As the market for lawyers' professional liability insurance continues to "harden," the need for good risk management in law firms has become more critical than ever, according to lawyers and risk management consultants who spoke March 13 and 14 at the Annual Conference on Legal Malpractice and Risk Management.

One group of panelists laid out carriers' concerns and recommended strategies for law firms to make themselves attractive to underwriters. Another group used the toughening market as a basis for reviewing basic techniques for implementing more effective risk management systems.

Underwriters Rule
A key factor fueling the focus on risk management is the "hardening" insurance market in which lawyers' professional liability insurance is becoming more expensive and less available, according to several speakers. Ronald E. Mallen of Hinshaw & Culbertson in San Francisco told the audience that the current market offers the "worst availability" of legal malpractice insurance that he has ever seen.

Wayne H. Carter of Target Capital Partners, Avon, Conn., predicted that prices will go up again this year for malpractice insurance, particularly in the areas of personal injury, real estate, and intellectual property. Firms should budget for premium increases of 25 to 50 percent and expect fewer carrier options and restrictive coverage, he advised, adding that self-insurance may be necessary for very large firms and very small firms.

Enron Fear
Lyle Hitt of Arch Insurance Group in New York said that with large firms that represent public companies, carriers are becoming concerned about such things as lurking liability in connection with structuring special purpose entities. Even though the Attorneys' Liability Assurance Society (ALAS) does not differentiate for risk, reinsurers do, and ALAS gets a lot of reinsurance, Hitt noted.

Naomi K. Yamada, who is with Arch Insurance Group in San Francisco, spoke of "Enron fear" among insurers. Client lists and the types of work performed will affect coverage and insurability, she said. Underwriters will look closely, for example, if firms are structuring pensions for clients.

Robert E. Cook of New York's AON Risk Services, which insures many large law firms, agreed that claims from corporate governance issues are of concern to insurers. Underwriters will scrutinize who the firm's clients are, he warned. Also, law firms can expect "Wall Street Journal underwriting"--that is, at the time of policy renewal firms will have to explain any adverse publicity they have garnered.

Survival of the Fittest
In the tough current market, it's "survival of the fittest," Orze commented. Law firms need to specialize and must dedicate resources to claims prevention and managing their risk and their risk profile, she suggested. "You can't have an office manager fill out your [insurance] application," she added.

Carter too warned that underwriters don't like lawyers' "dabbling." Firms need to focus on "core competencies" and risk management, he urged.

"Insurers are looking for a great deal more information from firms," Cook said, emphasizing the importance of a complete application. Firms are being asked for their 10-year loss history, rather than merely for five years, he noted.

London-based broker James Kalbassi said that when seeking coverage, law firms must strive to differentiate themselves from other firms. Firms need to detail their risk management activities within the past year, and focus on claims management too, advised Kalbassi, of Paragon International Insurance Brokers Ltd., a Lloyd's of London broker that specializes in lawyers' professional liability programs for law firms in the United States.

Thomas P. Sukowicz of Hinshaw & Culbertson's Fort Lauderdale, Fla., office, stressed that risk management can make a law firm more insurable. Law firm audits are being used not only by law firms themselves but also in the underwriting process, he said.

Systematic Management Recommended
Dustin A. Cole, a management consultant with Attorney Master Class, Maitland, Fla., stated that most lawyers prefer a loose, individualized structure. According to Cole, lawyers try to do as little management as possible. "Sometimes even the most sophisticated of firms," he said, "just looks like a bunch of sole practitioners in a building together."

Nonetheless, Cole said, lawyers need to break away from their customary style of practice and move towards "systems" involving standardized practices that give the firm a better method of quality control. Systems are the only way you create a good business, he said; "otherwise you've just got a bunch of craftsmen working together."

But as Anthony Davis, Hinshaw & Culbertson, New York, noted, lawyers don't like being told how to run their business. They resist the idea of "management" and routinely deny the existence of risk in their practices. "If you go in to hammer them over the head," Davis remarked, "they simply fight back."

How then to persuade attorneys that a risk management system or audit is a good idea? The best tack, Davis said, is to show them that an audit will serve clients better and make the firm more profitable.

Mentoring
In Cole's view, good risk management practice needs to incorporate a strong mentoring system characterized by a training system and compensation plan for the mentors.

He set out for the audience some do's and don'ts for a successful mentoring system. A mentoring system, Cole said, should include "an actual selection process." In other words, he said, it shouldn't be "an award for being a high producing attorney." Moreover, Cole advised that the mentor should not be the trainee's supervisor; otherwise the trainee's ability to speak freely will be inhibited. Finally, he said, there must be some sort of reward for being a mentor. "It can't be viewed as a penalty," he remarked.

Cole also recommended implementing a stronger support structure for the firm's "most valuable asset: its highest producing lawyers."

Many firms have such structures for their lawyers suffering from substance abuse or illness, or even for lawyers who struggle to meet the billing commitments, he said. But there typically is no formal structure that helps lawyers working at the ceiling of their ability, even though these are the attorneys who are most in danger of "burning out," he said. Cole characterized most firms' support for these lawyers as a mere slap on the back and an admonition to "buck up."

Peer Review
Joseph W.E. Schmitt, a claims attorney with the St. Paul Cos., St. Paul, Minn., focused on the desirability of "peer review" in the everyday decisions surrounding whether to accept new business.

For example, Schmitt said, a lawyer's "independence and ego" can cloud the lawyer's judgment about the wisdom of taking on a new client. He said that those who acquire the new business are often so concerned with collateral issues and driven by other motives, such as the potential fee involved, that they don't always look out for the firm's best business interests.

A good peer review system, he said, would require that another partner or, better yet, a committee sign off on the new matter.

A similar approach should be taken with conflicts checks, he said. A conflicts assessment, Schmitt remarked, needs to be something more sophisticated than asking another partner, "Do we have a conflict here?" He said that attorneys are naturally inclined to focus on why it isn't a problem now and won't later turn into one.

Schmitt also advised that well-drafted engagement letters can protect the firm if the relationship with the client goes sour. Such a letter answers many questions right off the bat, he said, and raises obstacles that may tell a plaintiff's lawyer to back off.

Blacked-Out Windows
Billing generates some of the greatest client discontent, noted Stephen A. French of LegalbillReview & Management, Brentwood, Tenn. He therefore stressed the importance of delivering clear, consistent, and accurate bills to clients.

Attorneys should write their bills so clearly, he said, that a third party unfamiliar with the matter could read the document and figure out what was done.

"I liken most lawyers' bills to a ride in a taxicab where the windows have been blacked out," Davis chimed in. In an ordinary taxi, he said, you can monitor your progress and "you can see you're going somewhere." In the blacked-out taxi, he added, "you can hear the motor running, and you feel the vibration and stopping and starting, but you have no idea what direction you're going."

Davis said it's a good idea to add cover letters to bills so as to convey "what's really important to the client: what did I do that got you closer to your objective and what will I do next month that will get you further down the road, and encourage you to pay last month's bill."

Davis also touted the value of making sure that lawyers don't allow too much time to elapse before they enter billable time into the system. At the extreme, he said, "the longer you can go, the more likely it is that you are prone to people padding bills." At a minimum, he added, you lose good billable time by not entering it right away.

Mirable Dictu
An interesting thing occurs when you tell lawyers that they have to bill a minimum number of hours, speaker Joel F. Henning added. "Mirable dictu, they bill that number of hours or more!" Henning is with Hildebrandt International in Chicago.

Moreover, Henning said, the miracle is duplicated when firms give clients a discount on their bill: the hours tend to increase by that same exact percentage. "If I were the client, I'd be skeptical," he said.

This point gave Davis a chance to raise one of his pet peeves: hourly billing. According to Davis, "hourly billing fundamentally encourages inefficiency." Indeed, he said, "I would argue the proposition that the minimum billing requirement is per se unethical. It is an inducement for fraud, period."

Henning identified several other questionable billing practices that are certain to rankle clients. For instance, he said, in some firms a partner will sit in on a meeting just because he is the "relationship partner," and then he will add his bill to the tab--even though the partner has added no substantive benefit to the client.

Henning also cited the all-too-common practice of training inexperienced associates by sending them along to depositions and hearings, and then billing their hours to the client. The client should not have to pay the firm for training its employees, he said.

Cowboys and Gorillas
Another problem Henning identified was partners "hoarding" work that ought to be delegated. A well-managed firm will ship the work where it can be performed most effectively--even if that means sending it to an office in another jurisdiction, Henning said.

But in a badly managed firm, he added, the partners will keep the work on their desks until they realize that they haven't got the time or expertise to follow through, and then they delegate it at the last minute.

Finally, Henning discussed what he called "character disorder issues." Not the "normal neurotic behavior" one routinely sees in law firms, Henning remarked, but true renegades who demonstrate a lack of moral judgment or conscience.

"The firms that are most vulnerable," Henning said, "are the firms where cowboys, 800-pound gorillas, and sole practitioners dominate."

Reproduced with permission from ABA/BNA's Lawyers' Manual on Professional Conduct, Vol. 9, No. 7, pp. 176-181 (March 26, 2003). Copyright 2003 by the American Bar Association/The Bureau of National Affairs, Inc. (800-372-1033).

This publication has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.