Step 2: rake in the cash by offering solicitors’ services to your clients? Well, it’s not quite so simple. Lauren MacGillivray asks insurers and lawyers how the Legal Services Act could change the industry.

The debate over whether insurers should have in-house or outsourced legal services is old news. These days, it’s all about insurers nabbing barristers’ wigs for themselves.

The number of law firms that specialise in insurance has always been low – 3.3% of solicitors in England and Wales, according to the latest figures from the Law Society. Now, as consolidation increases across the legal profession, their numbers are dwindling even further.

The Legal Services Act, which received royal assent last October but has yet to come into force (see box, right), is expected to cause even more consolidation. But it also offers insurers an opportunity to guarantee the future of insurance law through external ownership or investment in niche law firms.

The details of the legislation are still being hammered out. But it is likely that non-solicitors will be allowed to buy law firms. Insurers may also be able to acquire barristers’ chambers.

AXA is one insurer that is revamping its legal panel with the changes in mind.

Matthew Scott, head of liability claims and professional services for AXA Insurance, says: “Right now, we know the market is going to be allowed to be different in two to four years. But until we know the details and overlay that option against our overall business strategy, it’s very difficult to say AXA would definitely be in favour of doing a joint venture with a lawyer, or buying a lawyer, or having nothing to do with either concept. But it is a key element of our strategic planning.”

Scott says the wave of consolidation in the legal profession is bound to increase as a result of the act, as the market is freed up for new capital and investors.

AXA’s panel of 10 firms consists mostly of large commercial law firms, plus a couple of smaller insurance specialists. The panel has remained fairly constant over the years but, with the new opportunities in mind, AXA wants to cast its net wider when the panel’s contract expires at the end of this month.

“The Legal Services Act will force each insurer to consider its strategy and business model for all the different segments of the business that involve the legal services profession,” says Scott.

“Insurers will either want to keep buying the service on a case-by-case basis, like most of us do now, or think about strengthening or initiating an internal legal team for aspects of their business, or moving to more joined-up operating arrangements.”

The different segments of a business that Scott refers to go beyond claims litigation and extend to areas such as legal expenses cover and will-writing. Under the AXA umbrella, there is of course AXA Insurance, but also the life business and healthcare – all of which Scott says could be considered for a holistic approach to legal engagement.

If insurers do offer more general legal services such as will-writing, they can expect tough competition from supermarkets. “Tesco Law” is the term increasingly used to describe the practice of supermarkets offering legal advice if they take outside ownership of legal firms.

The giant retailers might also decide to white label legal products. But they are likely to stick to simpler services and stay away from areas such as claims litigation.

The advent of Tesco Law is expected to raise the pressure on smaller solicitors, forcing them to shut up shop or to consolidate.

One of the concerns surrounding the Legal Services Act is lawyers’ independence.

“There’s definitely a potential conflict of interest and that would need to be taken account of in the business model,” says Scott.

“I can’t imagine any law firm is going to want an insurer to invest if the consequence of that is that they lose lucrative income from other insurers.”

But he adds: “In the litigation field, many of the law firms are used by a number of different insurance companies and they have very well developed practices. That would have an added complexity if an insurer was a direct investor in the firm, but I don’t think the difficulties are insurmountable.”

“Until we know the details, it is difficult to say AXA would be in favour of doing a joint venture or buying a lawyer. But it is a key element of our planning.

Matthew Scott, AXA

The merger of Kennedys and Davies Lavery earlier this month marks a further decline in the number of law firms that specialise in insurance.

Both firms had a focus on insurance law, but Davies Lavery had a larger personal injury book. The merger forms a UK-wide legal powerhouse of more than 110 partners and 600 staff working under the Kennedys banner.

Nick Thomas, senior partner at Kennedys, claims there are only a handful of big players left in the UK that specialise in insurance law. He says the larger, multinational insurers often want law firms that can meet their global needs.

So, if there aren’t enough insurance law specialists, can’t the larger general commercial players pick up the slack?

“Most commercial firms don’t really know what to do with insurance,” says Thomas. “They look at it and think it must be a good thing, because insurers are obviously large players in the financial services world. But in terms of dealing with insurance claims, the turnover of insurance departments at all-purpose firms is surprisingly large; people are always moving around.”

He claims that insurance lawyers from commercial firms, as well as those from smaller specialist firms, will be looking for a home such as Kennedys.

“We’ve got a history of lifting good people with their clients out of other firms,” he says. “Usually it’s someone who’s a good insurance operator and who is stuck in a non-insurance firm. That’s been happening more and more lately.

“Those people are feeling disenfranchised because the large commercial firms charge the earth, which insurers don’t like, and people with insurance specialism in those firms are constantly butting up against conflicts of interest.”

These conflicts are situations in which a large commercial law firm may represent more than one party involved with insurance claims. It is quite possible that the law firm might not be able to act for the insurer because it is already acting for the insured party.

“The specialist insurance firms are in the best position to ensure there aren’t such conflicts,” says Thomas.

“So individuals have been really struggling within large, all-purpose, general commercial firms to actually hang on to their insurance work.”

He adds that it’s not enough for insurance law firms to simply specialise in employer and public liability and motor – they need to handle other areas such as professional indemnity, product liability and reinsurance disputes.

“It’s more and more important for insurers to have a one-stop service. So I’m certainly not saying personal injury, EL and PL [employers’ liability, public liability] is a bad thing and general and reinsurance is a good thing. You need to be able to provide the one-stop service for most clients.”

He’s not convinced external ownership of a law firm by an insurer would work because that might mean they were too closely aligned and would be seen as biased in the eyes of other clients.

Beachcroft is one of the law firms that offers services to insurers as well as specialising in other areas such as health. Paul Murray, its managing partner, also expects further consolidation of solicitors who specialise solely in insurance.

“The market has become very tough and a lot of players have chosen to move out of it,” he says.

“Lawyers who work in the insurance market find it hard to keep pace with procurement demands and the infrastructure needed. Only a certain size of firm is capable and the business is price sensitive.”

He is open to the idea of insurers buying law firms, though: “The attractions are that you’ve got a captive group and you might be able to manage the cost better. But insurance companies can be quite a sterile environment and I’m not sure how sustainable it would be.”

How the Legal Services Act will work

The Legal Services Act reforms the regulation of legal services in England and Wales. A Legal Services Board and an Office for Legal Complaints have been created, and regulators will be able to authorise licensed bodies to offer legal services.
The act is expected to introduce alternative business structures, in which non-lawyers can take external ownership or inject capital in law firms. It is also expected to allow partnerships between solicitors and non-solicitors in the provision of legal services. The act received royal assent on 30 October and the rules on alternative business structures are expected to come into effect in 2011 or 2012.
Insurers and brokers are considering their options. Historically, insurers have had a third-party panel of solicitors. They have been limited on the type of legal advice they could offer policyholders and have had to refer many cases elsewhere.
Under the new law, insurers would be able to buy law firms and sell legal services. By working closely with or owning a law firm, insurers say they could save their clients money. Affinity partnerships would also enable insurers to offer will-writing and conveyancing.
The Scottish government is considering its own version of the Legal Services Act. It plans to introduce the Legal Profession Bill this parliamentary year and, while the act will be introduced later than the English version, the alternative business structures may come into effect sooner in Scotland.