My PII has shot up this year – is my law firm worth anything still?

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November 16, 2021

In 2021 we have seen a common pattern starting to emerge of law firms dealing with conveyancing of a smaller size finding that their professional indemnity insurance has shot up to astronomical levels out of the blue.

Quite often with a bit of digging it becomes clear that the firms that have the largest increases tend to be those that have had a claim or notification in the last couple of years that has been resolved, but claims that they thought had long gone seem to be suddenly affecting new indemnity insurance proposals.

The question that we get asked increasingly from these firms where there has been a large increase in their premiums, is whether or not their practice still has any value.

Do Large PII Premium Hikes Affect Value?

It is very difficult to say at the moment because earlier in the year there seemed to be quite a demand for conveyancing firms with CQS accreditation and membership of lender panels. At the time I was composing articles saying that a rough rule of thumb for most valuations and practices of a smaller size (i.e. less than £1,000,000) would be to take last year’s turnover and halve it, and you probably would not be far off a sale price.

With the sudden hike in PII premiums at some of these firms, it is highly unlikely that they are the same attractive target for any buyers. One of the main issues is that the high PII premiums seem to spark questions and concerns from potential buyers that there is a reason for the high PII premiums, when in fact the reality is that most of these firms don’t seem to have done anything to warrant the sudden increase.

We’ve also heard anecdotally (and this could be right or wrong) that some deals have been scuppered by insurance companies themselves stepping in to refuse to allow one practice to merge or take over another, and to instead insist that the practice being taken over or the junior partner in the merger arranges for runoff cover to be taken out so that the new firm does not become the successor practice.

We have only heard of this in passing and it may or may not be true, but if it is true it is simply astonishing that there is a professional body in the UK who are under what seem to be restraints of trade with their practice completely controlled by a handful of insurance companies.

After all, there cannot be many trades in the UK where you actually have to ask for permission to purchase another business or get consent from your insurance broker in order to close your business down! I do wonder where things are going to go in future – are we going to see very large organisations practising law and smaller individual companies simply being squeezed out of areas where insurers believe that the work is too high risk?

It seems to be that whenever conveyancing is involved in an insurance quote and more than 25% of the business of a law firm is dealing with it the insurance premiums are turning into something of nightmares for most partners. Some of the most shocking premium hikes we have seen have been companies with turnover of £150,000 paying out just over 70% of their turnover in professional indemnity insurance.

Value

So the answer to the question as to whether there is any value if you have suddenly seen a huge hike in your premiums, is possibly yes depending on the circumstances, but the large hike will affect the chances of a successful sale or merger.

I suspect you have a couple of options which will be firstly to ride out the market and hope the premiums drop again or secondly to look to merge your practice with another firm but not to expect a cash premium for it in the hope they are prepared to take it over and save you the run off cover. The most extreme option would be to shut down your conveyancing department in the hope of reducing your professional indemnity insurance (and exposure to future hikes) down to a level that makes your practice a potential target for someone else.

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