Importance of Risk Management in a Hard Insurance Market
by Margaret Hepper
(County Bar Update, January 2003, Vol. 23, No. 1)

Importance of Risk Management in a Hard Insurance Market

By Margaret Hepper, Esq., senior vice president, Lawyers Division/Larger Firms, Affinity Insurance Services, Inc.

Whether anyone wants to admit it, law firm risk management fell on hard times in the mid-to-late 1990s. From the law firm’s perspective, work was abundant, hiring and proper staffing of matters were of highest priority, and the vast majority of clients were prospering. Best practices pre-hire conflicts checks on laterals, independent screening and approval of new business, and partner review of associate work product were often eclipsed by work that required immediate attention or the allure of New Economy clients. From the insurer’s perspective, competition for business rendered meaningful risk management discussions with insureds almost impossible.

Fast forward to the present hardening insurance market, and one sees an entirely different picture. Risk management is “in” again, along with the Old Economy. As this current economic downturn gathers momentum, law firms need to scrutinize their risk management programs to determine whether they remain vital or require some work.

As the insurance industry shifts to a harder market, it becomes increasingly important for law firms to adopt best practices within their firms so that (1) firms are optimally protected from potential claims and accounts/receivable collection problems, and (2) firms can evidence the adoption of “best practices” to their current or prospective insurance underwriters.

Why? Because law firm clients and certain non-clients sue attorneys and law firms more often during economically tough times. This happened in the 1980s, and it is likely to reoccur now. Also, in this insurance market, underwriters want to see and hear evidence of a firm’s risk management best practices. Firms must ensure that they properly document their policies and procedures, and can articulate their methods of measuring attorney and support staff compliance therewith. It is also critical that information concerning such practices and procedures is presented to underwriters in a way that optimally (but accurately) characterizes the firm as a safe risk.

Look to insurance brokers specializing in the area of law firm professional liability insurance to assist your firm in realizing the above-described goals.

First, brokers can direct their law firm clients to risk management resources that fit these clients’ needs. (For instance, an intellectual property firm may require different resources than a general practice firm.)

Second, brokers can help clients actually implement best practices by sharing how other similarly situated firms (without divulging confidences, of course) handle particular exposure areas. Using other firm models as guides, clients then save on time (a valuable commodity within firms).

Third, brokers can elicit the information that insurance underwriters will require and prospectively anticipate any issues that may arise.

Fourth, brokers can assist their law firm clients in presenting this information in the best possible light for the firm. In this way, the best possible pricing and terms will accrue to the firm.

Following is a list of some of the resources available to law firms in the area of risk management.

1.  Some issuers have created risk management value-added products that they provide to policyholders for free. In certain cases, these resources can be purchased separately for a small fee for non-policyholders. Some of these resources include:

-- access to hotlines which grant a certain number of hours of free consultation with a law firm that concentrates on law firm risk management

-- newsletters that provide valuable information through articles authored by experts in the area of law firm risk management, and

-- Web sites with online self-testing for best practices

2.  The American Bar Association publishes a number of valuable resources, including self-testing tools and forms for standardization of best practices. Firms should utilize these.

3.  The insurance application in itself is a valuable tool for information gathering and presentation of risk management ideas. For example, law firms can glean valuable information about engagement letters, management by committee, and standardization within certain areas of practice by reviewing the application required by many underwriters. Further, your broker may be able to assist you in spotting issues, preparing responses for areas of concern, and presenting information in its most favorable light. It is, therefore, advisable to fill out the forms carefully and with an appropriate amount of planning and forethought. This is best achieved by leaving sufficient time for this task and ensuring that your firm uses an appropriate resource for the application’s completion.

4.  Certain groups, RRGs (Risk Retention Groups) and RPGs (Risk Purchasing Groups) in particular, provide their members with a variety of risk management services such as:

-- guidelines for members on a variety of subjects, such as engagement letters, conflicts checking procedures, billing practices, and document storage

-- audits by law firm risk management experts

-- commissioned reports on a variety of risk management topics

-- presentations and/or workshops conducted by guest lecturers with developed areas of expertise

In the absence of membership, certain of these groups may also provide this service for a fee.

5.  Expert auditors can be retained directly by law firms for a variety of services, including:

-- in-depth audits of practices and procedures, and suggestions for improvement

-- workshops and seminars for firm employees and/or partners (often for CLE credit)

To obtain the best possible advice regarding how to maximize your insurance options through risk management tools, contact your broker well in advance of your professional liability insurance expiration date. Your broker can then advise you about the resources available to your firm, and working together you can bring home the best available insurance and risk management solution for your law firm.

This article is intended to inform the reader of potential liability exposures for attorneys. This article reflects general principles only and does not render legal advice. Readers should consult legal, financial, insurance, and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association nor Aon and its affiliates assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of the information. Reproduction without written permission is prohibited. This article is made available to the County Bar Update by Aon Direct Insurance Administrators, administrators of the Aon Attorneys’ Advantage Program, part of the LACBA Sponsored Aon Insurance Solutions Program available to LACBA members. The Aon Attorneys’ Advantage Program provides comprehensive risk management services as part of the wide variety of benefits available to policyholders. The risk management program includes periodic seminars with attorneys that specialize in risk management, a quarterly newsletter, a risk management confidential hotline, and a risk management Web site. For information or to speak to a representative, visit
www.aonsolutions.com

# # #