Adam Kemal-Brooke explains that members of LLPs are exposed to enough risk to need special insurance


The professional indemnity renewal calendar has reached its finale and many lawyers are sitting back, safe in the knowledge that they have obtained cover and got a good deal for their firms. A recent survey found that most practices consider price as the most important, if not only, factor worth considering when purchasing their insurance. The same survey suggested that many firms do not actually understand what their coverage provides.



With this in mind, it is unlikely that many firms have considered management liability insurance as an essential part of their coverage, but maybe they should.



As a result of the recent increase in many firms converting from a traditional partnership model to limited liability partnership (LLP) status, directors and officers (D&O) insurance - often called management liability insurance for partnerships and LLPs - is becoming increasingly important for LLPs to protect their members from personal liability incurred as a result of their role.



Many people would think that, given the way LLPs are structured, the limited scope of a member's role in an LLP (compared with a director of a company) and the lack of outside shareholders, D&O cover would be unnecessary, as there is no risk of members facing personal exposure. After all, you have just converted to an LLP - was that not the point?



Unfortunately, there are more potential exposures that could lead to a member's liability than perhaps first thought. It is a misconception that just because each member has limited liability, their own liability to either the partnership or third parties is also limited. The limited status only limits a member's liability with regards to the partnership's debts and liabilities.



In the UK, there are many statutory provisions that can lead to either criminal or civil liability for directors and officers. The Companies Act 1985 itself contains more than 100 offences. The Limited Liability Partnerships Regulations 2001 incorporates the majority of the Companies Act provisions, along with the Company Directors Disqualification Act 1986 and parts of both the Insolvency Act 1986 and Financial Services and Markets Act 2000, and applies them to members of an LLP. Combined with other legislation and both expressed and implied duties that members owe to the LLP and third parties, it is easy for a member of an LLP to be found personally exposed to liability.



While the potential for liability is vast (slightly less so than that of directors and officers of a company), there are three key potential claimant classes: the members, the LLP and third parties (including regulators and other public bodies).



Although members do not owe other members a fiduciary duty in an LLP, it is possible for members to sue one another in a few scenarios. The most notable is an action against the majority for a fraud on the minority.

Similar to company law, it is possible for members to bring a claim in their own names but for the benefit of the LLP which has been wronged by its majority members. In such a scenario, it is likely that the courts will apply similar principles as those used in company law and could award appropriate relief to the LLP (not the members). Costs incurred in defending any such action, and any potential award of damages, could be borne by the individual defendant member(s).





One of the most common types of D&O action is when the company sues its own directors for breaches of fiduciary duty, a breach of their duty of skill and care and, in some circumstances, breaches of contract.

In the case of an LLP, this is no different. The member can be sued by the LLP for all such breaches and liability to either compensate or to indemnify may arise. For example, a member of an LLP oversees a junior fee-earner's work and the firm provides negligent advice to a third party. It may be possible for the firm to allege that the member had breached his duty to the LLP and caused its loss.





Section 6(4) of the Limited Liability Partnership Act 2000 expressly envisages the possibility of a member being personally liable to a third party for a wrongful act or omission done in the course of business of the LLP or with its authority.



An increasing area of liability for individuals arises under the myriad of employment legislation. Claims for sex, disability, race and age discrimination, as well as claims of harassment, can all be pursued in either an employment tribunal or the court system and individuals, including members, can be held personally liable.



Liquidators are also an ever more common source of litigation against directors and officers, as many liquidators will seek to blame former directors for losses associated with the company and which arguably contributed to its downfall. Members are no less exposed should the firm fail. Furthermore, they are potentially liable for wrongful trading and fraudulent trading, and can also be subjected to disqualification proceedings in many cases.



The scope for third-party liability is so wide that it has even been the case that personal guarantees on credit cards, other credit arrangements and contracts enforceable against a director have resulted in personal liability - and there is no distinction to draw with LLPs.

Regulation of companies is increasing and litigation against companies easier. Investigations by ombudsmen, the Financial Services Authority and the Serious Fraud Office, disciplinary procedures, prosecutions under health and safety legislation and the Enterprise Act 2002, to name but a few, can all result in personal liability of a member by way of damages, and the legal costs associated with defending actions or responding to investigations.





Members of an LLP would be advised to understand the nature of any LLP agreement in place, as it might limit the rights of members to sue one another, to indemnify members against third-party liability or even to limit or exclude the right of the partnership to seek a contribution from the member for any negligent acts that have caused the LLP to suffer loss. It is also important to consider the potential liability that members might face if an LLP cannot or will not indemnify them for any number of claims they might face exposure for.



A D&O policy could indemnify members for some or all of their personal liabilities under either a standard indemnity for wrongful acts or as part of legal representation cover for costs and expenses incurred as a result of an investigation.



Many company directors require D&O insurance to be in place before they will take a position with a company. Just because it is not mandatory does not mean that this kind of insurance should not be considered to protect members of an LLP too.



Adam Kemal-Brooke is a US attorney at London-based Fishburns Solicitors, specialising in D&O, management liability and professional indemnity