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Today’s business and legal environments have brought a dramatic increase in the number of lawsuits filed against businesses of all types. Of course, lawyers themselves are not immune to this trend and are increasingly being sued for malpractice. Dissatisfied clients frequently claim damages for errors and omissions by their legal counsel. Transactional security assignments, estate and probate work, tax shelter work, and intellectual property matters have all had a significant number of ever-larger claims, according to recent reports from lawyers’ professional liability insurance underwriters. Frequency isn’t the only issue. Severity has also increased. In the past five years there have been 10 claims with loss reserves of more than $50 million. Before that, there were none. What are law firm administrators and managing partners to do? First, firms should recognize the issue as real and important. Second, firms should develop and implement a risk-management and loss-control plan. Finally, firms should continue to purchase comprehensive professional liability insurance to protect their assets. RISK MANAGEMENT One of the keys to reducing claims (and insurance costs) is to identify areas of high risk and have systems to manage these exposures. Here are some examples of effective quality control. • Articulate a management philosophy. Experience has shown that a clear, committed management philosophy and a corporate culture that supports risk-minimizing action, teamwork, and loss control do matter. Assigning one partner to be responsible for the quality of client service, claims, loss control, or ethics can be a big help. But try to avoid the impression that it’s only the responsibility of one person. The entire firm must be involved and engaged daily. • Watch client intake. Proper client-intake procedures, beginning with evaluating the appropriateness of potential clients and whether the requested work fits your skill set, are important. Gauging the “appropriateness” of clients can include reviewing their current and expected financial condition, the experience and quality of the client’s management team, and the company’s long-term business strategy and short-term goals and objectives. It is also important to evaluate the proposed engagement in light of your firm’s experience and capabilities. Are your lawyers experienced in such matters? Do you have the appropriate resources to undertake the work in the time required? Some well-run firms have a screening committee to review potential clients, assess any conflicts, and bless new engagements. In any event, a detailed engagement letter that includes a clear delineation of the matter to be addressed and the name of the specific client should be provided. • Consider conflicts of interest. Many claims have come out of situations in which attorneys were operating in “conflicted” or even “perceived conflicted” circumstances. Carefully evaluating the potential for conflicts is a screening step that can eliminate problems later. Conflicts may come not only from current or past clients but also, for example, from overlap in subject matter for intellectual property work. Often this “conflict review” uses an automated database and is conducted as part of the broader client-intake process. • Watch the docket and calendar. Missing filing deadlines can lead to problems with clients. Systems must be in place to record key steps and flag critical dates. Properly implementing technology can help, but many experts still suggest centralized control and redundant systems to avoid missing deadlines. • Evaluate requests to join boards. This can be a tricky area, as strong client relationships often lead to requests to join boards of directors or opportunities to invest in client firms. This creates actual or perceived conflicts that can cause problems later on. Some of the law firms with the best insurance-claim experience have outright bans on investing in clients or holding outside directorships. • Manage lateral hires. Lateral hires of experienced lawyers can be a valuable way to expand firms. Just be careful not to inadvertently absorb bad practices or clients or liabilities for past work. Any work or clients coming over with the new lawyer should still be vetted through the typical client-intake process. Additionally, firms should make it clear to lateral hires that they will not pick up liability for work the lateral hires conducted before joining. A key step is to ensure that the new attorney is integrated into the firm culture. • Report incidents early. Encouraging early reporting of potential claims incidents allows for intervention and action to prevent major claims. As one attorney recently noted, “Problems are not like fine wine; they do not get better with age!” Be careful to maintain attorney-client privilege by limiting discussions to your in-house counsel. • Avoid suits for unpaid fees. The number of suits against clients for unpaid fees has a direct correlation to counterclaims of malpractice by clients. Avoiding such collections actions should be a high priority. Best practices include well-documented bills and timely follow-up when payments are late. PROTECTING ASSETS Even with a comprehensive risk-management program, it is important that law firms consider carrying sufficient professional liability insurance to protect against lawsuits. Lawyers’ professional liability insurance provides protection from “damages and claims expenses” arising out of a “negligent act, error, omission, or personal injury” in providing (or failing to provide) “professional legal services.” For most lawyers today it is considered basic business practice to carry professional liability insurance. Available insurance ranges from $500,000 (typically for sole practitioners) to $200 million or more. Here are some issues to evaluate. • Look into the financial stability of the insurance company. The last thing any law firm needs is to purchase insurance only to find that the insurance company isn’t around to pay claims when they arise. Ensuring financial stability can be tricky, but a good starting point is to check an insurer’s rating from a financial rating agency. Look for insurers with a track record of insuring lawyers and sense of commitment to this specialty market. • Review defense costs. Professional liability insurance provides two forms of financial protection: reimbursement for the cost of actual settlements or awards for damages and the cost to defend you in the event of a claim. These “defense costs” are sometimes provided in addition to the limit of liability you purchase, but in most circumstances are included in the limit. Similarly, some professional liability insurers include defense costs within the deductible, while others will cover all defense costs from the first dollar. • Determine a retroactive date. Since professional liability insurance for lawyers is written on a “claims-made” (versus occurrence) basis, it is necessary for both the claim to be made and the work leading to the claim to be undertaken during the policy period. By instituting a “retroactive” date back to the firm’s inception or some other reasonable date in the past, you are ensuring protection for all claims made during the policy period for any work done after the retroactive date. • Value long-term partnerships. Law firms should recognize the value of long-term relationships with their insurers. This value is particularly evident when a claim occurs that may be “gray” in terms of coverage under the policy wording and underwriters decide, based on their relationship with a firm, to provide coverage with no argument. Another time when relationships can make a difference is when the availability of insurance capacity is being reduced and insurance companies have to decide which clients to maintain and which to jettison. Having a track record with an insurer can help prevent your firm from being one of the ones that is left adrift in the market. • Select the amount of coverage. Selecting the appropriate coverage is important to cut insurance costs. Law firms should evaluate their financial capacity to absorb claims and only buy insurance above that level. This retained risk is known as the deductible, or retention. The higher the deductible, the lower the premium will be. Firms often use premium savings achieved by raising the deductible to purchase higher limits to protect against the rising severity of claims. • Choose the right coverage extensions. Ideally, a firm should seek a number of coverage extensions. These include innocent-partner protection, which provides coverage for the firm even if a partner or associate undertakes an act that would otherwise not be covered; automatic coverage for new associates and lateral hires; and coverage for punitive damages. Not all of these coverages will be available for all firms, depending on the size of the firm or past claims experience. Protecting your firm’s assets is a two-step process. First, take steps to reduce the risk of professional liability claims and ensure that claims are promptly reported and addressed. Second, procure sufficient, high-quality insurance to respond should a claim occur. All members of the firm should know that they have a responsibility to manage these costs.
Dan Knise is president and CEO of Ames & Gough, a professional liability broker with offices in McLean, Va.; Boston; and Atlanta.

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