Measuring and Addressing the Impact of Professional Liability Claims on a Law Firm
Part 1
It”s been clear for a long time that smart law firms address their professional liability risk issues before an errors and omissions claim occurs; not after. In doing so they avoid the consequences of the fact that serious, professional liability claims against a law firm can have devastating effects. Very often the effects range far beyond the actual claims-dollars involved. The impact can include large amounts of time lost by a number of Partners in dealing with the circumstances surrounding the law suit, large deductibles expended, oft-times deteriorating relationships between and among partners, loss of clients and repercussions among the firm”s client community.
Most of the time the focus seems to be upon the monetary factors: “How much is paid out by the firm in its deductible? How much is paid by the insurer to settle the claim?” However, emphasizing the monetary loss truly begs the issue of the real impact on the firm”s continuing health. 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. Clearly, the impact goes far beyond the financial side. Our observations of law firms which have suffered serious claims losses indicate that the impact of these losses have to be carefully considered in ways separate and distinct from the dollar damages issues.
For law firms that 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 its need to pay higher professional liability insurance premiums and substantially higher deductible amounts make a difference in the basic firm 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, after a series of professional liability claims problems, the firm lost first, its bankruptcy department, then its estates practice before finally dissolving. All of this happened in a matter of months. In fact, given the competitive nature of the business today, it would be a surprise to find a firm saddled with these kinds of difficulties that did not have outside parties making efforts to exploit the circumstances by trying to entice certain partners and/or departments into other law firms.
To make matters worse, and further complicate the issue, not at all unlike a patient who has experienced a 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 were 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. The only way the firm, once it”s experienced a serious claim, can avoid costly mistakes in the future, is by analyzing 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 does not have the ability to objectively evaluate the claim and its origins, it may fail to assess the damage and determine how the same problem can be avoided in the 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; to do this objectively and without recrimination as much as possible. Most of the time professional liability claims happen because of systemic issues which may not be necessarily specifically related to an individual attorney’s practice (of course that can have been the case). Evaluating a law firm internally by those who are involved is particularly difficult. It is oftentimes helpful to acquire the services of an outside third party to provide an objective viewpoint and to assist the firm in developing a plan to overcome the issues which have created difficulties. In the next column we’ll talk about some measures by which a law firm can evaluate itself in order to rebound from difficulties and to create an even stronger entity than before.
Part 2
In the first installment, it was noted that “The only way that a law firm, once it”s experienced a serious professional liability malpractice claim, can avoid costly mistakes in the future is by analyzing the claim and coming to grips with what it was that allowed the claim to occur in the first place.” This is indeed a difficult proposition for any entity but if the firm does not have the ability to objectively evaluate the claim and its origins, it may fail to assess the damage and determine how the same problem can be avoided in the future.”
There are really two ways in which a firm can evaluate the circumstances which led to a professional liability claim: one is to evaluate the circumstances internally by appointing a special committee or an individual to do the analysis; the other is to go to an outside third party, risk management specialist and ask them to do the analysis themselves. 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 the peer review process set up and operating in a firm in which an individual is actually reviewed for the quality of the work and their relationship with their clients. For that reason, if the firm does not have such a process already in place, it is difficult if not impossible to do the analysis in a neutrally oriented and reasonably objective fashion. The contrary may very well be true. Other partners or shareholders in the firm may be extremely concerned with the professional liability claims and with the individual who was involved with that claim. For individuals who have not been sued it is a difficult thing to understand how it can happen, let alone what the circumstance may be which led to the difficulty.
Whether the firm is doing the examination on their own or if they”re utilizing the services of an outside third party there are factors involved in an analysis of the professional liability 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 organization and sets out the basic structure and operation. Years ago when most law firms were partnerships, there was a good deal of effort put into setting up these kinds of issues.
When corporate structure and form became popular and firms started to use bare-bones, off the shelf, shareholders agreements, much of that very specialized 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 actually relates directly to the substance of the individual partner’s practice other than covering compensation and/or retirement issues. We have seen some law firms, in fact who are placed in the position where they have no way to actually force the departure of a partner or shareholder from the firm based upon “best practice” standards and the reliance upon professional responsibility and/or state bar mandated standards. In any case, a partnership or shareholders agreement should give some guidance toward the individual’s responsibility to uphold an objective quality of the practice of an individual lawyer in the law firm. Failing that, or if that is the inadequate, then other issues must be addressed questions relate to the client base of the individual lawyer, whether or not they practice largely independently, if they have a singular practice area (with no other lawyers in that practice) are all general areas that must be examined. Then the specifics are given their day, beyond an analysis of the actual facts and circumstances related to that particular professional liability situation, the firm needs to review the way in which an individual bills their clients, the methodology that they used to collect their fees, the write offs which are given to particular clients, any client complaints or history of difficulty which that lawyer may have had either inside or outside the firm are all “grist for the mill”. There is a particular school of thought which says that questionnaires should be used with that individuals clients to determine whether or not there are other difficulties which are
outstanding
or whether that one particular professional liability claim was of a ”one of” nature.
Looking back on this list of issues that must be addressed, it is easy to see why most law firms do not successfully make the analysis that should be made of their professional liability claims. That”s why so often if there is any analysis done, it is done by the outside third party who have the ability to ask these questions because of their neutrality in the circumstances. One way or another, however, a law firm that has suffered the professional liability claim needs to make an analysis to determine how it happened and how it can be prevented from happening again. The degree of circumspection that a law firm can utilize determines whether or not they can move forward from the claim as a healthier entity or continue without making the changes needed to avoid such claims in the future.
The Role of Risk Management Partner/Shareholder in Small to Mid-Sized Firms
PART 1
On the evolutionary scale, most of the time the changes which occur in law firm management happen first to the larger, more complex law firm entities. Many of those changes and alterations, over a course of time, filter down to small and medium sized firms as the practice world grows more complicated and the issues take on the same or a similar cast to those experienced by larger firms. The classic example of this of course is the position of managing partner/ shareholder which has, over the last two decades, become more and more popular in the small to mid-sized law firm environment. This is simply an organic and evolutionary result in response to the growing complexity of managing a smaller law firm: dealing with the business of law as well as managing in an ever more competitive practice environment.
In the same manner, over the last several years, more and more larger firms have started to appoint lawyers to other positions with specific responsibilities aside from and additional to those of a managing partner. One of these emerging choices is that of a Risk Management Partner (RMP). Just as was the case with the adoption of a managing partner role, it would appear to be time for the smaller and mid-sized segment of the law practice world to look carefully at this newer option and decide whether it is appropriate to add that capability to a smaller law firm environment.
The reason for firms adopting an RMP position today is to address the growing responsibilities of managing a group of 20-60 lawyers. Just as those pressures and the corollary management requirements grew in the 1990″s, today, the time constraints involved in focusing on the financial aspects of the practice such as billings and collections, assuring that there are adequate law practice controls in place and simply trying to keep the firm competitive in a tough legal environment (while still trying to practice law) take all the time and effort of the individual in that role. The result is that there are a number of requirements for a risk-adverse, efficient and effective practice where efforts all too often fall very short of the attention which theses categories deserve.
The usage of an RMP is in response to both external as well as internal challenges to the law practice. The position can be customized to involve itself in responsibilities for very important matters which are often given inadequate weight or little co-ordination due to time constraints and/or other factors. These categories of responsibility include issues involving complex lawyer-client relationships, the firm’s relationships with other law firms (co-counsel and joint ventures), managing the professional liability landscape (insurers), the defense of professional liability claims, new matter intake into the firm and advice with regard to ethical constraints. This paper suggests a list of just some of the possibilities for this position to assume.
- Provide the impetus for the development of practice standards and application of the standards of Professional Responsibility (Ethical Standards) to the firm at large. This includes advising the firm on ethical considerations related to the practice including relationships with the governing bar authority, licensing of the attorney population and representation of individual lawyers in complaints which may have been brought against them.
- Bring more focus to questions related to professional liability throughout the firm including the evaluation, acquisition and management of professional liability insurance questions including the management of Professional Liability Insurance matters including choosing the broker, assessing the coverage needs, selecting (for approval by the partnership) the insurer participating in claims defense.
- Monitor the contractual relations with other law firms with whom there are on-going relationships.
- Manage questions related to conflicts of interest including the development of a conflicts of interest determination program.
- Help to develop standards for case evaluation and matter intake to insure that cases are accepted where there is expertise in the firm for handling the matter properly and that the firm’s fee agreements are adequate for the protection of the entity and that the agreements are used each and every time. Work with the firm in its development of “best-practices”.
Of course, no one would argue that it really doesn’t matter how these various issues are managed as long as they are managed. That’s the joker in the deck, however. Unless it is someone’s direct responsibility to see that these issues are covered they generally are not addressed adequately and if covered at all and then only on a patchwork basis. Lawyers in firms talk about these particular responsibilities (and others) all the time and leave annual retreats with serious commitments to do a better job on the subjects but the reality is that most firms are not very successful at keeping up the pressure and accomplishing these goals at the end of the day. Despite the very best of intentions, even in firms that are on the whole generally well run most of these responsibilities are not accomplished particularly well in a vast majority of cases.
PART 2
The answer to the question of “Why establish the Risk Management Partner/Shareholder (RMP) position?” is reasonably simple: to provide substantially more emphasis to the accomplishment of certain tasks (such as the management of the professional liability insurance issues, assistance in developing a workable and effect conflicts determination program, managing relationships with various Bar authorities and establishing ethical standards for the practice) as deemed significant by the firm. By creating such a position, the firm, even one with a fairly dynamic managing partner position, underscores and emphasizes the significance of these requirements. It is not that the responsibilities are necessarily so dissimilar in nature to those of a well constructed managing partner role but that they have at their core the protection of the firm’s interests in certain discrete categories outside the primary focus of most individuals handling the managing partner responsibilities and outside the focus of even an executive committee. In many firms, these responsibilities are handled in a way which might well be described similarly in the “as time permits” category.
The experience drawn from hundreds of law firm assignments in the U.S. and in the U.K. (Study of Claims, BERMAN & ASSOCIATES, Copyright 2008) tells the story of inadequacies in handling these very important aspects of the practice. Moreover, empirical evidence suggests that in an effort to attend to these additional responsibilities, hence, spreading the responsibilities of the managing partner too thin, the result is a dilution of the effectiveness of the managing partner in attending to their more traditional responsibilities as well.
The truth is that the Risk Management Partner position dovetails very nicely into a well managed firm decision-making (management) structure. It also provides a very welcomed degree of attendance to these issues in firms which may not be so well orchestrated. In other words, in firms where decision making is generally not as effective as it should be, the appointment of a RMP with a tailored position description brings a greater degree of structure to the whole of the practice. In either environment the appointment of a partner “point-person” tasked to insure the accomplishment of these goals is very much a “win-win” proposition.
Sample RMP Position Description
Please note that this is a composite description which will always be altered by the operation of other elements of firm governance (managing partner, general counsel, etc.) and their assigned duties and responsibilities.
- Point person for the development and operation of practice standards in the firm
- Overall charge of issues related to professional liability and risk management
- Overall charge of issues related to the firm’s conflicts of interest elements
- Involvement with the standards for new case accession into the firm
- Involvement with the firm’s docketing and calendaring operation as it affects risk management