What happens when you close your practice? Your Master Policy questions answered

The Master Policy professional indemnity insurance renewal period often brings with it some queries from practitioners about how cover operates when a firm decides to cease trading.

A practice may close its doors for one of several reasons; often the principal or principals of the firm are reaching retirement, or they are moving on to other roles. Alternatively, the practice may be merging with another firm. With the 2025 renewal season now underway, this article covers some of the key features of Master Policy cover for firms that have ceased to trade, and the steps that need to be taken before closure of the practice.  

This article will focus on the professional indemnity insurance requirements when closing a practice. There are, of course, many other considerations. Planning ahead is critical when retiring, winding up or selling your firm, or merging with another practice. The Law Society of Scotland has created a Winding Up Checklist which is a very useful tool to help practitioners plan ahead and anyone thinking of ceasing to practise or winding up a Scottish legal practice should carefully review the checklist as part of their planning. It will be apparent, even from a quick glance, that the list is not short, so it is important to be realistic about the timescale in which the various steps can be achieved.

Run-off cover under the Master Policy

All Scottish legal practices have professional indemnity insurance cover under the Master Policy. As part of the winding up process, the Master Policy brokers, Lockton, will need to be contacted and notified of the date of cessation of practice of the firm. At the date of cessation, the firm will be put into “run-off” cover (this is the term used for the continuing professional indemnity insurance cover provided to ceased practices under the Master Policy). The Master Policy continues to provide run-off cover, for as long as the Master Policy exists, in respect of:

• Existing claims which have already been intimated to insurers.
• Claims that are intimated after the closure of the firm, insofar as they relate to matters dealt with by the firm prior to the date it ceased to trade. 

Run-off cover is necessary because professional indemnity insurance operates on a "claims made" basis: the policy which responds is that which is in place at the date the claim is made. This could be long after the error or omission occurred and after the firm has closed.  

Once a firm’s policy is in run-off the Master Policy will not cover any work carried out by a solicitor or firm after the date of ceasing to practise or trade. This may seem obvious, but there have been a number of instances where solicitors have, with the best of intentions, undertaken further work or agreed "just to finish off" something for a former client even after having ceased practice and when run-off cover is already in operation. Here the correct course of action is to resist any temptation to remain involved but  instead to explain that the firm is no longer trading and can no longer act on behalf of the client. 

In addition to there being no cover in run-off under the Master Policy for anything done after cessation of a practice, any act or omission of a solicitor post cessation, however well meaning, could prejudice the defence of any subsequent claim. 

Firm mergers or acquisitions

Master Policy cover must also be dealt with appropriately when a firm ceases trading on the basis that it is being acquired by, or is merging with, another practice. The insurance arrangements for both firms will need to be considered together in advance of any merger. Firms considering a merger or acquisition should contact the Master Policy team at Lockton, who are happy to provide more information. 

Arranging run-off cover

The first step in the process of arranging run-off cover is to contact Lockton. They will deal with the necessary administration to place a firm’s Master Policy into run-off. Lockton will need:

• Written confirmation of the date on which the firm will stop trading (an email will be sufficient).
• Confirmation of contact details for at least one principal of the firm so that they can be contacted after the firm has closed, for example if a claim is made by a former client. 

In many cases there will be no run-off premium payable. However, in some cases a firm may need to pay a one-off premium at the point at which the firm ceases to trade. This will depend on the number of consecutive years the firm has had Master Policy cover in place, and the firm’s claims record. Again, Lockton’s team can provide information on this. 

Where a run-off premium does need to be paid, this is a one-off payment and a premium does not require to be paid for each subsequent insurance year. 

More details on run-off cover and the calculation for any run-off premium can be found in the Master Policy wording and the Rates and Rating Factors Rules, both of which can be found on the Master Policy online portal which is available to all Scottish law firms.  

Additional run-off cover

It is important to remember that run-off cover under the Master Policy provides the same limit of indemnity per claim as applicable to firms that are still trading (currently £2 million for any one claim). Many firms have additional professional indemnity insurance (referred to as excess layer, or ‘top-up’ insurance) to provide cover above the Master Policy limit, depending on the nature their practice and the value of the transactions they deal with. When a firm with top-up cover goes into run-off, it should consider retaining additional insurance post run-off to ensure that the correct level of cover is in place. Practitioners should be aware that top-up cover is annually renewable and will attract an annual premium charge.

Contacting Lockton

For more information on run-off cover or any other questions about the Master Policy, you can contact Lockton at masterpolicyteam@uk.lockton.com, and you can reach a member of the team directly on 0131 345 5599. 

By Matthew Thomson and Anna Forsyth (Lockton), and Stuart Craig and Lynne Cardow, (DAC Beachcroft Scotland LLP). 

This is an article provided by Lockton, the official insurance broker responsible for placing and administer the Master Policy of the Law Society of Scotland. Lockton is the direct point of contact for anything related to the Master Policy, including claims, practice changes and general enquiries.