Lifeboat for limited liability partnerships
As the number of UK registered firms converting to Limited Liability Partnerships gathers pace, Travelers has developed a product to overcome one of the hurdles LLPs face.
The primary reason why firms convert to LLP status is to secure limited liability. But at the same time as losing the unlimited liability of a partnership, the members of an LLP also lose the protection of joint and several liability with their partners.
Although the professional indemnity programme for each firm will extend to cover claims made against individual members, that individual would be exposed in the event that the protection afforded by the firm's insurance were insufficient to cover the claim. If the individual were a partner in a traditional partnership, each partner would be liable jointly and severally in equal proportion. As a member of the LLP, once the protection afforded by the firm is exhausted, the member being sued would stand alone.
In such circumstances, other members may choose to bail out their colleague, but conversely they may choose not to, especially if they blame them for the demise of their firm.
Post Andersen, the prospect of a claim exceeding a firms' indemnity programme is not fantasy. Many partners are concerned that conversion to LLP status could leave them or their partners exposed.
Purchasing additional indemnity insurance protection does not offer a total solution unless the limit available in the programme exceeds the value of every claim. In the event that a claim exceeds the professional indemnity limit purchased by the firm, then the individual members' assets are directly at risk.
An option considered by some firms is to create a trust fund, which is set aside for the benefit of the dependants of any member left as the sole target for a claimant. This meets the objective of protecting the assets of each member without the fund automatically forming part of any sums payable to the claimant. But it requires LLPs to set aside significant sums for an eventuality that may never occur.
As a leading professional indemnity insurer, we have encountered this issue directly, with firms citing this concern as a potential obstacle to LLP conversion. So, with the number of UK registered firms converting to Limited Liability Partnerships rising all the time, we developed our Lifeboat product to overcome his potential obstacle to conversion.
Travelers Lifeboat Policy has been designed to sit behind the Trust and provide the protection when it is needed. With this product in place, firms do not need to establish a fund. LLP Members know that when a claim is made against them as individuals which exceeds the protection available from the firm or its insurance programme, our Lifeboat policy will meet the costs of protecting the personal assets of the Member. It will also give the Trustees the opportunity of negotiating with the claimant to avoid the member (or members) being declared bankrupt.
The policy is written on an aggregate basis with Limits up to £10 million and is available to all UK based LLPs, subject to underwriting considerations.
Lifeboat factsheet
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Travelers Insurance Company Ltd.