Growing through mergers? Beware the block negligence claim, warns leading PII adviser

Last year was 12 months of unprecedented merger activity in the legal market. Experts are predicting that the trend will continue in 2013 with more mergers as firms seek to stay competitive by increasing their geographic spread or achieve shared critical mass in the marketplace.

But according to specialist professional indemnity broker Prime Professions, the recent case involving McManus Seddon Runhams (MSR) highlights that a rushed merger can lead to a wave of negligence claims and higher professional indemnity insurance costs.

Glenda West, director at Prime Professions, explains: “With organic growth particularly difficult to achieve in the current market conditions, many will see a merger as the only route. Some mergers will be born out of necessity or even desperation in a few cases, and in the heat of time-pressured negotiations, it can be easy to overlook certain warning signs.”

Merger-led growth: lessons from other professions

“However, there is a very real danger of exposing your firm to a raft of professional negligence claims and causing your professional indemnity insurance costs to skyrocket if you ignore risk management concerns. Market consolidation fallout in other professions demonstrates that when a firm is taken over, compliance failures or instances of professional negligence might only come to light months after the merger but the risks can be huge.

“Baker Tilly found itself exposed to a raft of mis-selling claims in relation to tax avoidance schemes as the successor practice to HLB Kidsons, a fellow accountancy firm it took over in 2002. In the legal world, we saw a very similar issue with claims related to legacy firms just this month when McManus Seddon Runhams – a solicitors’ firm that had always had an unblemished claims record – found itself facing 17 claims over conveyancing transactions, all related to the work of a firm it had taken over.”

Why your insurer will be worried

“Insurers are already facing a wave of recession-fuelled claims, and they will clutch at straws to avoid paying out if you file a block notification with the potential for hundreds if not thousands of claims to come in. This means you could find yourself mired in litigation against your insurer for years to come over the validity of a blanket notification of potential claims – and that is in addition to the disruption and stress of handling the actual claims against your firm.”

Managing the risks

“In short, a merger is no silver bullet that can address concerns about growth – it could actually derail your firm’s work and its standing in the eyes of insurers. It is not all bad news, though – there are ways of ring-fencing claims relating to a particular issue in order to improve your firm’s risk profile. However, careful planning and expert advice will be required to achieve this. We would offer the following top three tips to any firm considering a merger:

  • Undertake proper due diligence before merger so that issues are discovered and notified beforehand. We recommend that a specialist firm should be instructed;
  • Take expert advice before making a blanket notification; and
  • Ask for the firm’s QICS (Qualifying Insurers Claims Summaries) and if there are a number of notifications that cause concern, then request your broker to assist by authorising them to speak to insurers to ascertain the real issues.”

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