A law firm may be comprised of one individual attorney or a group of attorneys practicing together. Where there is a group there are usually partners and associates. Partners generally share the risks and responsibilities as well as the profit. Associates usually are provided office or desk space and handle cases which the partnership assigns them. A law firm usually has a staff of employees who handle phones, typing, filing, and other secretarial and office management necessities.
Developing and implementing a solid risk management plan for a law firm is essential for survival and success in today’s legal arena. Risks are actions having potential to result in negative outcomes for others or for ones self. Risk management is anticipating risks and taking actions to minimize exposure and potential negative repercussions. “Risk comes from not knowing what you’re doing.” -Warren Buffett-, American Investment Entrepreneur
A law firm must decide if they are going to hire an outside risk management firm
or keep the procedure in-house. If kept internal, one choice is to appoint one partner as
General Counsel. That person is responsible for developing, implementing and
monitoring the plan. If choosing the General Counsel approach, one must determine if
that partner will continue practicing or simply handle risk management. The third
choice is to hire an employee trained and certified in risk management. This last
choice is optimum.
“The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning,” -Charles Tremper- Concerning law firms, nine broad areas of risk have been identified. Each has a variety of risk categories within itself. These nine risk areas have been categorized in order of probability and impact using an ABC formula. A represents high probability and or high impact. B represents moderate probability or impact. And C represents the least likely probability and the lowest impact.
Recognizing that a serious mistake or law suit in any one of the nine areas could bring disaster made categorizing a difficult task. Providing malpractice insurance ended up on top. All areas involving clients and opposing sides followed and internal risk, although of high impact, fell into last place.
Having malpractice insurance coverage does not lesson the probability factor, but does soften and transfer a portion of the monetary impact in a law suit. Some financially established companies opt to retain this risk and avoid the high cost of malpractice insurance. Smaller firms or firms just getting started usually need to purchase insurance. “Insurers are increasingly sophisticated about the difference between a well-managed and not-so-well-managed law firm and they’re much attuned to whether law firms are operating under appropriate policies and procedures. The degree to which insurers believe that law firms are doing this affects not only the price they’re offered, but also the scope of coverage, the limits that firms will be able to buy in the marketplace, the amount of their deductible and the terms of coverage” (Davis, Anthony 2008).
Some firms turn to the limited liability partnership, but this is only a partial cover. “The draw of LLP status is, of course, the limited liability. Unlike a partnership, in which partners have unlimited liabilities, members of an LLP are liable only up to the amount of their personal investment in the LLP” (Greenwood, Clive, and Tamar Halevy (2005) 39).
Under common law, members of an LLP can still be held financially accountable in negligence cases if they gave the suing party advice. Deciding on a partnership or LLP can only be determined by looking at the partnership agreement. A thorough examination will determine which will provide the best protection for the individual law firm. Incorporating in today’s business environment is a risk avoidance tool that should be utilized. It neither eliminates nor transfers risk, but is a method of reducing impact. In days gone by, malpractice was a law firm’s only real area of risk. Today it is just one of many, reflecting our changing times.
All cases are not worthy of the firms time and effort. Some cases spell trouble from the beginning and must be rejected. “Pattison of CNA says that lawyers can significantly minimize risk at the onset of an attorney/client relationship. He recommends developing a strong client intake system that weeds out poor quality clients, such as companies with too much red ink that may later be inclined to pursue the firm as a defendant. A well drafted engagement letter can also spare future turmoil by spelling out the precise nature of professional services including the attorney handling the matter, specific duties that are not covered, a time frame, and a definition of who the firm will-and will not-be representing” (Goldberg, Julie 2008).
Constant and open communication between the firm and its clients is critical to risk reduction. Having skilled and properly trained secretaries alleviates stress in this area. Once a case has been accepted by the firm and an attorney has been assigned, follow-up is vital. Appointments and court dates must be kept. A file containing all pertinent information must be built. Once the case is closed, the file must also be properly closed and stored. Having open files lying around is a liability. Client tracking is a retained risk and requires diligent attention to minimize.
Billing procedures consist of three components: fee structure, accounting, and collections. Fair fee structures must be established and used consistently. The quickest way to create a hostile client relationship is to have one client discover that they paid more than another client for the same service. The fee structure must be included in the client engagement letter. Billing, accounting, and collections may be outsourced or handled internally. A large firm can normally afford a comptroller to handle billing procedures. A smaller firm may decide to transfer their risk by sending their billing to an outside source. Retained or transferred fees must be collected. They are the life of the firm.
The first order of business is the purchase of equipment and the maintenance agreements. The risk involved in this process pales to the real risk management issue of keeping client privacy protected in this electronic age. Understanding that every word in the firm’s computers can be subpoenaed makes it imperative that caution is taken with every click of the mouse. Office computers will be used for scheduling, documentation, and much more. A strict policy to keep personal information off of the firm’s computers is necessary. Having separate computers for different duties is also a good move. Technology and client confidentiality is a retained risk that requires continuous care and training.
The human resource department is accountable for a multitude of responsibilities, each representing an area of risk. HR can handle payroll. If a firm has a comptroller or accountant, payroll would fall to them. Payroll can be transferred to a provider like Paychex. Transferring payroll out is a good method of risk reduction. Employer-employee relations are handled by the owners. Coordinating complaints and resolutions is HR’s job. The relationship between individuals operating within the firm also presents an area of retained risk that must be monitored and controlled.
HR is responsible for distributing the firm’s policy and procedure pamphlet, maintaining W-4s and I-9s, and other documents pertaining to the firm’s employees. HR should keep partners and employees aware of training sessions and continuing education compliance. They should post OSHA, EEOC, and other requirements in visible locations. HR will monitor workman’s compensation, disability, unemployment, and changes in the law. Although HR’s main job is employee records, the department will handle many areas of retained risk. Professional and organized record keeping is their tool for risk minimization.
“Adequate financial management in a law firm means that the firm has accurately anticipated its financial requirements by profit planning and budgeting. The quality of its financial management affects the way that the firm makes decisions. Cases, in which there appears to be a conflict, may not be handled properly if a firm is suffering from cash shortages. Risks are taken to which claims are very often the inevitable result. A law firm which is well managed financially may be able to withstand the difficulties which ensue if there is a major claim. Firms that are not well managed financially do not survive for very long” (Berman, Tom 2010). A General Counsel may handle finance or an outside accounting firm may be hired, thus transferring part of the risk. There are many financial decisions to make. One such decision is whether the firm will own or rent its location.
The choice of locations is important in two areas: curb appeal and ease of access. Purchasing entails the retained risk of damage to the structure and the risk of obtaining a clear title. Ownership usually necessitates the purchase of hazard insurance. Different policies must be compared. A commercial policy package includes a building and personal property package. A business owner’s policy covers mainly property and liability.
Owning or leasing both location and vehicles is an economic question which each firm will have to decide. Insurance considerations include: business income loss, glass breakage, business auto policies, credit life, errors and omissions, title insurance if buying the location, and workman’s comp. Coverage such as liability, professional liability, or a commercial umbrella must also be examined. Options include: personal injury liability, outdoor signage, monies and securities, employment dishonesty, mechanical break down, disasters, full replacement coverage, and so on. Insurance decisions will take time and research.
Some large firms might self insure by covering damages and losses with cash. Others may purchase their own insurance company like CitiGroup did with Travelers. This is an area where partial risk can be transferred by insuring. Most small firms will choose to insure. Health and life insurance must be considered. Group insurance should be provided. Firms that offer benefits attract a better quality of employees, partners, and associates than those who do not. Providing incentives is a good method of risk reduction.
A budget must be established reflecting every expense from advertising to zip forms. A trust account must be set up for handling client funds. Federal, state, and local banking laws must be strictly observed. It is an excellent practice to hold 10-15 percent of profits in a rainy day account to offset disasters and claims. And, “Amortize large one-time expenditures over your fiscal year (i.e., professional malpractice insurance, depreciation)” (Rose, Suzanne (2005) 22-25).
A law firm must be prepared for natural and man made disasters. “What every firm needs to do is to develop a plan that is particular to its own needs. Law firms must answer the questions: What are the essential elements of operating this law firm? And, what would happen if one of those elements went down? Technology is one consideration, but law firms also need to look at how employees would operate, how they would communicate with each other; and whether everyone knows what the plan is. If our computers aren’t accessible, how are we going to access the back-up data? Can people work from home? Have we developed the right system so that the server will keep running even if we’re all working remotely” (Davis, Anthony 2008)?
Disasters happen. It is possible that an office could be inaccessible for days at a time. The firm must have a plan to keep people working. Clients will need to be serviced flawlessly. This is a retained risk and the only method of minimization is to keep every member of the firm and all outside affiliates fully advised of the plan.
“A partnership or shareholder agreement should help to translate overall firm philosophy into day to day policy and then provide the wherewithal to see that policy is carried out” (Berman, Tom 2010). The partnership agreement must spell out the partner’s positions. They may be equal or each may have a different financial investment in the partnership. Partner compensation must be established. A draw system is one way to provide partners with a fixed monthly income. Both a profit sharing policy and benefits must be agreed upon. A policy for admission, termination and promotion of partners as well as other staff must be penned. Associate position and pay scale must be defined.
A firm having more than two partners needs to elect a General Counsel who will train associates, supervise staff, monitor attorney work-loads, and oversee the day to day operations. Extra compensation for the General Counsel must be discussed. If the General Counsel is to continue practicing, a separate office manager will need to assist. The partnership must provide the firm’s policy and procedure handbook. This booklet should address every component of operation from vacations to sick time and job descriptions. General employee policies must include: the Americans with Disability Act, nepotism, overtime, breaks, standards, leave of absence, equal opportunity policy, internet, telephone, cell phone and texting policies, garnishments, and every aspect covered in the risk management plan. Special attention must be given to the chapters on discrimination and sexual, racial, age, and gender harassment. Firm statements of “no tolerance” must be expressly laid out. Actions that will be taken must be defined including: warnings, suspension, termination and legal processes.
Enactment can be monitored and enhanced by periodic training and brain storming. A data log must be established containing every case brought against the firm or firm member. These cases must be researched. There are two questions that must be answered. What went wrong? And, have we taken proper measures to fix the issue? “Firms can do their own audit, or they can have an independent audit. The purpose of an audit is similar to an MRI in the medical context: it’s a diagnostic tool. It’s finding out what policies and procedures people are actually following, as opposed to what law firms think they need” (Davis, Anthony 2008). Audits should be conducted annually to account for changing times, culture, environment, and laws. “A good rule of thumb is to assume that everything matters.” -Richard Thaler- (Thaler, Richard, and Cass Sunstein (2008) 3).
“Law firm risk management is thus evolving from reactionary and rudimentary to proactive and comprehensive. It is now a standard for survival in an increasingly complex and competitive business environment” (Goldberg, Julie 2008). Risk management protects a firm’s reputation and enhances profitability. Although it is impossible for a law firm to operate totally free of risk, ignoring risk or devising escape hatches will not alleviate the need for a thorough risk management plan.
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