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
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.