A proper conclusion
“By failing to plan, you are planning to fail”
This quote from Benjamin Franklin applies just as much to closing down a law firm as it does to any other area of legal practice. As always, preparation is key.
Where possible, solicitors should plan carefully for ceasing practice, well in advance of actually doing so. All firms should undertake some form of planning. While this might be part of a broader retirement strategy or succession plan, the closure of a practice can sometimes happen sooner than anticipated. For example, financial difficulties or unexpected illness can lead to principals giving up their practice all of a sudden. As such, even where solicitors have no plans to close their firm in the near future, it is often sensible to carry out some form of contingency planning in the event of such issues arising.
Managing the process
Where a practice is ceasing, arrangements need to be made for how ongoing business will be transferred, how client files will be dealt with and how accounting procedures are to be completed. It is critically important to communicate with clients throughout the process, providing them with plenty of notice to allow them to transfer any ongoing business.
In order to close a practice effectively, as a starting point we would strongly encourage practitioners to follow the Law Society of Scotland’s Ceasing a Practice Checklist. This will prove extremely useful to solicitors in covering off the many aspects that need to be considered when winding up (or ceasing) their firm.
As outlined above, planning is key. Your firm’s risk management procedures should include having a plan in place for an orderly closedown.
In your plan, you might want to consider:
- how clients will be informed, well in advance of the closure;
- how you will ensure that you do not take on new work that could continue beyond the intended closure date (such as litigation, complicated executries or conveyancing matters);
- who else needs to be notified of the closure – for example, the Society, Lockton, your bank and any other relevant organisations and authorities your firm has dealings with;
- how active matters will be transferred to a successor firm or another firm;
- dealing with client files, including archiving and indexing closed files and letting a third party know where the files are stored (see paragraph below);
- compliance with GDPR requirements and preserving client confidentiality following closure;
- returning money on account to clients and any property that might be held on behalf of the client.
Where a file has been archived following closure, the defence of a claim under run-off cover is often made much more difficult in situations where the file cannot be traced. As such it is important to provide clients and others (e.g. the Society, former colleagues or another firm) with details of where files have been archived so they can be retrieved at a later date if necessary. This is particularly relevant to sole practitioner firms, where only the sole practitioner themselves might know where past documents have been archived. In these cases it is important for the sole practitioner to ensure that files can still be obtained in the event that the practitioner becomes uncontactable.
As a matter of good practice, you should notify any former clients who may be affected, for example those who have appointed you executor in a professional capacity and those clients for whom you hold documents such as wills or title deeds. That may be an opportunity for them to collect such documents and reduce your future archiving cost. It is important to obtain written acknowledgments from clients that documents or other client property have been returned. Again, that might help in the defence of a potential future claim.
Retirement through merger and acquisition
Many sole practitioners and smaller firms will choose to sell their business as a retirement strategy. However, selling a practice as a going concern, at the desired price, can be challenging and requires strategic planning.
Practice mergers and acquisitions always need to be approached carefully, and principals considering this option should ask themselves the following questions:
- How good is our client book?
- How profitable is the business?
- Have we identified particular firms with whom the business has a natural fit?
- Have we carried out identity and other checks on potential buyers?
- Do we have a good claims experience?
- Is the acquiring practice taking on our firm’s past liabilities (i.e. will it become a “successor practice”), or will we be responsible for insuring these?
It is essential that solicitors inform clients of any change in ownership before it happens.
Solicitors would clearly have to gain client consent to transfer files and any money in advance. They should therefore provide clients with sufficient information to allow them to make an informed choice about whether they continue to instruct the new firm (the firm once it has changed ownership) or take their business elsewhere.
Insurance and client protection
The Master Policy is provided on a “claims made” basis, meaning that cover applies at the date the claim is made, not when the error or omission causing the claim occurred. Losses on the Master Policy are therefore “long tail liabilities”, meaning it can often take several years after the work was done for a claim to arise.
When a practice ceases and there is no successor practice to take on responsibility for any claims that might arise from historic work, the firm’s Master Policy certificate will go into “run-off”.
In run-off, the Master Policy continues to provide cover in respect of claims already intimated as well as any claims that are intimated after the closure of the practice, insofar as they are related to matters dealt with by the firm prior to its closing. Run-off cover continues indefinitely as long as the Master Policy arrangement remains in force.
This provides a significant degree of protection for both the public and for principals in law firms, who might otherwise face personal liability for claims that may arise after the firm in question has ceased.
Solicitors should be aware that, unless the practice is taken over and the acquiring firm accepts liability for the practice’s past liabilities, the Master Policy cover must be placed into run-off when a practice ceases. The limit of indemnity provided in run-off will be whatever the mandatory limit of indemnity is under the Master Policy at the time the claim is made. The self-insured amount will be the same as that applying to the firm at the time the policy goes into run-off.
Depending on the nature and value of your work, you might want to take additional PI run-off top-up cover, over and above the £2 million.
Run-off premiums and top-up insurance
As stated above, the run-off cover remains in force as long as the Master Policy arrangement is in place and is paid for by a one-off premium charge. In some cases there may be no charge for run-off cover if the firm has been paying into the Master Policy for at least four years and has had no Master Policy claims.
There is no entitlement to a refund of the Master Policy premium paid for the year in which the practice closes.
If you purchase top-up professional indemnity cover at the time of closure, you may wish to continue to have added protection above the Master Policy £2 million limit. This can be arranged, but practitioners should be aware that top-up cover is annually renewable and will attract an annual premium charge.
Contact Lockton!
Any principal taking steps towards ceasing their practice in any circumstances should contact the Master Policy team at Lockton at an early stage, to discuss the various Master Policy implications and how these might affect overall costs of closing the practice. These include future premium rating, assessment of self-insured amount (excess) contributions in respect of past and future claims intimations, possible charges for run-off cover, and professional indemnity insurance top-up cover requirements.
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