Firms that take on lateral hire partners can find themselves getting a lot more than they bargained for if they unwittingly become a successor practice, reports Grania Langdon-Down

Here is your starter for ten – though if you get it wrong it could cost you much more than that. You are taking on three partners from a ten-partner firm. Could your firm end up becoming the successor practice to the whole ten-partner firm, responsible for insuring its liabilities for all time?


On the face of it, the answer is no, because one of the triggers to becoming a successor practice is taking on a majority of partners. But that could become an expensive ‘yes’ if you do not check what the remaining seven partners are doing. If some of them go off in different directions, that could leave an entity immediately before transition where your three partners are now the majority – and yours becomes the successor practice.


Failing to carry out that kind of due diligence when taking on lateral hire partners can open law firms up to huge liabilities. Yet a survey of 37 of the top 100 law firms by specialist Liverpool solicitors Legal Risk found almost half did not carry out any checks for successor practice liability when hiring partners from other firms (see [2005] Gazette, 24 February, 3).


Legal Risk partner Frank Maher warns: ‘It is frightening how few firms consider the risks. You can destroy a whole firm with 100 years of history, millions of pounds of fee income and the best clients in the world at a stroke – by making it uninsurable.’


The issue of successor practices came to the fore in 2000 with the change from the Solicitors Indemnity Fund (SIF) to open market insurance. Mr Maher explains: ‘The SIF covered all solicitors for everything, and picked up claims if a firm packed up. But once it went open market and people could get their insurance almost anywhere, the Law Society had to ensure there was cover for those firms.


‘What it did was try to set up a catch-all situation so that, as far as possible, there would be a firm which was the successor practice. However, it is not always entirely a matter of justice who is the lucky winner, because it can carry a whole can of worms.


‘It can expose a firm that has itself done nothing wrong to huge liabilities, which could mean it ends up with an uninsurable risk – and once that happens, it is not long before it is out of practice. Certainly if a firm finds itself in the assigned risks pool, the “sin bin” for uninsurables, then it adds to a firm’s overheads – potentially by millions.’


Addressing successor practice issues on behalf of law firms, insurers and brokers now forms about one-sixth of Legal Risk’s workload, and Mr Maher is aware of at least half-a-dozen highly contentious cases. However, because cases that do not settle are dealt with by arbitration, the details remain secret.


The rules on successor practices are governed by the Law Society’s minimum terms and conditions (MTC) for professional indemnity insurance. The starting point is that there must have been a merger, acquisition, absorption or other transition that means that a firm is no longer being carried on as a discrete legal practice.


Then there are several factors that trigger the rule. A firm will become a successor practice if it expressly holds itself out to be the successor of another firm that no longer exists, for example by including ‘incorporating Bloggs & Co’ in its title. It could also become a successor practice by taking on a sole practitioner as a principal, or by taking on a majority of partners in a firm. It could even occur where a firm takes on a minority of partners in another firm, but also takes over that firm’s premises, assets or goodwill.


With the profession becoming ever more mobile, the issue of successor practices is one firms ignore at their peril. Mr Maher says: ‘When Andersens’ legal arm packed up, that left open a huge issue over who was going to be the successor practice. There were good people there and everyone wanted them. But if, hypothetically, there had been a claim from an Enron-type issue against Andersen Legal, then whose insurer would have dealt with it? A number of firms took teams – one was more proactive in avoiding any risk than the others.’


In one case this year, Mr Maher acted for a top 100 law firm that did its due diligence and took on some partners from another firm. ‘The Law Society then intervened and closed down that firm, and it was suggested that the people [our client] had taken on were enough to make it the successor practice to the whole lot.


‘That was pretty undesirable and could have made [our client] uninsurable. We decided the Law Society had got it wrong because our client had not held itself out as the successor practice, while two partners who hadn’t been taken on had carried on using the other firm’s name which showed they were the successors.’


He suggests ways of guarding against the risk. ‘You have to educate your staff and control your marketing people. They can be a liability because they love putting a news splurge out saying “we proudly announce we have taken over Bloggs & Co”. That is the last thing you want when you have a successor practice in an Andersen situation. It’s okay to say Fred, Bill and Jane are joining us but don’t say you are taking over XYZ & Co. One piece of notepaper or one stray e-mail can do the damage.’



Mr Maher adds: ‘You need to understand the risk and then put in a strategy to manage it. It might be as simple as making the person you take on a consultant rather than a partner. In other cases, you might decide it isn’t worth the risk. You also need to check out the consequences with your broker, because you marry in haste and repent at leisure.’


Solicitor Richard Gerrard is marketing manager for leading indemnity insurer St Paul Travelers, which has three solicitors advising full-time on these issues. He explains: ‘Professional indemnity insurance for solicitors is underwritten on a claims-made basis, which means the policy that responds when a claim is made is the one in position at the time the claim is made, not at the time the event complained of occurred. Our message is that when hiring – and, in particular, when hiring senior staff and partners – a succession check should be an integral part of the recruitment procedure. In some firms this happens, but the proportion where it does not is worryingly high. Some firms will want to examine succession issues going forward, but some will also want to re-examine their genealogy in order to ascertain if there are liabilities they may have unwittingly acquired in the past.’


Andrew Darby, head of professional indemnity at Chancery Lane, says the Society can provide a view on whether a firm is a successor practice based on its interpretation of the rule. ‘But it is just a view. We have no powers to make a binding ruling.


‘We get a number of calls from law firms, brokers and insurers seeking guidance on this issue. A firm may not have intended to be a successor practice but has become one because it held itself out as being the successor, for example, by putting on its notepaper “incorporating Bloggs & Co”. The wording may be removed subsequently but it does not affect the position. Having fallen within the definition of successor practice, the firm is on the hook and it can’t get itself off.’


One issue that has caused problems is whether there can be more than one successor practice. Mr Darby says: ‘You can have more than one successor practice, for example where two firms take on departments from a prior practice and both hold themselves out as being the successor practice. In these circumstances, each succeeds to the whole of the prior practice for indemnity purposes. What you can’t have is partial succession – you can’t have one practice succeeding to a third of the previous one and another practice succeeding to the rest.’


He continues: ‘If a claim is made against the prior practice in circumstances where there are two successor practices, you effectively have dual insurance. As regulator, we could look to either of those insurers to pick up the claim and they could presumably look for a contribution from the other insurer.’


Mr Darby warns that a law firm that wrongly assumes it is not a successor practice may not give full disclosure in any proposal form, which can cause difficulties with its insurer when the true position becomes clear, usually when a claim arises. ‘The insurer may have rights of reimbursement against the firm behind the scenes over the extent to which any proposal form was filled in correctly. But it doesn’t allow the qualifying insurer to repudiate cover or avoid the claim,’ he says.


Ronnie Fox, president of the multi-disciplinary Association of Partnership Practitioners, says it is ‘sensible advice to think about successor practices and ask questions’, although he says it is normally clear which is the successor firm.


Mr Fox, senior partner of City law firm Fox Williams, says: ‘It would be unusual for a lateral hire of one or two partners, for instance, to end up making the hiring firm a successor practice. It depends on the ratio between what you are taking on and what is left.’


William Glassey, a partner specialising in lawyers’ professional indemnity with US/UK firm Mayer Brown Rowe & Maw, adds: ‘Successor practice issues are not something we have yet seen as an issue for larger law firms, but we have seen our insurer clients grapple with them with smaller firms, which can have substantial claims.


‘We have seen some practical problems. It can expose the acquiring firm to liabilities it didn’t anticipate. It can result in disputes between insurers, which is one of the areas where we have become involved, over which firm is the successor practice, and – if there are two – what the respective contributions should be to a claim. These can be really messy to sort out and very time consuming for both insurers and the lawyers concerned.’


Mr Glassey says firms can also be left defending claims where they have little knowledge of the underlying facts, where the relevant person who did the work may not have joined their firm, and where they may not even have any documents. He advises both acquiring firms and transferring partners to seek advice, in the first instance from their insurance brokers, but also from specialist lawyers or the Law Society. He says: ‘The rules are technical and can be counter-intuitive in their application. In our experience, this can mean that firms aren’t sufficiently aware of the risks. We see difficulties arise which could have been resolved, or managed more effectively, had they been addressed before the acquisition, transfer or dissolution happened.’


For Sue Carr QC, who specialises in professional negligence and indemnity insurance law at 4 New Square in London, there is no substitute for studying the MTC provisions, which are reviewed every October. ‘Solicitors need to be aware that there are sometimes subtle but material differences in the wording from one year to the next.


‘What is vitally important is that firms keep good records of all transitions and partnership arrangements. Ideally, they should keep separate files setting out the genealogical history of each firm.’


She says the successor practice rule is still a fertile source of dispute between firms and insurers: ‘Whilst there are now commonly accepted views on some of the major issues of principle which have unravelled since the MTC were first put into place, there are still many disputes both of principle and in the application of the rules to the individual facts of any given case.’


She adds: ‘This is an issue of huge everyday practical importance for solicitors because a firm can be landed with liability for a practice which it feels has absolutely nothing to do with it. It should also not be assumed that the result of proper application of the successor practice rule is necessarily a natural or obvious one. Solicitors can receive advice that they are a successor practice in circumstances which leave them spitting mad because they can’t see why.’


Ms Carr says the rationale behind the rule is that the public shouldn’t have to deal with claims that are uninsured. ‘Certainly the public is looked after,’ she says. ‘But I imagine that solicitors can sometimes find it pretty frustrating.’


Grania Langdon-Down is a freelance journalist