Most law firms view their Insurers (and sometimes brokers) with skepticism but with the right broker there is a lot to be gained from collaboration if you wish to grow and acquire other businesses.

An acquisition is most likely going to change the profile of your firm in terms of income, number of partners and very importantly the worksplit. This can often enhance your profile by “watering down” the % of high-risk legal work but it can also go the other way which can at best narrow your options at renewal and at worst take you out of appetite for even your current insurer. The right broker will help you with “forecast modeling” and advise you on what impact this could have and for more informed budgeting.

Many firms will only undertake financial due diligence on a target acquisition, and in order to keep your Insurer onside you must carry out this exercise on a percentage of live and recently archived files, via an independent specialist. This will give your Insurer some comfort around the past liabilities of the target firm, but also around your ability to manage the acquisition process – unless they have that comfort, there is always a risk that they will raise objections to what you are doing.

Anything that flushes out from this exercise must be reported to the outgoing vendor firms Insurers and they must respond by stating that they accept it as a claim. In addition, a declaration circular to the vendor firms fee earners will also demonstrate a clean bill of health to the Insurer, or otherwise, and provide a basis for driving out any other matters which must be left behind.

Your Insurers are rightly nervous of inheriting issues that lurk beneath the surface of a vendor firm, and which might be the cause of their exit. We have a number of examples of firms failing to tell their Insurers that they have become successor practice to another firm, and some who purport to have inherited an office location but not the expired firms’ liabilities.

Some vendor firm opportunities will arise at the last minute with a need for swift action. There is a temptation to consign these matters to warranties to be signed by the vendor partner/directors, but that does not deal with the risk that the purchaser’s own program could be tainted by the things which might flush out after the deal is done.

Most Insurers keep a detailed record of all of the law firms in England and Wales, as they will have seen them as a presentation for their PII Insurances several times in the past. In many instances they retain details of problem firms, people and rogue solicitors (unofficially of course)? and their databases enable them to pinpoint whether a firm presents a good risk or otherwise. This can be put to good use as they might just know something beneficial about your target acquisition that you don’t know yourself.

The bottom line is that if, via your broker, you communicate with your Insurer, take their advice and work with them, you are far more likely to obtain a successful outcome than by pressing on and telling them when it’s a fait accompli.

Jon Cook – QPI

January 2024