Does your practice have an effective risk management plan?

September 26th, 2016
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By Ann Bertelsmann

No matter how large or how small any business is, it is essential to have a risk management plan in place. In this regard, attorneys’ practices are no different from any other businesses – although some of the types of risk will of course differ.

The starting point for legal practices, is to analyse the business and professional risks inherent in the practice. It may be helpful to categorise risks as either internal or external.

A practice has no control over external risks, for example, a downturn in the economy, but plans can be put in place to mitigate the negative effects, in the event that the external risk materialises. On the other hand, internal risks and risk-prone situations can be avoided, to a large extent, with effective risk management interventions.

This article focuses only on professional and reputational risks in a legal practice.

Being professionals – just the same as doctors or engineers – attorneys have professional risks that are specific to their profession. They can be held liable to their clients or third parties who suffer harm if anything goes wrong in the course of their professional practice. They also carry a serious responsibility and risk in holding money in their trust accounts on behalf of the public or clients. Any breach of their professional duties and responsibilities could lead to professional indemnity (PI) claims or claims for theft or misappropriation of trust money.

Receiving claims from clients and the public is a distinct possibility. Every year the Attorneys Insurance Indemnity Fund NPC (AIIF) receives between 400 and 500 claims notifications from attorneys’ practices where clients allege that they have suffered a loss as a result of things going wrong in the handling of their legal matters. The Attorneys Fidelity Fund (AFF) receives an average of 870 claims per year by the public, for misappropriation or theft of their trust money by attorneys’ practices.

Traditionally, the most common risk areas that cause claims are –

  • ineffective delegation and supervision;
  • ineffective diary and calendar systems; and
  • conflicts of interest and absence of uniform practice rules within the firm – such as those dealing with scam and fraud prevention, billing, engagement procedures, file audits and document management.

Risk management procedures and interventions to minimise these risks, should therefore be incorporated into attorneys’ risk management plans.

Practitioners’ attention is specifically drawn to the following two problem areas:

  • Scams: These should be a major cause of concern for the profession, because we hear of attorneys’ practices being scammed – almost on a daily basis. It is astonishing how many firms fall for these scams. Be vigilant and do not trust anyone. Educate staff and make sure that your rules and procedures close as many loopholes as possible. For more information about these scams, see the AIIF website (www.aiif.co.za/latest.html).
  • Certification of documents: Because many claims are made against attorneys arising from problems with certification and witnessing of documents, the AIIF has imposed an additional 20% loading on the excess for this.

Extract from the AIIF NPC, Professional Indemnity Insurance Policy for 2016/2017:

‘20. Where the Dishonest conduct includes:

  1. a) the witnessing (or purported witnessing) of the signing or execution of a document without seeing the actual signing or execution; or
  2. b) the making of a representation (including, but not limited to, a representation by way of a certificate, acknowledgement or other document) which was known at the time it was made to be false;

The Excess payable by the Innocent Insured will be increased by an additional 20%.’

Some of the risks can be transferred by way of adequate insurance cover. Unfortunately most of the risks are not insurable. Insurance gives some financial peace of mind, but it is not enough on its own. It certainly does not fix reputational damage. Non-recoverable financial losses include the non-payment of fees by the dissatisfied client, insurance excesses and billable time spent out of the office with insurers and their counsel, as well as in court and enquiries. Commercial insurers also take your claims experience into account when calculating premiums.

What are the risks and consequences associated with professional claims?

Reputational risks

  • Dissatisfied clients may not instruct your firm again.
  • Unhappy clients or members of the public may warn everyone, not to use your firm.
  • Details may be published in the media or in court documents.
  • Your practice could possibly be sequestrated or liquidated.
  • Where there is theft or misappropriation of trust money, criminal charges may be brought against the perpetrator, who may be suspended or struck off the roll.
  • Complaints to and possible disciplinary hearings by the relevant law society may lead to suspension or striking off the roll.
  • Staff morale could be negatively affected.
  • A possible breakdown in the relationship between the partners/directors, and the dissolution of the practice could follow.

Financial risks if you are uninsured or hold inadequate levels of cover

All South African practices have automatic cover for professional indemnity claims through the AIIF. This is subject to a policy that can be found on the website (www.aiif.co.za/about-us.html). The amount of cover is limited and not all types of claims are covered. (Your practice may need to privately buy additional PI cover (known as top-up cover) through your own broker or insurer. There is also an excess payable.)

The AFF protects the public (not the firm) by compensating them for misappropriation of their trust money by an attorney or his or her staff – but only if the practice and its directors or partners are unable to refund them. So there is no protection for the partners or co-directors and they are jointly and severally liable. They could even lose their private property. (The practice can protect itself and its directors or partners by buying cover for misappropriation of funds.)

Dealing with a professional indemnity claim can also place a severe emotional and psychological strain on the practitioner and staff involved.

Once you have established what your main risks are, you will be in a position to develop a risk management plan.  If you do not have such a plan in place and do not know where to begin, there are numerous helpful books and internet articles on the topic. It may also assist you to read the document entitled ‘Risk Management Tips’ and also other risk management related articles on the AIIF’s website (www.aiif.co.za/risktips.html).

Plans on their own are of little value unless they are implemented properly and, where appropriate, filtered down to all your staff.

The importance of assessing the gaps in your practice’s risk management

A risk management plan cannot remain static and will have to be updated and adapted regularly, to ensure that it remains relevant and effective. The risks facing a practice or any other business are constantly changing with new risks emerging from time to time.

It is important that your practice keeps up to date with all legal developments and threats to the profession, for example, current scams and frauds perpetrated on legal practitioners.

One way of assessing some of the gaps that may be present in your risk management, is to complete the risk management self-assessment questionnaire, which should be completed online, or downloaded from the AIIF website (www.aiif.co.za/selfassform.html).

Risk Management self-assessment questionnaire

Please note that the AIIF NPC, professional indemnity policy for 2016/2017 provides as follows:

‘23. Once the Insured has notified the Insurer, the Insurer will require the Insured to provide a completed Risk Management Questionnaire and to complete a claim form providing all information reasonably required by the Insurer in respect of the Claim. The Insured will not be entitled to indemnity until the claim form and Risk Management Questionnaire have been completed by the Insured, to the Insurer’s reasonable satisfaction and returned to the Insurer.’

Definition:

‘XXIV Risk Management Questionnaire:

A self-assessment questionnaire, which can be downloaded from or completed on the Insurer’s website (www.aiif.co.za) and which must be completed annually by the senior partner or director or designated risk manager of the Insured as referred to in clause 5.’

The AIIF strongly advises all attorneys’ practices, as part of their risk management plan, to have Minimum Operating Standards (MOS) in place and to ensure that all staff members have access to them and are trained to follow their required procedures and standards.

The MOS should cover –

  • professional standards and practice-related office procedures like management of trust and business money;
  • delegation;
  • supervision;
  • drafting;
  • client care;
  • billing;
  • file notes;
  • document retention;
  • filing; and
  • diary and engagement management.

If your practice has a regularly updated plan, which is effectively implemented, you should have greater peace of mind, your risk of claims should be substantially reduced and your client’s should be happier.

Ann Bertelsmann BA (FA) LLB (Wits) HED (Unisa) was the legal risk manager for the Attorneys Insurance Indemnity Fund in Centurion. Ms Bertelsmann has recently retired.

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