PI insurance when buying or merging practices

Q: How might a typical deal be handled?

Illustration only. Firm A, with fee income of £900,000 and £2 million any one claim cover, buys the fee base of a retiring ICAEW sole practitioner, B, whose fee income is £300,000. The contract says A takes no liability for B's past work. B notifies two known circumstances to her insurer before cessation and buys run off. Her insurer must offer two years under clause D4, and she plans to renew annually for the remaining four. A tells its broker about the acquisition and expected fee income of £1.2 million, keeps its £2 million limit and confirms that its policy has no retroactive date. A year later a former client of B complains about a capital gains computation B prepared. The claim is directed to B's run off insurer. Had A bought B's company instead, A's policy would have needed to cover B's company as a predecessor in business.

When a practice is bought or merged, someone must insure the work it did before the deal. Either the buyer’s policy covers the acquired firm as a predecessor in business, usually through a successor practice extension, or the seller keeps the liability and buys run off cover. ICAEW requires the seller to have at least two years of run off and to take all reasonable steps to cover four more, while ACCA requires six years.

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Who is responsible for the acquired practice’s past work?

It depends on what is bought. If the buyer acquires the company or LLP that ran the practice, the entity’s history comes with it, including any liability for past advice. If the buyer acquires only the client list and goodwill, the past work stays with the seller. ICAEW’s helpsheet on buying and selling fees says a purchaser would be advised not to assume liability for work done before the sale, and that a seller who is an ICAEW member must have a minimum of 24 months’ run off cover for work done for those clients before the sale.

In practice the line blurs. Clients do not care who bought what; they complain to the firm now handling their affairs, and a buyer who has rebranded the old practice under its own name may find claims addressed to it anyway. The insurance should follow the legal and commercial structure, and both sides should agree it in writing before completion. The structural choices are explained in merging two accountancy practices and buying an accountancy practice.

What is a successor practice clause?

A successor practice clause, sometimes called a predecessor in business extension, makes the buyer’s policy respond to claims about work done by a firm it has taken over. The ICAEW, ICAS and Chartered Accountants Ireland minimum approved policy wording builds this in: the definition of “Firm” includes the predecessors in business of the firms named in the schedule, and the definition of “Insured” includes current and former partners, directors and members, past and present employees and subcontractors, and their estates. The ICAEW PII guidance (paragraph 6.23) reminds firms that their cover needs to extend to past and new principals and predecessors in business.

Two practical points follow:

The insurer must know. ICAEW’s helpsheet on changes in the composition of a firm says a firm should inform its PII provider of any changes as required by the policy terms. An acquisition will normally require the insurer’s agreement, a revised proposal and, often, extra premium.
Retroactive cover must reach back far enough. ICAEW qualifying insurance must give retroactive cover for work in the previous six years, and many insurers apply no retroactive date at all. ACCA’s GPR 9(6) requires full retroactive cover for all past business. If the buyer’s policy carries a retroactive date, the acquired firm’s older work may not be covered unless the insurer agrees.

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What about problems the seller already knew about?

Known issues usually stay with the seller’s insurer. Clause E7 of the ICAEW minimum wording excludes claims arising from any claim or circumstance notified under an earlier policy, so a matter the seller notified before the deal belongs to the seller’s policy. That is the outcome the seller should want: before completion, the seller should notify every circumstance it knows of, as described in notifying circumstances to your PI insurer.

A circumstance the seller knew about but never notified is the danger. Under clause D1.3, if a circumstance should have been notified under a previous policy, the later insurer will not exclude the claim but will limit the indemnity to what the earliest previous policy would have paid. A buyer who discloses the acquisition to its own insurer without first asking about the seller’s known issues risks inheriting that gap. ACCA’s factsheet warns that claims from work by acquired predecessor firms can be challenging to defend and stresses thorough due diligence when acquiring another firm.

What run off does the seller need?

Under ICAEW regulation 2.8, when a firm ceases to practise, the members in practice at cessation must ensure compliant cover is in place for at least two years, and then take all reasonable steps to maintain it for a further four. Regulation 2.7 applies a two year minimum to an individual member who ceases. Clause D4 of the minimum wording obliges the insurer to offer at least two years of run off from cessation, which may be conditional on an extra premium; if that run off does not start because of non payment, the insurer must tell the relevant institute within 7 days of the payment date.

ICAEW’s page on run off explains that if the business is taken on by a new principal and the policy is maintained, run off can be provided by that policy, but where the new owner does not want the historic liabilities, for example where only clients transfer or the old entity is dissolved, the ceasing entity needs a standalone run off policy. ACCA’s GPR 9(5) requires six years of cover after cessation, which may be arranged by the new practice or by the previous firm, on terms equivalent to the previous insurance. Insurers usually want to have held a risk for at least two years before offering a six year block, according to ICAEW, so sellers should talk to their broker early. For more on cost and duration, see run off cover when an accountant retires.

Does the buyer’s limit of indemnity need to change?

Probably. ICAEW minimum limits depend on gross fee income: at least £2 million under regulation 3.2, or two and a half times gross fee income with a minimum of £250,000 for firms with income below £800,000 under regulation 3.3. ACCA’s minimum is the greater of two and a half times relevant total income and £100,000, rising to £1.5 million each and every claim once total income reaches £600,000. Regulation 3.6 bases gross fee income on the last completed accounting year, but ICAEW’s guidance says firms should consider whether that is sufficient where there has been a significant increase in fees since. An acquisition is exactly that kind of change.

ICAEW’s guidance (paragraph 6.13) says firms must plan in advance when their structure changes: on a merger the principals must make sure the new firm has qualifying insurance that covers the existing firm, and when a firm divides each new firm needs its own cover as well as cover for the original firm’s historic work. Where an ICAEW member is a principal in a mixed practice, ICAEW expects compliant insurance to cover the whole practice.

How might a typical deal be handled?

Illustration only. Firm A, with fee income of £900,000 and £2 million any one claim cover, buys the fee base of a retiring ICAEW sole practitioner, B, whose fee income is £300,000. The contract says A takes no liability for B’s past work.

B notifies two known circumstances to her insurer before cessation and buys run off. Her insurer must offer two years under clause D4, and she plans to renew annually for the remaining four. A tells its broker about the acquisition and expected fee income of £1.2 million, keeps its £2 million limit and confirms that its policy has no retroactive date. A year later a former client of B complains about a capital gains computation B prepared. The claim is directed to B’s run off insurer. Had A bought B’s company instead, A’s policy would have needed to cover B’s company as a predecessor in business.

What mistakes come up in practice acquisitions?

Leaving the PI position out of the sale agreement and assuming the other side has it covered.
The seller letting cover lapse at completion and only then looking for run off.
The buyer not asking the seller for a claims history and list of notified circumstances.
Taking on the seller’s staff and files without telling the buyer’s insurer.
Rebranding the seller’s practice so that clients and third parties treat the buyer as the same firm.
Calculating the limit on pre acquisition fee income for a year in which fees will grow substantially.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.