Claims: why manage the risk?

Claims experience is probably the most significant factor influencing an insurer’s decision to insure a risk. Insurers want a return on their investment and will view a firm/lawyer with a significant history of claims as a poor risk.

A firm with a good claims record, on the other hand, can and should expect this to be reflected in the cost of its premium, but this is not a panacea. Insurers look at a firm’s risk profile holistically and there are other rating factors that are taken into account (for example, fee income, work type, claims paid and reserved over a ten-year period, number of partners) that can have a very significant impact.

Premiums can vary from under one per cent of turnover, for a more profitable firm undertaking low-risk work with no claims on its record, to ten per cent or more for a firm with high risk work and a very poor claims record.

Not only do firms have to fund the excess payment and pay an increase at the next renewal, but there is also significant latent cost: wasted management time and fee earning time spent dealing with the claim, compiling documents – perhaps even preparing detailed witness statements or going to trial. Being involved in a claim is a millstone around the lawyer’s neck.

Lawyers sometimes do not see the importance of reputation until that reputation is threatened. There is little anonymity these days. Being known as the firm or the lawyer who (allegedly) made a mess of a transaction can lead to loss of a reputation built up over a long period.

How you deal with the claim may determine whether the loss is confined to that particular matter or whether there are wider implications.
Your attitude to the client and
the claim will vary depending on whether you were acting on a one-off transaction or whether the claim is an aberration in a long and successful commercial relationship. There can sometimes be tensions between firm and insurer when the claimant is an important commercial client.

Risk management

There are many practical and strategic measures a lawyer can put in place to mitigate against and avoid the risk of claims, including the following.

n Responsibility

It is the responsibility of all lawyers to ensure that they mitigate the risk of claims. That this is not just the remit of the firm’s risk and compliance partner/team should be a message that transcends down from the board or senior partners. All staff should be made aware of their duties, from their obligation to advise clients of their right to seek independent legal advice, should a circumstance arise, to their duty to notify circumstances (that may give rise to a claim) to the compliance officer for legal practice (COLP)/claims partner and cooperate with insurers.

To get lawyers to buy into the mindset of managing risk, they need to know what their
role is and what is expected of them, whether
they will be individually responsible, and that their actions or inactions have consequences.

n Communication

The firm should have at least an annual communication about risk awareness and it is often salutary to talk about the firm’s own claims experience. Supervisors need to be made constantly aware of what can go wrong and
what is going wrong so that messages are communicated to case handlers. And all of this needs to be done in such a way that people give their best on a daily basis to their clients and do not simply try to avoid the worst.

If a claim does arise, there are difficult issues related to communication, because nobody likes to be at fault or even have an unmeritorious claim against them. There has to be an acceptance that claims are part of professional life, but case handlers will need support through the process which, if the case goes to trial, will be a very arduous one. Like anything else, the sooner the firm and the case handler get to grips with the claim, prepare the evidence and develop a strategy, the better.

It is important that there is a person or department within the firm that knows the firm’s claims record and has overall control, making sure that the firm’s views are represented to the insurer. It is, after all, possible that the case handler will have to give evidence and the firm’s name will appear in the media. There may well be PR issues to deal with.

n Training and supervision

Although there are some dangerous notions about legal knowledge and expertise being taken for granted by clients – the law becoming a commodity and the like – most areas of practice have technical difficulties and any substantial case or transaction will require not only legal input but strategic planning and insight. Accordingly, it is very important that structures for supervision are in place so that nobody is out of their depth.

The number reporting to the supervisor will of course depend on the complexity of the work, but large teams with inadequate supervision will inevitably be a source of claims. Occasionally the supervisors themselves will be a source of the claims and that means the firm needs an overarching approach to risk which includes an independent review of the incidence of claims from time to time.

n Diary management and key dates

Diary management is a simple measure that
has immeasurable results. Wholly avoidable claims can arise as a result of missing limitation, failing to serve a defence and/or pleadings
on time.

Key dates should be immediately input to
the case management system (paper file or electronically) upon receipt. Periodic key date prompts should alert the lawyer and his/her supervisor that a particular action needs to
be taken.

n Data capture

Recording incidence of claims centrally so that patterns can be readily identified is important, so that any underlying issues can be flushed out and dealt with. For example, it is useful for firms to see which areas of work tend to generate the largest number of claims as this may inform strategic decision making on whether those risk areas are still profitable.

The insurance premium to protect the firm in respect of claims is a major item of expense in any law firm budget. The benefits of insurance are considerable, but a poor claims record can put a firm out of existence, causing considerable financial loss and huge anxiety, affecting not just those who have caused the claims but all of the partners and members of staff.

The firm needs to create a culture of constant improvement and of continually doing the best possible work for clients who want to preserve their relationship with the firm. Although claims can have a negative impact, they have also over the last 30 years helped to contribute to improved standards and the profession is now more responsive and client focused than it was then. That should send a positive message to law firms and encourage them to pursue the goal of a claims-free organisation. SJ

Michelle Garlick is a partner at Weightmans and leads the Compl-i service ?www.weightmans.com. ?Bhavni Shah, Joanne Smith, Adam Entwistle and Jennifer Haren also contributed to this article.This is an excerpt from ‘The Good Risk Law Firm: the Comprehensive PI Insurance Toolkit’, Ark, May 2014