Professional negligence: Dodging complaints

With six months to go before the October deadline for solicitors to renew their professional indemnity cover, and against a backdrop of harsh economic times and a hardening insurance market giving rise to higher premiums, time is now of the essence for firms as they focus on managing business risks. What practical steps can solicitors take now to reduce the risk of claims and keep insurance premiums down?

Claims against solicitors are rising. As commercial ventures fail and the property market continues to slide, clients increasingly look for avenues to recoup their losses. Professionals backed by indemnity insurance are attractive targets.

In addition, as cash flow becomes an issue, fee recovery actions by solicitors are increasingly met by counterclaims alleging negligence as a fee-avoidance tactic. Even when these are entirely bogus, the defence costs and management time spent by firms can be significant and difficult to recover.

Complaints to the Legal Complaints Service (LCS) for inadequate professional service can also be predicted to rise. Use of the LCS is free for complainants, but the process can remain costly for solicitors and their insurers: the LCS can award compensation up to £15,000 and costs up to £840. Defence costs will also need to be accounted for.

The Solicitors Regulation Authority (SRA) is generally asserting itself more prominently and is exercising its powers to investigate, prosecute and sentence disciplinary transgressions with greater frequency, often prompted by the LCS. Likewise, many lawyers conduct business which is policed with equal rigour by the Financial Services Authority (FSA), as illustrated by a recent Court of Appeal decision against Yorkshire firm Fox Hayes. The financial risks extend not only to prospective fines and prosecution costs, but also defence costs, with often adverse impact on credit status, future insurance eligibility and premiums, not to mention reputation.

Internal pressures

Firms are also experiencing pressure from within. Fee earners with insufficient work, or already involved in consultation processes, may struggle with job insecurity, loss of morale and stress. While a concern to the conscientious employer, distracted fee earners are also more likely to make mistakes, thus increasing the risk of claims and regulatory intervention. Even where workflow is buoyant, there is often pressure on firms not to replace staff who leave. But the savings may prove illusory if over-work and lack of support results in mistakes.

The uncertain economic climate can be a catalyst for acquiring whole teams of fee earners and mergers between law firms. These may make good business sense but can also be traps, because the 'successor practice' provisions of the Solicitors Insurance Rules are designed to protect clients by ensuring, as far as possible, that there is an insured entity to whom they can look in the event of a claim. Accordingly, firms that acquire another practice without careful diligence may find themselves saddled with a raft of liability risks. These complex rules deserve expert consideration well in advance of lateral hires, team acquisitions or mergers: the potential impact on claims, and hence future insurance premiums, can be huge.

Given these risks, firms should expect insurers to pay closer attention to proposal forms and to probe more deeply into a firm's business before deciding whether to offer renewal terms and at what level.

The risks may not be confined to premium increases. Insurers must be expected to become more reluctant to offer terms at all where a firm's risk profile is deemed unacceptable. An increasing number of firms could find themselves confined to the Assigned Risks Pool (ARP). In 2007, just 27 firms entered the ARP, but in 2008 it was closer to 150: an increase of 555%. A further rise in ARP membership in 2009 has been forecast.

What measures can firms take to make themselves attractive to professional indemnity underwriters? Risk management remains the insurance industry's buzzword, but what does it mean in practice for a law firm, and how should it affect day-to-day operations?

Training and recruitment

A firm's greatest asset is its people, so it is worth investing time and money to hire the right staff and to train and resource them. But stay alert for 'bad apples', because it is not uncommon for a firm to find itself facing a raft of claims all stemming from one incompetent or dishonest employee. Firms would do well to tighten up their recruitment policies, check information provided by applicants and review performance during probation periods.

Training is important, in crucial background skills as well as technical knowledge, the most prominent areas being regulatory and disciplinary issues, e-security and diary management. Where precedents are in use, someone should be tasked with ensuring they are accurate and up to date.

Client acceptance

A paramount theme of modern risk management is that problems should be foreseen and provided for in advance or at the outset of a file.

Risk to the practice should be considered before the firm agrees to take on a new client: for example, does the client fit with the firm's strategic objectives and are fees likely to be paid? From a claims perspective, does the firm have the expertise and resources to meet the client's requirements? Turning away clients is difficult, especially in the current climate, but the cost of a claim in the future could well exceed the fees generated now.

Financial scandals and mortgage fraud are increasingly in the news, and where money has been lost, claims against the professionals engaged in the underlying transactions can be expected to follow, often with complexity, high costs and difficult honesty issues. Even careful professional firms can be engaged with unsavoury characters, but simple checks and precautions greatly reduce the risks. The Money Laundering Regulations 2007 and their detailed requirements must be taken seriously by all firms, not least to avoid criminal liability and professional disgrace, but also because effective customer due diligence, as required by the regulations, can significantly reduce risks of claims.

File opening procedure and management

The opening of a specific matter file is another key stage in the risk management process. Checks must be undertaken for conflicts of interest, but showing evidence of these checks on the file is equally important.

Assuming the firm is free to act, a well-drafted Rule 2-compliant engagement letter is a key weapon in the risk management arsenal. Lengthy standard client care letters and terms of business are much more commonplace today. Yet many lawyers still have to learn the importance of spelling out precisely what the firm is required or going to do, or, when necessary, what it has not been required to do. This can be a vital salvation from a multitude of problems. Confusion over costs is also often the catalyst for a LCS complaint or claim. Providing clear information at the outset, updated as the matter progresses, is key.

An added benefit of scrutinising the instructed tasks carefully is that the lawyer will often gain a better understanding of the types and value of the risks facing the client from which he, the lawyer, is being engaged to protect the client. Full evaluation of these can then help to alert the lawyer to the possible need to control at least their quantum risks by limiting the extent of their legal exposure in the event of a liability (albeit not below the compulsory minimum level of professional indemnity insurance). Provisions for this in solicitors' retainers are increasingly common, as they have been for accountants - and surveyors - for some years.

Once the client's file is up and running, there are many practical steps that can be taken to avoid the mistakes that often lead to claims. A sensible file organisation and document retention policy can help fee earners to easily find documents, records of advice given and instructions received. In addition, mandatory use of a diary system, with appropriate reminders in advance of key dates for important court and transactional deadlines, is invaluable in trying to avoid administrative mistakes.

It is also important that files are actively progressed and the quality of advice given to clients is checked. The Code of Practice Rule 5 requires active management of all law firms, including a requirement for a system to check the quality of work. Documented policies for supervising staff and their work, as well as a file audit trail, will help evidence a firm's dedication to regulatory compliance.

Policies and procedures are all well and good, but they should be regularly reviewed to ensure they are meeting the purpose for which they were designed. There is value also in regular review of claims and complaints records to identify any patterns and devise strategies to avoid repetition.

Early birding

As renewal season approaches, early proactive contact with an insurance broker is likely to help the firm to steal advantage. In past years it has sometimes suited firms to play the 'last minute' game, holding back from commitment to renewal until as late as possible so as to reap the best premium terms from insurers with spare capacity. With fewer qualifying insurers to the profession and an austere economic outlook, that sort of approach is far less likely to produce much dividend this year.

Duncan Greenwood is a partner and Naomi Park a solicitor in the professional risks group at Beachcroft.