Lawyers’ risk management – international trends

Law News recently caught up with André Louw, Chairman of Jardine Lloyd Thompson (JLT) Australia Pty Ltd, to get the low-down on trends in lawyers’ risk management and professional liability insurance from the United States, and how we can expect to see New Zealand mirroring (or differing from) these over the next 12 months.

Issue 2 Lawyers Risk

Mr Louw’s comments are in part drawn from themes discussed at a recent conference on legal malpractice and risk management, hosted by American law firm Hinshaw & Culbertson LLP, but contain some salutary tips and reminders for practitioners in this part of the world on how they conduct and protect their practices.

Increase in estate planning and probate work

Having not only a profound economic impact, but also a huge effect on legal practice, is the wave of baby boomers now reaching retirement age. Some 10,000 baby boomers are retiring in the US every day, which is not only impacting insurance premiums (as retirees stop buying life insurance and income protection insurance), but also generating a greater demand for estate planning work.

Where this becomes of potential concern to insurers is that (in the US at least), it appears that with this greater demand, a lot of lawyers who are not specialist estate or probate lawyers are taking on this kind of work as “friendly amateurs” to help out family and friends – “dabbling as dilettantes”, as Mr Louw puts it.

“In such instances, lawyers are not charging fees, not getting engagement letters, and not entering the matters on the firm’s systems. The question from the insurance point of view is, would this be covered in the event of a claim? Is it part of the firm’s business or would it fall within the ‘business pursuits’ exemption?”

Ageing populations are not exclusive to the US, however, and Mr Louw is keen to issue a similar caution to practitioners here.

“We’ve not been notified of it happening here but I’m confident it is taking place – I would be surprised if it is not. Australia and New Zealand have similar demographic profiles to the US, and not as many lawyers are specialists in this area as insurers would like to see. Lawyers are often button-holed at parties to do this kind of thing, but it can involve complicated structuring and tax questions that a non-specialist may not be equipped to handle. The concern is that a lot of risk management profiles may be being bypassed – that the work is essentially being done ‘off-piste’.”

However, he also considers that the challenges presented by the ageing baby boomer population can be viewed as a great opportunity for becoming more specialised in estate planning, wills and tax planning work, or as a chance to set up alliances with other firms who do this work.

Engagement letters and client conflicts

Lawyers are all drilled since their earliest days of legal practice on the vital importance of engagement letters. However, according to a study done by Hinshaw & Culbertson and SwissRe, although 97% of insured law firms say that they have engagement letters in place at the time when they are completing proposal forms for insurance purposes, it seems that they are only on file 65% of the time when it comes to matters being notified.

This becomes particularly problematic when you consider the potentially complex corporate structures of today’s clients. If a firm is engaged by a client that is a parent company of a number of subsidiaries, the firm might (impliedly) end up acting for all of those subsidiaries, unless specified to the contrary in the engagement letter. And unless all of those entities are entered onto the firm’s system, they would not show up as part of a conflict search, leading to no end of headaches.

Mr Louw strongly urges that engagement letters specify who is not the client, as much as who is, and that they specifically exclude any subsidiaries who are not intended to form part of the engagement. He also suggests firms get more proactive about clarifying when they cease to act for a client or in relation to a particular matter.

“It is important in contractual terms to be able to tell whether or not a matter has been completed, but this is something lawyers are not always good at doing. A number of our law firm clients have now jumped on board with the concept of ‘dis-engagement letters’, which, as with certificates of completion issued in an engineering project, help avoid ‘project creep’.”

Cyber risk and data security

Cyber risk is on everyone’s lips at the moment (you only need to look back through Law News’ recent series on Cloud computing to understand why!). The nature of lawyers’ work (requiring them to travel, always be contactable, and handle lots of sensitive information) can make them particularly vulnerable in this regard, particularly if they accidentally leave a phone or a tablet behind.

“In the past, we’ve really only seen these claims manifest under travel insurance policies (i.e. claims for the hardware), and a more pragmatic forgiving approach has been taken to the potential breach of security and/or loss of information. Now, however, clients (especially in sectors like financial services or health care, which deal in highly sensitive information) are asking their law firms whether they have data security measures and cyber insurance in place.”

A lot of law firms have a BYOD (“bring your own device”) policy, meaning that if a lawyer leaves the firm, the firm can wipe all of the work-related data from the device. A number of JLT’s Australian clients install software on their employees’ devices which separates the professional material from the personal, so that they can wipe the professional content when an employee moves on.

“Some clients in the US actually want to audit firms’ data security measures, and we are starting to see this more in Australia as well. At the very least, firms need to be prepared for greater visibility in terms of cyber.”

“Watch this space – cyber is going to become more of an issue, and cyber insurance will become ‘par for the course’ if firms are trying to pick up contracts and panel appointments in particularly sensitive sectors. But it is also an opportunity for firms to ‘get on the front foot’ and differentiate themselves from their competitors.”

And finally, don’t forget to notify potential claims!

Mr Louw is keen to “disabuse any misconceptions” that lawyers may have about notifying their insurers of circumstances that may give rise to a claim against them, in these or any other areas.

Lawyers can be poor at keeping insurers in the loop, perhaps because they are “generally good at fixing things”, which can lead them to think that “they’ll be able to sort it out”.

“Other types of professionals will get on the phone to us straight away when threatened with a lawsuit, but lawyers tend not to be fazed by litigation – it’s their ‘stock-in-trade’.”

While it is often thought that merely notifying a potential claim will automatically lead to increased premiums, this is not the case, and insurers actually see appropriate reporting as a positive, rather than a negative, so keep the lines of communication open.

Jardine Lloyd Thompson (JLT) is a recent addition to the suppliers involved in the ADLS Member Benefits programme, and is one of the world’s leading providers of insurance, reinsurance and employee benefit-related advice, brokerage and associated services. JLT will endeavour to procure preferential rates on insurance products for ADLS members. For more information, please visit the “Member Benefits Programme” tab on ADLS’s website: www.adls.org.nz/for-the-profession/member-benefitsprogramme/.

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