Damage control

By Thomas Berman, Principal, Berman Associates

It’s been clear for a long time that smart law firms address their professional liability risk issues before any errors and omissions claim occurs. In doing so, they avoid the devastating effects of serious professional liability claims.

Very often, the effects range far beyond the actual claims amount involved and can include:

• large amounts of time lost by a number of partners in dealing with the circumstances surrounding the lawsuit;

• large deductibles expended;

• deteriorating relationships between and amongst partners;

• loss of clients; and

• repercussions among the firm’s client community.

Most of the time, the focus seems to be upon monetary factors, i.e. the amount paid out by the law firm in its deductibles and the amount paid by the insurer to settle the claim. However, emphasising the monetary loss truly begs the question of the real impact on the firm’s continuing health.

Wider impact

The impact upon the fabric of the partnership itself is a good example. It is not unusual for the partner most involved with a particularly serious errors and omissions claim to simply leave the firm. This has to be carefully considered in ways separate and distinct from the dollar damages issue.

For law firms which have suffered major professional liability losses, it can no longer be business as usual. Important and fundamental questions must be asked and answered such as:

• Can the firm survive the loss in its present form?

• Will the need to pay higher professional liability insurance premiums and substantially higher deductible amounts make a difference to the firm’s basic construct?

• Will the very good lawyers stay with the firm long enough to allow the firm to regain its position in the legal community, or will they themselves be tainted?

Examples of these issues are in abundance. In a recent consultation with a firm of 70 lawyers which had a series of professional liability claims problems, the firm lost its bankruptcy department and then its estates practice before finally dissolving. All of this happened in a matter of months.

In fact, given the competitive nature of the legal sector today, it would be surprising to find a firm saddled with these kinds of difficulties and not have to deal with outside parties exploiting the circumstances by trying to poach certain partners and/or departments into other law firms.

In denial

To make matters worse, like patients who have experienced serious trauma, law firms tend to want to immediately forget about their professional liability problems: a case of group denial in the classic sense. The firm wants to pretend that the whole thing never happened, neither the claim nor the repercussions that are still very much in evidence.

When the partner most involved with the claim has departed, it actually gives the firm the ability to believe that the departed partner was the real concern, not the systemic difficulty with which the firm operates on a continuing basis. What makes this particularly difficult is that, by taking this approach, the firm precludes whatever good that can come from their bad experience.

Most of the time, professional liability claims happen because of systemic issues which may not necessarily be specifically related to an individual attorney’s practice (of course that can also have been the case). The only way the firm which has experienced a serious claim can avoid costly mistakes in future is by analysing the claim and coming to grips with what it was that allowed the claim to occur in the first place. This is a difficult proposition for any entity. Indeed, if the firm cannot objectively evaluate the claim and its origins, it may fail to both assess the damage and determine how to avoid the same problem in future.

The answer of course is for the firm to take stock of its circumstances and develop a plan to deal with issues which may have created an environment in which the claim could occur. As much as possible, this should be done objectively and without recrimination.

In my next column, I’ll talk about some measures by which a law firm can evaluate itself in order to rebound from these difficulties and create an even stronger entity than before.

tberman@bermanasscoiates.net