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Professional Indemnity Insurance Notifications Were Valid

A professional firm that unwittingly acquired a poisoned chalice through the merger market, inheriting another firm’s potential liabilities in respect of a substantial number of negligence claims, has won a High Court ruling that it gave valid notification of the circumstances to its professional indemnity insurers.

The firm had been shocked to be served with numerous negligence claims in respect of property transactions carried out by a firm the business of which it had indirectly acquired. A review had revealed about 5,000 files emenating from the other firm which were said to be more likely than not to contain examples of malpractice and breach of contract.

The firm’s insurers refused to accept that valid notification had been given in respect of all but 32 potential claims and declined to extend the firm’s cover into the next financial year. Although there was no suggestion of any wrong-doing by any of the firm’s partners, its efforts to find alternative insurance cover were fruitless and it was forced to fall back on the insurer of last resort provided to professionals viewed as uninsurable on the general market.

The High Court ruled that the ‘justice of the case’ demanded that the notification given by the firm to its insurers be viewed as valid. The insurers’ rejection of cover had been wrong insofar as it purported to require each potentially risk-laden transaction to be identified as a separate circumstance.

The case illustrates the importance of doing a thorough due diligence exercise during any acquisition.