Risk management – that ubiquitous topic

The developing risk management agenda

Drivers for risk management initiatives

What is driving these initiatives, and why are they seen as so important?

Effective risk management is essential for the long-term success of the profession, and is integral to delivering on the Law Society of Scotland’s goal of legal excellence, and to ensuring a sustainable and affordable Master Policy for the benefit of the whole profession.

Many of you will remember that in 2017 the Master Policy was arranged on a three-year deal, where lead insurers committed to a stepped reduction in the global PI premium – the total annual premium insurers require from all firms. This is subject to profitability review triggers, and two of the key triggers relate to claims frequency and the total value of claims incurred.

Improving risk management is an important way to make a contribution to the reduction of claims delivered by the profession to the Master Policy, and a positive impact on the levels of PI premiums paid by the profession as a whole.

Why is risk management the answer?

Over the last 10 years, fewer than 10% of claims submitted under the Master Policy were as a result of errors of law or errors of fact. This means that over 90% of claims were as a result of other issues, such as missed deadlines, poor or missing letters of engagement, lack of reliable file notes, failures to register title etc.

None of these issues are reflective of how much solicitors know or understand about the law, but they are reflective of poor housekeeping and a lack of risk control procedures designed to avoid what are often very simple errors.

Better risk management systems and controls can go a long way to mitigating or indeed avoiding some of these claims. Risk management is increasingly recognised as a critical part of the management of law firms, but it has not yet been effectively integrated into the way all firms work. No one expects firms to be 100% perfect in everything that they do; the law and the rules and practices surrounding the provision of legal services are highly complex. There will always be claims, but clearly having over 90% of the profession’s PI claims relating to what are, in many cases, avoidable risks means that the adoption of robust risk management measures has some way to go. Ideally, risk management needs to be understood and implemented as a business tool, as opposed to a burden or a bureaucratic add-on and a distraction from the day job.

If we accept that risk management can have the impact on claims which we’ve just described, then if solicitors need any further convincing of the value to be gained in reducing the number of claims brought against them, they only need to think about the impact on the individual and the firm when a PI claim is made.

The impact of a PI claim

If a firm is unfortunate enough to suffer a claim, the impact can be serious, for the individual fee-earner and the firm.

1.     Hidden costs

The Master Policy is one of the widest PI covers available in the market, but however wide the extent of the protection, that cannot save a firm from the hidden costs that may arise when it suffers a claim.

Working with claims handlers and the panel solicitors engaged to defend the firm can be a time-consuming and exhausting process. Many hours may be eaten up reviewing the file in question, being interviewed by solicitors, building a robust defence to the action. Those are hours in which individuals are not earning fees.

It is not just the solicitor who handled the file who may be involved; partners too will want to be included in reviews. In addition, depending on the nature of the matter, there may be a need to review other files to ensure that similar errors or omissions did not occur on multiple occasions, across multiple clients. 

2. Anxiety

No one wants to be on the wrong end of a PI claim. It can be an anxious time, even where you don’t believe you’ve done anything wrong. It can affect your confidence, call your professionalism into question and cause sleepless nights. No matter how supportive and helpful a firm and its partners may be, for the individual it can be a stressful experience. 

3. Impact on client relationships

Depending on the nature of the claims matter, it could mean that it costs you your client. This isn’t always the case, but if the nature of the dispute is acrimonious or means that they no longer trust or value your professional service, they may take their business elsewhere.  

4. Reputational damage

If clients do move away from a firm in these circumstances, it is likely that they are not going to be the firm’s greatest advocate thereafter. A disgruntled client may share their views with other businesses in your area. If, as is occasionally the case, the matter is a high-profile one, e.g. if it is reported in the local press, this can have the potential of reflecting badly on a firm. 

5. Payment of the self-insured amount

Let’s not forget the self-insured amount (policy excess). The standard excess under the Master Policy is £4,500 per principal, with a maximum of £67,500 per firm. So where a claim is successful and significant damages are to be paid, there would be a requirement for the self-insured amount to be paid first. 

6. Impact on future PI premiums

The rates and rating factors that determine a firm’s PI premium include premium loadings where the firm’s loss ratio is in excess of 60% (i.e. the ratio of claims to premiums). So, not only will a firm have had to bear the cost of the policy excess where a claim is settled, it may also be penalised by having to pay an increased premium at the next renewal of the Master Policy. 

Challenge of the Innovation Cup

In summary, therefore, there are a number of reasons to embrace the idea of robust risk management within a firm, not least of which will be the improvement in the delivery of professional services to its clients. Fewer errors create less likelihood of friction with a client and help to make their experience of the firm a seamless one, as well as improving the firm’s chances of avoiding PI claims.

We already know the type of risk management areas, which, if addressed, would help firms, but these areas are determined by cases we have seen in the past. We don’t have a crystal ball to see into the future and help us recognise the risk management challenges which it may present. However, practising solicitors and those of you working in solicitors’ practices across the country do have insight into what may be tomorrow’s issues – you are dealing with them every day.

So I would urge you to share the launch of the Innovation Cup as widely as possible across your firms and encourage participation. This is a great opportunity to hear the views of the profession about what areas are relevant for risk management now and in the future, and more importantly, make the most of the creativity that is out there by seeking to harness that creativity for the good of the profession.