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Legal Services Bill to increase exposure for UK law firms, Marsh

The Legal Services Bill currently passing through the UK Parliament will cause major changes in the structure and ownership of many major law firms and increase their risk exposure, according to broker Marsh.

This is in addition to the trend for law firms to move away from the traditional partnership model to a Limited Liability Partnership (LLP) model, which is common in the US. Marsh also predicts that if or when third parties take up equity positions in law firms there will be an increased exposure to a variety of professional, management and employee-related risks.

Sandra Neilson-Moore, European practice leader for Law Firms’ Professional Indemnity at Marsh said: “Outside ownership interests will mean that decision making can no longer be wholly driven by what is good for the partners and the firm in the long term, but will ultimately be influenced by the desires of major shareholders for a return on their investment - sometimes a very quick return.

“Growth in all markets may be the goal and some firms may find themselves under pressure to produce growth at any cost. LLP, which strips away both the risk and the bonds of joint liability, may exacerbate this. The result of this change in culture is increased liability exposures for managers of a firm to its employees, shareholders and third parties. This may lead to a need for UK firms to purchase management liability and employment practices liability insurance. Few do so now.”

Neilson-Moore also warned law firms about the insurance implications of the increasing complexity in terms of structural and status changes, there are further issues for firms involved in mergers or acquisitions.

“Major law firms often leave the question of insurance to the very end of considerations when negotiating a merger or acquisition. This is common, but very dangerous, particularly in a regime that requires all solicitors to be insured, and provides that there will either be a cessation of the practice altogether – in which event there must be run-off insurance – or a succession of it by another practice, which will take responsibility for all that went on before. A firm can find itself a successor to claims arising out of the past acts of even long departed partners and employees of a firm that it acquires or merges with,” said Neilson-Moore.

“Due diligence should include a comparison of the two firms’ insurance programmes, claims experience and risk management techniques, but it is truly amazing how often this is left undone altogether, or addressed only cursorily, and at the last minute,” added Neilson-Moore.

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