Escaping the vultures' clutches

Many personal injury firms still have little idea of how to deal with the seismic shockwaves hitting the sector and many choose to ignore them altogether.

Recent headlines about ‘vulture law firms’ making professional negligence claims against PI law firms and potential carnage anticipated for those who are still reliant upon pre-LASPO work in progress (WIP) should sound alarm bells for those failing to change. Although quick fees generated from efficiently run post-LASPO cases are enabling some firms to cash in, all personal injury firms should be alive to the need to evolve with the current market and manage risk effectively.

Capital reserves

By now, the sector should have dealt with the bulk of the lower value pre-LASPO cases – those with standard costs, recoverable success fees and after-the-event (ATE) premiums. In some cases, this has not happened and a glut of cases remains, with allegations from some quarters that this is due to deliberately slow management by fee earners.

While this has foundation, the likely outcome from dilatory claims management when limitation hits is that claims will speed up once proceedings are issued, assuming of course that a firm has sufficient capital reserves to fund increased court fees.

Ultimately, however, dilatory handling of PI claims and poor technical expertise will lead to an erosion of the value of pre-LASPO WIP due to the insurance industry arguing over inflated hourly rates, conduct and proportionality issues.

The resulting profitability of these pre-LASPO cases is therefore questionable. Cases that have dragged on for years with WIP written-off and significant capital invested to fund their slow management may equate to financial losses that are not so LASPO-proof after all.

Firms still working through their pre-LASPO caseload need to realise that there are actually profits to be made through an efficiently run post-LASPO caseload. What is needed is a robust time and financial analysis tool to deliver the meaningful data required to consider which cases will be profitable for them.

Most pre-LASPO cases are still hanging around because of firms’ failure to adapt. At the top of every firm is a hierarchy trying to protect itself and attempting to avoid the inevitable spotlight on whether the firm’s skillsets are really ‘LASPO-proof’.

Many firms are trying to manage both pre and post-LASPO cases,as well as multi-track matters at the same time. Unfortunately, very often they are litigated in the same way, resulting in a number of problems, namely:

• overworking low-value cases;
• underworking higher value cases;
• missing significant value for clients and profit;
• WIP and disbursement lock-up;
• increased capital requirements;
• reduced cash flow; and
• medical agencies, experts, counsel, costs lawyers and other suppliers chasing for payment as their patience and timeframes for enforcing payment run out.

Lacking expertise

So, poor case management is partly to blame for many firms’ failure to adapt to current changes. Another issue for a number of firms is that they are seeing cases failing due to a lack of expertise.

We are seeing evidence of missed or inaccurately assessed key dates, inaccurate assessment of liability and quantum and inadequate reporting to legal expense insurers. In some cases there is inadequate monitoring of rehabilitation, which is causing problems with recoverability and potentially placing an increasing strain upon the NHS – therefore costing the taxpayer.

All of this can lead to compensation awards being adversely affected. Not only does this let down clients, but it also has the knock-on effect of hitting the bottom line, eroding profitability and meaning that financial targets are not being met.

Increasingly, before-the-event (BTE) and ATE insurers have to pay out for lost cases and some are refusing to pay, alleging poor risk management by law firms. Cash flow is being adversely affected and payments to third parties are being delayed. As performance issues are raised, and inevitably Solicitors Accounts Rules and other regulations are breached, such firms are facing rising professional indemnity insurance costs.

All of this does not escape the notice of banks, investors, professional indemnity and legal expense insurers, medical and other agencies or providers. Their hardening attitude is palpable as a new breed of PI law firm emerges that is inherently at risk of professional negligence and poor financial performance.

Whether you are a small firm or in the top 100, all firms carrying out PI work are exposed to risk.

To date most have had their PI fee earners and management working in silos, armed only with industry quality marks and standards to protect them. None of these provide any level of comfort around technical, operational and financial skill and expertise.

Performance management

In addition, the arbitrary hours-based continuing professional development scheme is now being replaced, following SRA proposals recently approved by the LSB. As erosion of safeguards and exposure to risk within the sector goes, what we are witnessing is akin to a JCB digging up a child’s sandpit.

So, current schemes that have hitherto given firms comfort around their ‘performance management’ are not working, nor are they fit for purpose. If they were, then the sector would not require the significant financial investment and consolidation that is currently taking place.

If a firm is unaware of its risk exposure, actively choosing to look more closely is not often on the agenda. Predicting when and why some firms will fail in PI is impossible.

What we do know, however, is that these underlying issues are hitting the sector now and small firms will disappear without being noticed. Medium-sized organisations going under will perhaps be noted with a media-worthy nod, and the large firms who have set their stall out ‘Enron style’ (once described as “America’s most innovative company” by Fortune magazine), if they fail, will fail big.

Firms who are small, niche and nimble may adapt quickly enough as performance issues surface easily when there’s nowhere to hide. Larger firms have far more to fear from operational inefficiencies, rogue management and fee earners who can cause damage that goes hidden for years.

It all equates to financial, regulatory and PII risk and it will prove true that the bigger they are, the harder they fall.

Meaningful and expert risk management has to be the top priority of any business. I estimate that less than 3 per cent of the PI sector (law firms, banks, funders, insurers, suppliers included) has meaningful risk management on a par with the well-established and recognised levels of risk management within the highest levels of the corporate arena.

The current ‘checklists’ and ‘audits’ in today’s recognised quality standards are a far cry from the meaningful risk management needed. Risk management in all aspects of the sector should be analysed to the highest competence standards and measured in terms of knowledge, expertise and ethics.

Only with that will businesses be able to make robust decisions to enable them to continue to invest in or withdraw from the PI sector with confidence. SJ

Lesley Graves is the managing director of personal injury consulting law firm Citadel Law