Michael Harvey offers a step-by-step guide for law firms looking to minimise their professional negligence risks and cut their insurance premiums

Claims against solicitors can be expensive, not just in terms of damages and costs, but also in terms of reputation risks, the amount of time likely to be spent dealing with the claim and a resultant increase in professional indemnity insurance (PII) premiums.

A good place to start for any firm concerned about its risk profile and wishing to improve its risk management is to identify the top 10 risks faced by the firm and then consider the steps necessary to minimise those risks. For those with serious concerns, there are specialist risk management firms that can audit firms and prepare risk reports.

A firm's risk profile will vary depending on its size and personnel, and the type of work. Property work is the most common source of claims, and commercial and financial work can give rise to the most costly claims; but all areas carry risk. 

Negligence claims can arise for many reasons of course. Common examples include missing limitation dates, undersettlements, failure to advise, drafting and administrative errors. It is in fact relatively uncommon for a solicitor to face a claim based on actually getting the law wrong.

The risk of exposure to negligence claims cannot be entirely extinguished, but there are steps firms can take to reduce risk, many of which are simple common sense, but which are overlooked surprisingly often. Some of these are set out below:

Clients

1. Carry out checks on a prospective client, ensuring you consider the source of any referral and/or how and why the client approached the firm. Are there any conflicts that prevent you from representing them?

2. Consider whether any prospective client is suitable and matches the firm's client profile. 

3. Carry out and document the necessary money laundering checks.

Instruction and scope of retainer

4. Make sure your client has provided, and continues to provide, clear and timely instructions. Are their goals clear and realistic?

5. Ensure that a clear fee arrangement is agreed in advance and send clear and comprehensive client engagement letters and terms of business.

6. Clearly define the scope of your retainer, including what you have and have not agreed to do. Keep this under review.

7. Make sure your client is aware of its own obligations and advise it of the potential consequences if it fails to meet them, eg failure to meet a deadline. This is particularly the case in the brave new post-Jackson world where it seems the courts are, as expected, taking a tough line on delays and missed deadlines.

Matter handling

8. Allocate the matter to someone with appropriate expertise and experience.

9. Keep written records of all advice given, following up oral advice in writing. This should include keeping clear and accurate notes of all telephone attendances and meetings. Claims often turn on a lack of written notes. 

10. A good diary system is essential to capture and flag up key dates, and for others to be alerted if the person dealing with the matter is absent. 

11. Make sure everyone keeps up to date with the latest developments within their own area of expertise. This includes not only developments in the law, but also procedural developments, such as those introduced with the Jackson reforms. Lack of knowledge will be no excuse.

Supervision and review

12. A good system of supervision is essential. A supervisor with appropriate competence and experience should be allocated to each fee earner, including senior partners as well as newly qualified lawyers.

13. An open-door policy is no substitute for a structured system of proactive supervision, including monthly file reviews and review meetings.

14. The system should be documented and the outcomes of the reviews recorded. File auditing, either by internal or external auditors, with documented audit trails, can be an invaluable risk management and supervision tool.

Documents

15. Files and electronic documents should be secure from unauthorised access.

16. Document, IT and data protection policies should be in place and enforced.

17. Files should be in good order, filing kept up to date and key dates clearly marked.

18. Have a written disaster recovery/business continuity plan.

Insurance

19. Certain types of work and certain jurisdictions will not be covered by the firm's PII cover. It is therefore vital that the work carried out by the firm does not stray beyond the scope covered by its PII policy.

20. Make sure someone in the firm is responsible for dealing with its PII insurance, knows the terms of the policy, and makes sure all relevant staff are aware of the requirement to notify the responsible person as soon as they become aware of a circumstance that could give rise to a claim.

Compliance

Compliance is outside the scope of this article, but it should be noted that Principle 8 of the Solicitors Regulation Authority's new outcomes-focused regulatory regime requires that firms must run their businesses "with proper governance and sound financial risk management principles", and we should all by now be familiar with the requirements of firms to have appointed compliance officers for legal practice (COLPs) and compliance officers for finance and administration (COFAs), with responsibility for ensuring the firm has adequate systems and controls in place.

An onerous burden?

This may all seem onerous, but it is surely worth it to reduce the risk of costly and damaging negligence claims; and good risk management can benefit the firm in other ways. 

PII insurers are increasingly interested in a firm's risk management processes and procedures. If a firm is able to demonstrate that it has properly thought through its risk management, this is likely to impress a prospective PII insurer and result in significantly reduced PII premiums. Good risk management cannot be achieved instantly, and requires all those working within the firm to buy into a culture of risk management – and this must be led from the top.

Michael Harvey is a professional negligence partner at Berrymans Lace Mawer.