Firms planning to expand must analyse the impact of any action on their professional indemnity insurance. This must be done at the outset, not as an after thought, says Martin Ellis


A significant number of firms of all sizes in the legal profession have or are considering their future. Of that number, many will have considered their growth strategy and will no doubt have contemplated merging, opening new offices (at home and overseas) and/or lateral hires.



During these times, it is essential firms ensure that the impact of any action on their professional indemnity insurance (PII) policy and its requirements is at the forefront of their mind and not treated as an afterthought.



Experience shows that far too often the due diligence process only concentrates on the financial aspects and business of the transaction – not on the risk to the firm and the potential insurance cost which may arise.



It is obviously impossible to deal with every risk and insurance issue, but the following may assist in identifying a few of the key factors that a firm should take into account.



Mergers and acquisitions

Whether a merger is large or small, PII issues must be taken seriously. The rules governing successor practice are not straightforward and misinterpretation could lead to severe cost implication.



The due diligence process must therefore focus on the past liabilities of the individual or firm in question. You should ask to see the target firm’s:

l Existing insurance arrangements;

l Risk management manual;

l Evidence of regulatory compliance;

l Complaints register;

l Claims records and that for all its predecessors’ firms; and

l Details of any disciplinary matter, whether in the past or ongoing.



It could be costly to finalise a transaction only to find out that insurers are not uncomfortable with insuring the firm going forward. The recommendation is simple: involve your broker and insurers at the earliest opportunity. Invite them to assist with the PII element of the due diligence process.



As a minimum, the following questions should be answered in advance. Will risk profiles be changed? Will existing insurers be happy to insure the newly enlarged firm? What are the premium implications? Will a different policy excess be imposed for past and future liabilities? Is the limit of indemnity adequate? Will the newly enlarged firm have fewer or more insurers available?



Addressing some or all of these questions will certainly provide food for thought and should form an important aspect in discussions.



Finally, it is vital that any matter which could possibly lead to a claim is notified prior to any transaction. Appropriate enquiries with all partners and fee-earners should be made within good time prior to the effective date of the transaction. Every effort should be made to start with a clean claims record for the newly enlarged firm.



Lateral hires

Be wary of hiring teams from smaller firms and subsequently being liable for the legacy issues. This could happen if the firm then ceases to exist. A number of firms have been unwittingly deemed to be a successor practice due to the closure of a smaller firm. You must fully consider all possible consequences of hiring the team.



In any event, questions should be asked about past disciplinary matters, whether individuals have been subject to allegations of negligence, or ever caught up in PII claims for whatever reason. It is good practice to ask incoming hires to sign a declaration relating to their claims history.



If work in progress is transferring, make sure that appropriate file audits are undertaken and that clients are fully aware of where your firm’s liabilities start and end.



Overseas offices

Ideally, the firm’s insurers will feel comfortable with the jurisdictions that your firm wishes to operate in. It would be no surprise to learn that insurers have their likes and dislikes in relation to certain territories. It is fair to say, however, that most insurers accept that larger firms operate on a global platform and cater for this when assessing risks.



Local insurance requirements require consideration. A number of countries maintain compulsory arrangements for PII. It is important to understand your firm’s obligations in this regard and to ensure that your firm is fully compliant with local regulation.



You should also consider:

l Local limits of indemnity;

l Local compliance and regulatory issues;

l Claims handling and claims notification provisions;

l Communication between the firm’s PII partner, insurer and broker;

l The acceptance of legacy liabilities of existing local firms (due to mergers and so on); and

l Liabilities arising from joint ventures or international networks.





Your insurers will encourage a general and unified approach to management of risk.



It is appreciated, however, that specific regulatory requirements are unique to each office. Each firm should appoint a partner or senior manager to be responsible for risk management and PII for an overseas office, while maintaining and co-ordinating the management of claims with their head office and insurers.



In times of change a three-way dialogue should always be maintained between the firm, its broker and insurers. Firms should involve their insurance adviser with their strategy and ask for their input at the earliest possible stage.



Martin Ellis is a director and the head of the solicitors practice group at broker Prime Professions