August 18, 2022
As little as possible, is the quick answer, with the longer answer appearing below!
Call the broker
We have had a number of instances where sellers have felt an obligation to notify their insurers about everything to do with the sale of their business. When they have thought about selling, they notified their broker. Each time they get an expression of interest from a buyer, they notify their broker. Each time discussions get to the point of an offer being made , they notify their broker. Essentially the seller in these cases has notified their broker about everything, from the moment they have even thought about contemplating a sale or disposal, right through to the point that they actually get close to the point of closing a deal.
Unfortunately, in these deals to date, the firms have not managed to successfully sell. One of the main issues has been the involvement of the PII broker. In fact, as soon as a seller notifies me that they are consulting their broker during a deal going through, we get a sinking feeling..
Printing money
I suppose the fundamental question is why would you feel it necessary to notify someone whose sole existence is dependent on you giving them lots of money on an annual basis, and working in a trade where making changes to anything, no matter how small, results in extra fees being paid? Does your broker really need to know anything about your own personal commercial plans and what business is it of theirs?
Contractual obligations
Yes, but there are contractual obligations, you may say. Indeed, I have heard of PII contracts where there is an obligation in the insurance agreement to notify the insurers of any material changes ‘being considered’ that will affect the insurance. This includes planned material changes, and in one instance it included even thinking about making a material change.
Confidential information
I am currently working on a law firm valuation and reviewing a PII proposal form that includes questions such as ‘are you considering becoming an ABS in the next 12 months’ and under ‘Significant Change’ – ‘…do you expect any significant change in the coming year? For example…merger or closure of your practice?’
Why should anyone tick yes to this one? Would this in any way lower the premiums? What business is it of the brokers to know whether you are considering closing your practice? If you get home insurance do you need to notify the insurers if you are planning to sell the house and whether you did or not would this make any difference to the insurance? Anecdotal evidence suggests that if you do tick yes to this question or notify the broker of any intention to retire, it can make life very difficult for any buyer taking over the practice and looking to acquire the benefit of the PII policy.
Broker involvement scuppers sales
The simple fact is that, in our experience, if you notify your insurers of everything to do with a sale of a commercial entity, it is highly likely you will never get a sale, because the insurers will try and get involved at every single step of the way and lob spanners into the works wherever possible.
Our suggestion
The usual advice when it comes to insurance is to of course keep within your contractual obligations, but to have a careful think about what those contractual obligations actually are, and how you can progress a deal and stay within them. Give your broker as little detail as possible on the basis that the more information you give them, the more likely it is either a fee will be charged and/or they will scupper your deal.
Regardless of the deal that is being done, a quick and easy way of looking at dealing with the insurers is simply that if you manage to sell your business, then at that point you can notify your insurers that you are no longer the owner, and a new owner is coming on board to take over, and then anything to do with the insurance is dependent on the new owner and not you.
The business is carrying on if someone is taking over as a buyer, or if another law firm are purchasing your practice they become the successor firm, so there are no insurance issues for you personally, and the insurance you have is almost certainly going to be tied to the business.
There are lots of different routes to affect a sale of a business, and how this occurs is dependent on the structure of your company, but the quick and easy solution to dealing with insurers is to keep them at arm’s length for as much as possible, and just do not forget the old adage that your professional indemnity insurance broker is most certainly not your friend.
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