Analysing claims

By Thomas Berman, Principal, Berman & Associates 

This is the second of a two-part letter on managing the impact of professional liability claims.

In the first instalment, I noted that the only way a law firm which has experienced a serious professional liability malpractice claim can avoid costly mistakes in future is by analysing the claim and what allowed it to occur in the first place. This is indeed a difficult proposition for any entity.

There are really two ways in which a firm can evaluate the circumstances which led to a professional liability claim. One option is to appoint a special committee or an individual to conduct an internal analysis, the other is to go to ask an external risk management specialist to do it for you.

The first method is difficult because of the obvious subjectivity involved. For the most part, partners and shareholders are not very good at evaluating one another. Few firms have an active peer review process, in which an individual is actually reviewed for the quality of his work and relationship with clients. Without such a process, it is difficult if not impossible to conduct the analysis in a neutral and reasonably objective fashion.

For individuals who have not been sued, it is difficult to understand how it can happen, let alone which circumstance led to the difficulty.

Partnership agreement

There are several factors involved in an analysis of each professional liability claim or circumstance.

The analysis should start with, strangely enough, the partnership or shareholders’ agreement. The entity agreement is a place where the law firm sets the tone for the organisation and sets out the basic structure and operation. The agreement should also give some guidance toward the individual’s responsibility to uphold the objective quality of the practice.

Years ago, when most law firms were partnerships, there was a good deal of effort put into setting up these kinds of standards. When corporate structure and form became popular and firms started to use basic off-the-shelf shareholders’ agreements, much of that very specialised language – which was so important to the setting of standards in the firm – was lost by the wayside.

As a consequence, for many firms there may be very little in the partnership or shareholders’ agreement which directly relates to the substance of the individual partner’s practice, other than covering compensation and/or retirement issues. Some law firms have therefore been put in the position of having no way to enforce the departure of a partner or shareholder from the firm based on internal ‘best practice’ standards and by relying on professional responsibility and/or state bar mandated standards.

Practice background

After comparing the individual’s actions with internal standards, other issues must be addressed. These are most often questions relating to the client base of the individual lawyer, such as whether or not he practices largely independently, if he has a singular practice area (with no other lawyers in that practice) and so forth.

Claim and clients

Next, the specifics of the claim are given their day. In addition to an analysis of the actual facts and circumstances related to that particular professional liability situation, the firm needs to review the way in which the individual lawyer has billed clients, the methodology used to collect fees, the write-offs which are given to particular clients, as well as client complaints or a history of difficulty which that lawyer may have had either inside or outside the firm. These are all ‘grist for the mill’ and must be examined in detail.

There is also a school of thought which says that questionnaires should be given to the lawyer’s clients to determine whether there are other difficulties which are outstanding or whether the particular professional liability claim is a ‘one-off’.

Being objective

It is easy to see why most law firms do not successfully make a full analysis of their professional liability claims. One way or the other, however, a firm that has suffered a professional liability claim needs to understand as objectively as possible how the claim came about and how it can be prevented from happening again.

The degree of circumspection that a law firm can utilise determines whether it can move forward from the claim as a healthier entity or continue without making the changes needed to avoid such claims in future.

tberman@bermanasscoiates.net