Information for solicitors about LPLC insurance when acquiring or merging a practice.
LPLC’s insurance policy covers claims made against a law practice during the period of insurance arising from its legal practice. A law practice is a sole practitioner, a partnership, an incorporated entity or a partnership of incorporated enitities.
Under the policy a legal practice is the business of a law practice of providing legal services and includes:
- the legal practice carried on by the law practice at the commencement of the period of insurance; and
- any legal practice merged into the law practice before or during the period of insurance (‘prior law practice’).
Insuring prior law practices in this way avoids the need for a new insurance policy to be taken out each time there are changes to a law practice's composition or ownership, such as when:
- a new partner is admitted to or leaves a partnership; or
- the business of an incorporated legal practice is transferred from one entity to another entity under the same or substantially similar ownership.
It also provides continuity of cover for all former principals and employees of a law practice no longer with the practice, whether through death, retirement or otherwise.
If you are considering acquiring or merging with another law practice, we recommend seeking a ruling on the operation of LPLC's 'prior practice' rules explained below.
LPLC also recommends seeking the consent from the other law practice to view its claims history as part of your due diligence in relation to a proposed transaction.
For the purposes of determining whether another law practice is to be treated as having been acquired by or merged with another law practice, LPLC looks at the substance of the arrangement and not only its legal form.
LPLC will determine which of the following three scenarios best describes the circumstances:
|1||The practice of Firm A (prior practice) merges with the practice of Firm B (ongoing practice).|
Firm A becomes a prior practice of Firm B, and the premiums and claims histories of Firm A and Firm B are combined when calculating any future claims loadings for Firm B.
|2||The practice of Firm A ceases and Firm A is disbanded, even though some or all partners join Firm B and/or Firm C.||Firm A is treated as a ceased law practice and subsequent claims arising from Firm A are dealt with under the terms of LPLC’s run-off policy for ceased law practices. Firm A’s claims history is not relevant to the calculation of future claims loadings for Firm B or Firm C.|
|3||Some of the partners of Firm A join Firm B, but the practice of Firm A merges with the practice of Firm C.||Firm A becomes a prior practice of Firm C and the claims histories of Firm A and Firm C are combined when calculating any future claims loadings for Firm C. Firm A’s claims history is not relevant to the calculation of future claims loadings for Firm B.|
In determining which of the three scenarios best fits the circumstances, LPLC will have regard to the following factors:
- any relevant agreement between Firms A and B (and A and C, if applicable)
- how the arrangement was represented externally
- how the arrangement was characterised for tax purposes
- where the principals and staff of Firm A went under the arrangement
- which firm occupied the premises of Firm A after the arrangement
- which firm collected the pre-arrangement debts of Firm A
- whether Firm B (or Firm C) assumed other assets or liabilities of Firm A
- any other matter LPLC considers relevant.