Buying a single dental practice or group encompassing several practices is as daunting as it is exciting. Selling can be equally so. Whilst there is much to look forward to, there is also much that you need to be aware of, making due diligence critical, which should include which party is responsible for complaints or litigation for treatments delivered before the sale.

James Gunn, vice president of Lockton, Densura’s parent company, shares his insights on the importance of both parties ensuring they are correctly insured for any potential litigation moving forward. 

Indemnity cover when selling a dental practice

If you sell a practice, you’ve most likely got cover on what we refer to as a claims-made basis. You need cover at the time the treatment took place, as well as when a patient or their representative makes the claim. So, if you’re selling your practice, you need to work out the legalities with the firm of solicitors or whoever is involved in the process. The sale of a practice does not necessarily mean that your liability attaching to prior treatment provided within that practice ends. Depending on the insurance / indemnity clauses within the sale agreement, these liabilities could remain with you for a specific period of time, or indefinitely. If you’re selling a practice, you need to ensure that you understand the indemnity position of the sale agreement and have insurance cover for the past liabilities relating to a sold practice where you are still responsible for potential complications arising from this prior treatment provided.

There are times when people don’t have huge exposure to claims made Indemnity, which is pretty much all of the corporate cover available in a dental space, so you may just assume that we don’t own that anymore; therefore, we don’t need to cover it anymore. However, you may still be liable for that pre-sale period, and would need to ensure that it is covered. 

Indemnity cover when buying a dental practice

In terms of buying practices, there are two aspects to it. Suppose you’re buying the assets, just the patient list or the actual physical locations of an entity, but you’re not taking on the limited company. In that case, you would need to notify your insurance provider that you’ve taken on X practice or X number of practices with effect from the acquisition date. They’ll be able to include that with no problem. 

If you’re buying the shares, you own that limited company. This adds a layer of complexity in respect of what happens in the event that a claim is received relating to treatment prior to your ownership of the practice. In this scenario, the patient is making a claim against the correct entity, of which you are now the owner. Regardless of whether you were in charge at the time the treatment took place, you are effectively the first port of call for any complaints or claims. Similar to nuances of selling practices, there will be different aspects to the liability position in respect of acquisitions undertaken on a share purchase basis. The share purchase agreement should be reviewed fully so the buyer of the practice(s) fully understands the liability of the former practice owners as this will be required in the event that a claim is received.

We’ve developed certain aspects with insurers where we could cover those past liabilities from pre-acquisition, which isn’t necessarily the norm for the insurance market. It’s a risk that I suppose not many people would be aware of because the share purchase doesn’t allow them to immediately send that liability back to the prior owners. Or if they do that and the prior owners don’t have insurance cover. Or if there’s only a fixed amount of time, say two years, that the share purchase is applicable for, and a claim comes in three years down the line. They need to be aware of that from an insurance and a liability perspective to ensure that all those areas are factored in.  And that’s what we’ve been doing for our clients over the past two years or so.

Densura stands out from the competition with a product that covers dentists expanding their business. 

We’ve worked with insurers to develop an additional capacity to provide cover for pre-acquisition liabilities based on several factors. Ultimately, our message is to have that conversation from an insurance perspective with the insurer or the broker. Ideally, we’d like that to be us. We can have that conversation with our clients, but there are traditionally four areas that the insurers would be interested in. 

• The location of contact details for previous dentists
• The Share purchase agreement 
• Contact details for dentists who have worked previously worked for the practice
• A copy of the seller’s insurance cover

Is it advisable to look at buying or selling whilst cases are still active and unresolved?

I don’t think it would necessarily have too much of an impact.  If there’s anything that’s already been notified under the prior owner’s insurance cover, then that would continue to be dealt with by the prior owner and by their insurance cover.

If you’re buying a practice that’s got some complaints or some ongoing complaints, it’s the due diligence process of making sure that those questions are being asked and that you know what’s happening. The issue could potentially arise where such a situation existed, and you weren’t aware of it. You went through with the purchase, and then things started to unravel from there. I think, providing that you’re aware of the situation and understand what’s happening, I don’t think there’s necessarily any key issue there. It’s all about that initial awareness.

What effect does the valuation of a practice have on insurance? If the business is valued higher than expected, would you have to notify your insurance company?

The valuation itself wouldn’t necessarily be a huge point of contention, certainly not from a dental malpractice perspective. What you will also need to consider is not necessarily the valuation but the amount of additional revenue that’s going to be generated from the acquiring business once that acquisition’s gone through. The main areas that the insurers would look at are the number of staff, the number of dentists and nurses specifically. The revenue that’s generated by the business and the number of patients that are being seen. 

If a business is buying a business that increases everything by 25%, for example, then that’s certainly going to have an impact on their insurance cover. Purely on the basis that it’s a situation where that business the insurers agreed to insure at the start of that policy period is obviously now much larger. You could be acquiring a business that has different offshoots to it. Things we’ve seen in the past around different activities where practices are more involved in the aesthetic side of the business. Botox and fillers in the head and the neck area tend not to be an issue because there are quite a lot of dentists that are doing that, but facial aesthetic procedures and the rest of the body, or just general beauty treatments, aesthetic treatments, that type of work, we are seeing more practices branch out into those areas. 

It would just be useful if a business that’s purely focused on the Dentistry side is acquiring one of those practices that have branched out, that they have a discussion with their insurance provider to make sure that they’re aware of that and that they are able to cover that as the new business is brought into the fold. 

That could be an area that you may trip up on if your indemnity provider isn’t ready to cover that. 

When buying or selling a practice, how does the indemnity cover continue between the two parties if different providers insure them?

If a practice is being acquired on a share purchase basis, and they currently have a policy in place within the insurance market, and they are taking on past liability, it’s a really simple process of just looking to include what we refer to as a retroactive date. Their existing cover will have a retroactive date, which means this is the first treatment date that we would insure, and that goes right the way through to the current expiration of that policy. If that business is selling its activities, selling the business, the new businesses are acquiring that, and they’re taking on the past liabilities, they would just look to include that retroactive date.

If they’re not taking on any of the past liabilities and it’s a line in the sand, “From this date, this is owned by ‘x’ business as opposed to ‘y’ business.”Then, they would look to ensure that the previous owners are holding their own Indemnity for the period that they were the owners. The new business would essentially have one acquisition date from this date onwards. We’ve included this in our insurance cover, and essentially, any treatment that relates to that date onwards is their responsibility. Any treatment that relates prior to that is the previous owner’s responsibility.

Is the onus on the previous owner to ensure there is cover in place for treatments they delivered?  What responsibility does the new owner have to make sure past liabilities are covered?

This is where the asset purchase versus shared purchase comes into play.  If it’s an asset purchase, the new owners would have zero legal liability for the treatment that took place prior to the acquisition. Essentially, from a legal perspective, they have no interest in that whatsoever. They wouldn’t be liable in a court of law for it. The onus is on the previous owners to ensure that they have their own liability in place for that because there’s no way it could fall on the new owners.

Where it’s a share purchase, the line gets blurred a little bit, and things like the due diligence process really matter. That’s because even though they’ve only been in control of that practice from the acquisition date onwards, they have taken on that previous limited company. As long as within that, you set out that you are not taking on any of those past liabilities that are associated with that practice. All of those relate to the previous owners of the practice. The onus is on them to ensure that they’re fully covered for it and that they’re protecting themselves; they take on all that responsibility. From a legal perspective, it fully puts the onus on the prior owners.

From an insurance perspective, it pushes the onus on the previous owners. If that share purchase doesn’t fully explicitly state that, or it’s the case that the previous owners are liable for a period of only two years, or something along those lines, then it opens the door a little in terms of the new owners needing to make sure that they’re fully protected against those potential issues. And from personal experience, we’ve seen it where some of our clients are fully confident in the share purchase agreements that they’ve got in place, and that’s been tested in that they’ve had cases come through to them in relation to practices they’ve bought and they’ve just passed it back to the previous owners. In certain other areas, that has been tried, but ultimately, the previous owner hasn’t bitten on that, and I think from that perspective, that’s where the share purchase agreement is key in terms of that relationship and how that’s dealt with moving forward.

What are the limitations or disadvantages of some legacy systems, whether it’s paperwork or old data management systems, for example? What’s the best practice for people regarding patient records, digitisation, and moving records from one business to another?

We have seen situations where a business has acquired another business, and the record-keeping hasn’t been as they would have had themselves or as they would desire it to be. Again, it relates back to the due diligence process, where it is key to understand how that business is currently holding its records. Whether it’s paper or a specific system, and can it be used to transfer those records to a new system? 

One of the key areas of defensibility for claims, particularly when they’re being notified more than two years in the past in relation to the treatment date, the patient records are the key line of defence to actually understand what’s happened, Especially where they haven’t specifically been involved in the treatment themselves as the owners of the practice. They haven’t had any kind of understanding of what’s been going on at the time, so they need to make sure that they do get across the records in as full a detail as possible. Where they don’t necessarily have all those records, then work on a solution to mitigate those risks, whether that be to contact the dentists who were involved at that time to understand what treatment was provided. Once again, it boils down to that due diligence process and what they knew about before they made the decision to acquire the business.

How does Densura look after practices with regard to buying and selling an existing business?

At Densura, we look after a lot of dental groups and dental corporations. When a business is dealing with a challenge, we can work with them to resolve that issue or come to a solution from an insurance perspective. Then, we would look to proactively have that conversation with the rest of our clients in the same space to get them ahead of any potential issues that may come down the line. That’s what we did in relation to the asset purchase versus share purchase. A couple of our clients were having issues or receiving claims in relation to past liabilities and needed some support around that. That’s where we can provide that assistance.

We’ve got a very flexible insurer and a very good relationship with the insurer that we’re working with. If anything comes down the line that is especially challenging for our clients, then we can morph the policy. We’ve had various situations in the past where we’ve been able to do that for one client and then roll that across to the rest of them as a standard upgrade or endorsement to the policy that we offer. It’s never static. We’re constantly looking for areas where we can improve the policy and it has additional capacity to provide cover for areas that sit outside of a traditional dental practice policy. We’re looking at potential discrimination cover where there are allegations against the business for discrimination. We’ve already included areas such as fraud and dishonesty of employees, and we’ve got loss of documents cover, to name a few. We would look to add in these types of extensions where there wouldn’t necessarily be any additional costs to the client, but it adds an additional layer of protection for them.