Staking an insurance claim

It's not an easy time for firms which depend on insurance work for a large part of their business.

Changes in the market, mergers, takeovers and reforms of the legal system mean that many firms are losing clients.

Three months after Eagle Star/Zurich closed its in-house legal department, the insurance giant is thought to be reviewing its legal panel. Chubb Insurance is also said to be joining the stampede of insurance firms looking at rationalising the number of law firms it works with.

Firms advising Guardian Royal Exchange (GRE) should also be worried. Axa Sun Life, the UK arm of French insurance giant Axa (the world's second largest insurance company) takes over GRE later this month and looks set to follow the trend towards smaller panels.

GRE has already reduced its panel from 70 firms to 21 in the past three years but Axa Sun Life, which has seven firms – Slaughter and May, Reynolds Porter Chamberlain, Bird & Bird, Sackers & Partners, Linklaters & Alliance, Allen & Overy, and Clifford Chance – admits that there will be “rationalisation”.

Axa Sun Life senior legal adviser Noleen John says: “I would need a crystal ball to predict what will happen but we will be rationalising and we won't have two firms doing the same work.”

Although she claims no decision has been made she says Axa Sun Life is “fairly happy” with its current firms.

Should it decide to cut the firms serving GRE, it will be walking a well-trodden path.

Last week The Lawyer revealed that insurance giant Iron Trades, which is reducing its 40-strong panel to about 10 firms, had appointed Berrymans Lace Mawer and Jacksons, to help it choose which firms to retain. Iron Trades has dispensed with its investment property business, which was assisted by Bird & Bird and Vizards, and is retaining only two investment properties.

Prudential is also engaged in a review of its panels which is likely to last two months. Prudential's head of legal Peter Maynard says the company is considering dispensing with its current system of using separate panels for its departments and appointing a single panel of firms to serve the company as a whole (The Lawyer, 19 April).

CGU – the insurance giant formed from the merger of General Accident and Commercial Union – may not have even finished its cuts. This month it slashed its panel from 100 to 18 firms to “achieve savings”, but spokesman Barry Gardner says the review will continue over the next 12 to 18 months and the panel's membership could change further.

The insurance companies are reluctant to talk about why they are making these massive changes, claiming that they are merely reviewing their operations and looking for savings. But some think the increase in the speed of change is due to further factors.

Forum of Insurance Lawyers (Foil) president Martin Bruffell blames Lord Woolf's civil justice reforms. Bruffell thinks that they are creating uncertainty among insurers and that it will take another couple of years for the insurance market to settle down.

Alan Bannister, a partner at Vizards Bannister & Staples – one of the lucky few to be retained by CGU – agrees. “The Woolf reforms mean that cases are now frontloaded, which means more work is necessary before risk assessment takes place, and insurers will be making decisions which their lawyers would previously have taken,” he says.

To prepare for Woolf, GRE set up a working party in September which included three of its panel solicitors. The company's head of claims services, Keith Stark, denies the Woolf reforms have influenced GRE's decision to reduce its panel. He talks of a “rolling process” with GRE moving from 40 firms in 1996 to 21 firms in 1997, when it set up three “niche firms” specialising in industrial disease and high-grade commercial work.

Stark says: “The ability to relate to a panel and interact with the members of that panel is becoming an operational aim and is more easily achieved with a smaller panel.”

With the number of clients shrinking and the market becoming increasingly unstable, insurance lawyers are looking for ways to adapt to the pressures of a new and highly competitive market. There are rumours that some firms – even some major players – are looking at pulling out of insurance altogether.

Pulling out may be a drastic step but it is clear that many firms are at least looking at consolidation.

In February, City firm Davies Arnold Cooper (DAC) revealed it was shedding 90 of its Manchester and London staff to concentrate on its “pillars of strength” – insurance dispute resolution, banking and property. While DAC's drastic restructuring shocked many medium-sized firms, competitors described the move as “courageous”. If market gossip is to be believed, many firms may follow suit.

As well as examining consolidation, some firms are looking at merger or takeover as a way of staking their insurance claim.

Three major players in the insurance market merged this month. Beachcroft Stanleys and Wansbroughs Willey Hargrave formed the 122-partner Beachcroft Wansbroughs; Welsh firm Hugh James and Exeter firm Ford Simey formed 57-partner Hugh James Ford Simey; and Vizards joined with Bannisters to form Vizards Staples & Bannisters. All are hoping to grab their share of the market.

Meanwhile smaller practices concerned about the fallout from the panel reductions are keen to join insurance specialist firms and are bombarding them with calls.

Foil vice-president and senior partner at Vizards Staples & Bannisters, Martin Staples, says he has been contacted by several firms which are keen to merge with his practice.

Staples, whose firm has been retained by CGU and Royal SunAlliance and expects to be retained by Iron Trades, says: “There's a lot of concern among insurance lawyers. Several firms have had mergers to protect themselves or have applied to join larger firms, and many individual solicitors have had their confidence damaged and are looking to join other firms.”

Staples thinks insurers might “narrow their panels too far”.

“Insurers could find themselves exposed by concentrating on a few firms since those firms will then be in a stronger position to negotiate over fees,” he says.

Bruffell says he is also receiving calls from smaller firms keen to clamber aboard his firm, Berrymans Lace Mawer.

Some are optimistic about the upheavals believing that the wave of cuts is merely temporary. Bannister says: “The insurance industry is cyclical and what goes around comes around.”

Bruffell, however, is rather more pessimistic about the future. “This is a difficult time for the smaller firms, the insurance market is supply-led and fiercely competitive and I can't see that changing in the foreseeable future,” he says.

Whoever turns out to be right, the upheavals in the insurance market and its effects on law firms may offer a clue as to how the legal profession will respond when a major source of work chooses to make changes.

And with the volatility in the telecoms and media industries, maybe there are lessons to be learned.