred. Currently, in 2006, the Master Policy limit of indemnity is £1,500,000.

The self-insured amount is £15,000 (£3,000 for each of the current five partners) at the date of intimation of the claim. That, in addition to the substantial Master Policy premium loading impact of the claim, falls on the firm as currently constituted.

The whole affair was extremely stressful for Vernon – not just the experience of having the summons served on him but also the requirement to attend lengthy meetings with representatives of the insurers, Master Policy panel solicitor and counsel. However, in financial terms, Vernon is unaffected by the claim. There had been no contractual arrangements regulating how liability as between partners and former partners should be dealt with in such a situation and the current partners took no steps to seek any contribution from Vernon.

Lea Lime & Pickering – Take 2

The background facts are identical to Take 1 except for the outcome of the claim. This time, Vernon was right to be concerned about the adequacy of the firm’s cover. The claim is settled at a figure of £1,650,000 (damages and claimant’s costs), which exceeds the current Master Policy limit of indemnity.

As the firm had no additional (“top-up”) cover at the time the claim was intimated, the partners who are liable, jointly and severally, are uninsured for the amount in excess of £1,500,000. That £150,000 is a joint and several liability of Vernon, Harry, Mike and Arnold.

Vernon has little or no money, having made an ill-advised investment around the time he retired and lost most of his capital. The property he occupies in Spain throughout the winter months belongs to his daughter and son-in-law. The rest of the year, he lives with the daughter and son-in-law in their home in Yorkshire.

Harry, Mike and Arnold are in a position, between them, to fund the £150,000. The £15,000 self-insured amount is borne by the firm as currently constituted, in addition to the substantially loaded Master Policy premiums.

The experience causes the partners to review the adequacy of the firm’s PII cover and the view is taken that the firm ought to have top-up cover so that the firm has cover of £3,000,000 overall (£1,500,000 top-up cover over and above the £1,500,000 compulsory cover under the Master Policy). The partners were particularly concerned to have protection for any claim arising from work done in the past and the top-up cover they arrange achieves this. It will cover any claim arising out of the firm’s ongoing activities as well as the past work of current and former partners and staff.

Note: As professional indemnity insurance is on a “claims-made” basis, top-up cover has to be purchased annually in order to maintain protection at the required level. It is the cover in force at the time a claim arises that responds to that claim – not the historic cover in force at the time of the alleged error or omission.

Lea Lime & Pickering – Take 3

The facts are identical to Take 2 except that the firm had converted to a limited liability partnership (“LLP”) in 2002. This was four years before the catastrophic claim arose but several years after the error giving rise to the claim.

Back in 2002, when deciding to convert to LLP, the partners had taken the view that they were thereby giving themselves a substantial measure of protection against negligence and other claims. Since conversion, they had taken a relaxed approach to professional indemnity insurance and took the view that they needn’t bother with top-up cover.

However, the exposure of the partners to claims arising out of pre-conversion errors or omissions remains unaffected by conversion to LLP. As the error on Vernon’s part occurred in 1995, conversion to LLP was an irrelevance. Vernon, Harry, Mike and Arnold remain jointly and severally liable as partners of the former partnership that undertook the transaction in 1995. The impact of the claim on the partners and the firm is therefore the same as described in Take 2.

Note: On conversion to LLP, the partners elected to proceed on the “continuation basis”, for Master Policy purposes. That means that the LLP is effectively the former partnership’s successor for Master Policy purposes. It is therefore the LLP’s ongoing Master Policy cover that responds to the claim against the former partnership. The alternative approach would have been the “run-off basis” which means that (a) the LLP commences an entirely new and separate Master Policy record covering errors or omissions occurring on/after the date of commencement of the LLP, and (b) the former partnership’s continuing Master Policy cover for claims arising out of activities of the former partnership is on a “run-off cover” basis.

Lea Lime & Pickering – Take 4

Assume the error occurred in 2003, that the firm had converted to LLP in 2002, and that the clients pursuing the claim were engaged by the firm on terms that made it clear that the clients were transacting with the LLP and would have no recourse against any member of the firm’s personnel.

The settlement of £1,650,000 would have exhausted the firm’s Master Policy cover (£1,500,000). In the absence of any top-up cover, the balance of the settlement would require to be met from the assets of the LLP.

If these assets were insufficient, the claimant might consider whether there existed any possible recourse against the personal assets of any of the LLP’s members or other personnel. By taking care in relation to the firm’s terms of engagement and other aspects of the relationship between the firm and the client (see risk management points above), it ought to be the assets of the LLP alone that are available to a successful claimant.

It is considered that individual personal liability could arise in the event that the claim arises out of a personal appointment such as a trusteeship (see “The Directing Mind”, Journal, July 2005, 36) or if the negligent individual had assumed personal responsibility to the client/claimant. However personal liability for negligent advice has not been tested in the context of an LLP.

Lea Lime & Pickering – Take 5

Imagine that the circumstances are as in Take 4 except that the terms of engagement incorporated not only a provision effectively limiting the clients’ remedy to a claim against the LLP but also a contractual limitation of liability capping the firm’s liability to £1,500,000.

In that event, assuming there are no grounds for the claimants challenging the validity and enforceability of any of the contractual limitation provisions, the exposure ought to be confined to a claim against the LLP alone, for which the current Master Policy limit of indemnity, £1,500,000, will provide sufficient cover. On that basis, the exposure of the LLP itself will be limited to the self-insured amount (£15,000), and the Master Policy premium loadings.

The financial impact of the claim on the individual members will be confined to the impact on their salary or share of profits.