Insurance industry “shaping the law firm M&A agenda”, say experts

Wallis: insurers effectively blocking deals they don’t like

Professional indemnity insurers are starting to shape the UK legal sector as they exert their influence during law firm mergers and acquisitions, experts have warned.

Nigel Wallis, a partner at Liverpool firm O’Connors who specialises in advising other solicitors, said the attitude of the acquiring firm’s insurers towards the target is becoming a significant influence on who buys whom – “and just as likely who doesn’t”.

“From our recent experience, insurers are not shy about expressing their opinion on targets and, in effect, blocking deals they don’t like,” said Mr Wallis. “This means us having to supply more and more information to insurers about a target’s current and previous insurance arrangements, previous acquisitions and financial information as these can seriously impact the acquirer’s risk profile post acquisition.

“If a target has unrated insurance paper, the insurer of the acquiring firm will want to know why this is. This is hardly surprising because, if a target’s insurer goes bust, the chances are the successor practice and its insurers will be left to pick up the pieces.”

Jim Brindley, a specialist law firm insurance broker at Towergate Professional Indemnity, said established underwriters in the sector have vast amounts of historical claims data on law firms and are “exceedingly well-informed about where the bear traps lie, both at firm level and at individual solicitor level”.

Lesley Graves, managing director of Citadel Law, a consulting law firm that advises buyers and sellers of personal injury law firms, agreed, highlighting “the importance of thoroughly reviewing a target’s case files for hidden problems when assessing the successor practice risk”.

Mr Wallis continued: “Given that it would be cavalier in the extreme to become a successor practice to another without insurer support, well-advised consolidator firms are now involving their insurers much earlier in the process and paying a lot more attention to their view of the firm or the book of business they are proposing to buy.”

He said that given the upcoming changes to professional indemnity arrangements, “understandably some underwriters are nervous about the legal sector at the moment. None of them wants to be left holding the parcel when the music stops only to find the prize is having to provide six years’ run-off cover with no-one willing or able to pay the substantial run-off premium”.

Mr Wallis said another factor is the way a number of the emerging consolidator personal injury law firms are becoming “highly skilled at due diligence” when looking to buy firms or books of business.

“Many of them now engage independent specialists to conduct a ‘deep dive’ assessment and valuation of a target’s case files. This is clearly having a major influence on what deals are done and what prices are being paid,” he said.


    Readers Comments

  • As a Professional Indemnity Insurance broker, I have had requests for information on a good deal of mergers over the past 13 years and I agree that firms should consult their insurers at the early stages of looking to merge.

    However insurers wont block mergers they will simply advise on the merged firm’s PI premium going forward post merger.

    If you are thinking of merging your practice simply consult your broker and they will advise on what services they offer in this regard.

    At Hera Indemnity we offer to complete full due diligence on potential deals and match firms well suited if appropriate.

    Your Sincerely Nick

  • This article is slightly misleading in my opinion. While it is true that an insurer may effectively make a merger financially unachievable by quoting a premium that is far too weighty to be worth completing, in my experience, they have never been in a position to veto a deal.

    Not withstanding the incredibly high cost of PI in the first place (which is a source of frustration at almost all levels), it is understandable that taking on board a much larger risk means the premiums go up so the insurers are perfectly sensible in reflecting this increased risk in the cost. There are plenty of steps a firm can take to reduce the level of risk and consequently increase their attractiveness for merger, both from the perspective of the insurers and the suitor firm.

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