Risk management for lawyers – international trends to watch for

Law News recently caught up with André Louw, Chairman of Jardine Lloyd Thompson Australia Pty Ltd (JLT), to get the low-down on international trends in lawyers’ risk management and professional liability, and how we can expect to see these play out in New Zealand over the coming period.

Andre Louw

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 earlier this year.

Preoccupations from the previous 12 months, such as increased estate planning/probate work due to the “baby boomer” demographic, as well as issues with engagement letters and client conflicts, continue to cause concern (see Law News Issue 2, 12 February 2016).

New developments such as “disaggregation” and the rise of artificial intelligence (AI) and other technologies which are threatening the legal services market also came in for much discussion.

Baby boomers impacting on trust and estate work

The US is “always a bellwether” for New Zealand, says Mr Louw. It is estimated that some US$6 trillion is about to pass from baby boomers to the younger generation over the next few years, with a consequent need for trusts, wills and tax advice. Australia and New Zealand, which similarly have ageing populations, are starting to display the same patterns, considers Mr Louw, albeit on a smaller scale.

The increasing need for trust and estate work is a “two-sided coin”. On the one hand, it is encouraging to see this practice area on the rise, but on the other, experience in the US shows a worrying trend of generalist lawyers attempting work in which they do not specialise – either to drum up more work in a tough economy, or to try and help friends and family save on legal costs.

While leading professional indemnity insurer CNA said that 50% of its insureds report doing trusts and estates work, this practice area generates the most insurance claims, having taken over first place from real estate in recent years. Mr Louw cautions against dabbling in trust and estate work as a “well-meaning amateur”, and says that insurers have a low appetite for business of this kind unless it is performed by specialists.

Aside from the legal intricacies, there is potential for other kinds of “fish hooks” to catch out the unwary lawyer – whether it is a transfer of anger from emotional clients or confusion over which family members the lawyer is acting for. Discussion at the conference indicated that a very high proportion of claims in the trusts and estates practice area come from “phantom clients”, e.g. intended beneficiaries or disappointed heirs under a will. Attempts to be helpful (for example answering questions raised by adult children who accompany a testator or testatrix to a meeting) may be seen to be setting up a duty of care towards these non-clients, who might end up having differing interests or becoming “disappointed beneficiaries” in due course.

Non-client claims may not fall within the insuring clauses of narrow policies if such policies respond only to claims by fee-paying clients, says Mr Louw, and that any intentional wrongdoing exclusions should be subject to final adjudication write-backs – an additional spur to caution.

Properly structuring the engagement and specifying who is and is not your client through engagement letters (as well as using disengagement and maintenance letters where necessary) can help obviate these risks, but according to CNA, when claims arise, an engagement letter is only in place around half the time. This is a significant cause of liability – there are half as many claims when there are engagement letters as when there are not.

While some lawyers may be reluctant to write a disengagement letter, and be concerned that doing so could be seen as severing the relationship, Mr Louw advises taking the diplomatic approach of making it clear that while one piece of work has come to an end, the firm would be delighted to act for the client in relation to any new instructions. Failing to properly close off the instruction could put the lawyer under an ongoing duty to keep the client informed, for example as to changes in tax law affecting the estate (and as Mr Louw says, tax law changes almost as often as Australian Prime Minsters!).

Legal services market under threat

The desire to pick up non-specialist work and fears of “disengagement” may be partially attributable to worries about legal work drying up in the current economic environment. Outside of trust and estate work, business (for lawyers in the US, at least) has shrunk. Similar patterns are discernible in Australia and New Zealand, where there is a big shift to corporate clients keeping some legal work in-house and referring less work on to external lawyers. Clients are also increasingly willing to “disaggregate” or “shop around” for legal advice, and will often split out different kinds of work across different providers.

The rise of artificial intelligence is also diverting business from law firms. It is causing much concern in the US, with new “automated” or “outsourced” entrants in the legal services market beginning to be real players. Legal process outsourcers now account for around US$1 billion of an estimated annual US legal spend of US$425-450 billion – a small enough figure perhaps but one which is on the rise. With more of the routine/repetitive work such as research and discovery now being done in-house or by technology, there is less work for junior lawyers and support staff to do.

Thomson Reuters, which used to confine itself to publishing and research, now offers services well beyond this, with products such as Practical Law directly assisting counsel with research and drafting work. Other types of work which have been the “bread and butter” of smaller firms in the past are increasingly being automated using new technology. “LegalZoom” in Austen, Texas which automates the issuance of business licences is growing really quickly and has taken a huge chunk of the business licensing market from smaller law firms – already it is performing 20% of all corporate filings in California.

“Block chain” technology (which enables payment without a bank acting as intermediary) may start cutting out law firms as well in routine areas of practice where parties can use smart or self-executing contracts. Predictions are that standardised contracts and block chain technology may start making inroads on conveyancing work. Smaller firms are particularly under threat from this type of technology, unless they can convince clients that they should pay a premium for the value of a real lawyer/client relationship over the cheaper, automated options.

Large law firms are still going to have a role providing expert judgement on higher level work, but may still be affected by disaggregation as clients begin to use firms only for complex/ high-end work as they see fit, rather than for every deal. Corporate clients in particular may use automated providers or in-house teams for routine work, with in-house general counsel in the US are becoming much more discerning – only tending to seek external advice on “bet the ranch” litigation, says Mr Louw.

A need to evolve

Law firms will have to start evolving to meet the changing demand, says Mr Louw. But while the legal service industry may be under threat, there are also opportunities.

“The smart law firms will do very well – those who are talking to their clients and responding to their needs, those who are upskilling and specialising in in-demand areas.”

This may mean accepting that clients want to use a mixture of technology-based solutions and traditional legal advice.

“Corporate clients and their in-house legal departments now hold a lot of sway, so firms need to ascertain what those businesses need and structure their deliverables accordingly. If law firms can adapt, get their strategy right, market their services to the right clients and compete for the business they want to target, they will succeed.”

Law firms are in for “interesting” times, says Mr Louw. “May I respectfully suggest that those law firms which identify, control and transfer their risks properly will cope with the interesting times better than those which don’t.”

“Insurers prefer to insure firms which can show this kind of targeted expertise and which have structured their client relationships properly using appropriate engagement and disengagement letters, as they tend to have lower claims incidences. These firms can make money at the front end and reduce risk at the back end – it makes sense both economically and in terms of risk.”

Jardine Lloyd Thompson (JLT) is a supplier in the ADLS Member Benefits Programme, and is one of the world’s leading providers of insurance, reinsurance and employee benefit 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”.

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