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.