Advice Exposed to Litigation – Even After Sale


There are significant risks to a professional in ceasing to trade says Tom Pasley of law firm Robertsons.

He says that while the business may be gone as far as the adviser is concerned, former clients will remember who they got advice from – particularly if they have a complaint.

Providing professional services in exchange for a fee can expose advisers – and former advisers – to claims from clients who rely on that advice, says the barrister.

Tom Pasley, Barrister at law, Robertsons Law.
Robertsons’ Tom Pasley…cautions advisers on ending their liability insurance too soon.

“While you are actively working or trading, you manage that risk by obtaining professional indemnity insurance,” says Pasley.

“When you retire or you sell, merge, or close your business, the window of risk stays open.”

He says the most effective way to manage that risk is to have run-off insurance.

“Professional indemnity policies operate on the ‘claims made’ principle, which means the insurer will only provide cover for claims if the policy is in force at the time the claim is made –  regardless of when the incident leading to the claim occurred,” says Pasley.

…the insurer will only provide cover for claims if the policy is in force…

“If such a policy expires, or is cancelled, additional claims cannot then be made under the policy. This is usually the case when you retire, or sell, merge or close your business. As a result, run-off insurance can become valuable.”

Pasley says that when selling or merging a business, the buyer will usually require the seller buy run-off insurance to protect itself from past liabilities for a period of up to six years (the civil money claim limitation period in New Zealand).

“Depending on the nature of the transaction, it may be that the seller can negotiate to have the buyer pay for that run-off insurance,” he says.

“Generally, the run-off premium will be reduced each year by say 10%, subject to there being no claims.”