What do you do when the company you have quite happily been providing legal services to for years suddenly disappears down the u-bend into liquidation? It is something the three panel firms of Independent Insurance have been forced to contemplate since the insurer fell into the hands of provisional liquidator PricewaterhouseCoopers (PwC).
Independent's dramatic collapse in June propelled Berrymans Lace Mawer, Davies Arnold Cooper (DAC) and Davies Lavery into an uncomfortable state of limbo. Stuck in a curious position as both creditor and continuing supplier, the firms have had to balance financial pressure to recoup lost earnings with the long-term need to retain a client.
Run-off work is essential to the firms as it will help to bridge the turnover gap, particularly because in some cases the run-off process can last for 20 years. For Davies Lavery, Independent generated a quarter of its business; Davies Arnold Cooper (DAC) has similarly been deprived of one of its top two personal injury clients.
For insurance firms such as Berrymans, DAC and Davies Lavery, the rates for claims work are so low that when they do finally obtain payment for work undertaken, it might be at such an amount in the pound as to make a loss for the firms. Even so, this is better than no payment at all. The collapse of Independent has also revealed an inherent problem for firms which are billing clients in the insurance sector.
Because so much of the work is ongoing litigation, and for relatively low sums, insurers request that billing be combined, rather than it being paid on a claim-by-claim basis. For this reason, Independent's panel firms will have amassed an amount owed to them over a considerable period. This is not like turning up, fixing the plumbing, sending an invoice and waiting for the cheque. The firms are creditors waiting for large amounts, estimated at about £2m. Their long-term relationships with the insurer could ultimately count against them. And the fact that they are dependent on run-off work in the meantime has added an additional layer of complexity to the proceedings.
Law firms that are focused on the insurance sector have been hit hard by industry consolidation and hardening markets. The collapse of a key client is clearly a significant blow to future revenue. So how hard should they push for the payment of outstanding bills?
On advice from counsel, the panel firms have approached policyholders to settle outstanding bills. Although legally accurate, this circumvention of the creditor's waiting list has prompted criticism. Policyholders have also been left in the lurch and may have run up a large legal bill that, until now, they would have had no knowledge of. They are hardly going to be pleased to be deprived of cover and to be presented with an invoice for legal services rendered.
Independent's panel firms are not unusual in trying this tack. The winding down of Builders Accident Insurance demonstrated a comparable situation in which firms went directly to the insureds for payment.
An adjacent matter, namely expert witness fees, has achieved prominence following leaked communications between Gerald O'Mahoney of DAC and Dan Schwarzmann, joint provisional liquidator at PwC. It was reported that DAC sought to obtain payment, believed to be around £4m, in respect of expert witness fees owed to it for work done prior to the insurer entering liquidation. This request was juxtaposed with the suggestion that, should the funds be unforthcoming, those same experts may not continue to provide their services.
PwC gave short shrift to this request for payment, stating that the provisional liquidator would not pay pre-provisional liquidation fees. Schwarzmann added the ominous caveat that if DAC could not afford to retain its experts, other law firms could always step in and take its place. Harsh words, but PwC has no room for passengers. With more insurers expected to suffer, law firms will have to toughen up on chasing payments if they are to avoid being flushed away with their clients.