Mergers and PII: What you need to consider

Professional indemnity insurance (PII) is probably a firm's third largest outlay after people and premises. Some key questions are:

• Who are the insurers on each side and which will take on the new practice?

• Who will pay any additional premium and when?

• Do you know enough about your merger partner's clients and work types to answer insurer's questions? They will be more demanding than they are on a simple renewal;

• What about claims records - are you putting panel status and work streams at risk?

• Will your insurer decline cover for people, teams, or work types?

• What about live claims - who is going to ensure they are completed efficiently?

• Do you have indicative quotes for rebates and premium top-up? andWill the existing level of top-up insurance be sufficient?

Due diligence

• Take advice from brokers and insurers on steps to be taken to make integration work and do not leave PII until the last minute;

• Make an assessment of workloads, work types, complaints histories, and regulatory intervention;

• Meet as many of the partners and staff of the merger partner as possible and ask about their approach and attitude to claims. Avoiding claims is cultural; can you physically mix staff to break down barriers?

• Survey all staff, asking them to declare any circumstances which may give rise to a claim and to report all disclosures to insurers before the merger. Agree that any such circumstance not notified will remain at the originating firm's risk and agree which firm is to pay excesses for claims moving forward. Remember, claims attract an excess depending upon the year of notification and that can be six years (at least) post merger - the excess may be higher then; and

• Discuss office procedures and training. Resist the temptation to continue operating as separate trading entities.

  High-risk areas

  Much legal work is potentially high risk and it is important that resources are aligned to the work.

The history of claims may reveal a high incidence of issues in the probate or personal injury team, for example. Consider people factors: absenteeism might indicate stress; redundancies might mean unfinished work or files not re-allocated.

Financial hygiene says a lot. A high level of debt or work in progress may indicate issues with the quality of solicitors or their clients.

The highest numbers of claims arise from property. Any merger involving property work should be scrutinised carefully: what is the quality of the client base, level of experience in the team, and procedure for handling money? Most claims within these categories arise from acting for lenders and breaches of the Council of Mortgage Lenders handbook.

High-value transactions create big risks. High volumes of transactions can create multiple claims. Look out for any history of generating lots of work from one source; in retrospect this is not always a good idea. For example, The Accident Group litigation caused expensive claims over a long period.

The firm will have a track record and a reputation. Has it been acting outside its usual line of work?

Failed mergers

The perceived wisdom is that most mergers fail. While there is not a lot of evidence that this is true, the recent larger firm failures, such as Halliwells or Cobbetts, arguably occurred following, or because of, mergers.

Fundamentally, firms fail because they run out of money - some will be making a profit but the banks have simply had enough and pull the plug.

Most of the time mergers fail because the firms should not have taken the steps to merge in the first place. If both firms are struggling, it follows that the larger firm is likely to struggle too.

Some mergers are about achieving growth to achieve a turnover target or status. The acquisition of a client base and the production of revenue are unlikely to be sufficient to produce sustainability. There needs to be a long period of post-merger adjustment.

Finally, it is important to remember that mergers are expensive. There will be lots of demands for the firm to pay money to ensure that there is a return on investment: increased overheads in terms of IT systems, travel, recruitment, and many other expenditure items. We go back to finance again: there needs to be leeway so that the extra costs of the merger can be accommodated within the firm's existing financial capacity. SJ

Patrick Gaul, pictured, and James Holman are partners in the professional risk team at Weightmans @Weightmans