A Professional Liability Risk Management Handbook for Lawyers

MANAGING LEGAL MALPRACTICE: A PROFESSIONAL LIABILITY RISK MANAGEMENT HANDBOOK FOR LAWYERS … Financial Management Another source of legal malpractice claims is financial … TABLE OF CONTENTS Introduction …..2 Risks to the Firm…..4 Firm Organization and Management Structure…..6 Firm Structure …..

Risks to the Firm Legal malpractice claims can occur in good or bad economic times. During good economic times, the size and number of engagements accepted by law firms trend upward. In such an environment, attention to detail may falter, management oversight may be overstretched, and time for training and supervision is often reduced, creating increased potential for errors that might lead to claims. Equally, when economic times aren’t so good, and matters go badly, those on the losing end look for someone to blame, preferably someone with “deep pockets.” So found a 2001 study of legal malpractice claims by the American Bar Association (ABA), which reviewed claims information from 23 malpractice insurers from 1996 to 1999. According to the study, some practice areas and activities present more exposure to malpractice than others: 24% of the claims reviewed arose from plaintiff personal injury law practice; 17% from real estate cases; 10% from family law; 9% from estate, trust, and probate work; 9% from corporate/business organization work; and 8% from collections and bankruptcy cases. Most claims arose out of preparation, filing, and transmittal of documents (25%), investigation other than litigation (17%), commencement of action or proceeding (16%), and title opinion activities (13%). Additionally, and more recently, securities and intellectual property malpractice claims have increased in both frequency and severity. Avoiding these claims is often a matter of risk management and of practice management—which should be one and the same. This handbook offers some advice for maximizing the benefits of law firm risk management.. A thoughtful legal malpractice risk management assessment and plan should: 1. Define the risk appetite (risk tolerance) of the firm. 2. Identify potential risks to the firm. 3. Evaluate and prioritize these risks according to the relative likelihood of an event and the potential severity of an event’s impact on the firm in the context of the firm’s risk appetite. 4. Implement risk mitigation strategies. 5. Purchase adequate insurance to transfer those risks that pose a significant threat to the firm’s financial stability. 6. Monitor and update risk mitigation strategies appropriately as firm priorities and its operating environment change. 5
FIRM ORGANIZATION AND MANAGEMENT STRUCTURE Firm Structure Practice management, and therefore risk management, begins with properly designing the legal ownership structure of the firm and its attendant formation documents (partnership or shareholder agreements). These agreements should be consistent with the firm’s business strategy and philosophy—including a management structure that will support the firm’s business objectives. For example, if top quality legal work is a business objective of the firm, their compensation arrangements should not excessively reward origination. Firms with well-written owner agreements that clearly define management structure, duties, and responsibilities are less likely to experience malpractice claims. Partnership/Shareholder Agreement The following checklist presents some key items to consider when drafting a partnership/shareholder agreement: n n General structure of the firm, including a risk management partner or (in larger firms) a general counsel or the assignment of those responsibilities. n n Duties and responsibilities of owners. n n Compensation scheme. (This should reward more than origination and billable hours. For example, staff training and supervision are critical to the risk management of the firm.) n n Income distribution. n n Death or withdrawal of partners. n n Disability of partners/shareholders. 6
n n Retirement of partners/shareholders. n n Capital accounts. n n Voting, including special majority provisions, such as the method of election of new partners, borrowing thresholds/caps, relocation, negotiating leases, opening of new offices, etc. n n Management structure and terms of service for managing body(ies) including frequency and intended scope of meetings, nature and number of committees, etc. n n Practice departments and election or appointment of department heads. n n Financial management, planning, and oversight. n n Management of legal staff and allocation of resources. n n Management of non-legal staff and allocation of resources. n n Employment practices and procedures. n n Dissolution of the firm. Financial Management Another source of legal malpractice claims is financial mismanagement, particularly fee disputes with clients. The well-run firm minimizes the potential for such disputes. Following is a selection of best practices for accomplishing this; many of these suggestions can be supported with work- tracking and time-utilization systems: n n Establish and manage revenue and expense budgets in accordance with the firm’s business strategy and philosophy

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