Risk management window dressing

July 1st, 2021
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The effective management of a legal practice is a holistic, multi-faceted exercise. A successful sustainable legal practice requires the constant application of a significant effort across all areas of the enterprise. If any area of the practice does not receive the required attention and effort, that area will soon turn out to be the proverbial weak link in the firm and vulnerabilities will be exposed. The consequences can be severe for the firm, from a financial and regulatory perspective. If the risk materialises, the firm can be exposed to claims or even regulatory action in some circumstances. A tick box approach is not sufficient for effective risk management. Unfortunately, however, there are some legal practitioners who have developed the ability to not only ‘talk a good risk management story’, but to also put it in writing knowing very well that it is not an accurate description of the measures in place in their respective practices.

The documents submitted by legal practitioners when notifying professional indemnity (PI) insurance claims to the Legal Practitioners’ Indemnity Insurance Fund NPC (LPIIF) should include a completed claim form and a background report. The risk management self-assessment questionnaire may either have been completed as part of the application for a Fidelity Fund Certificate (FFC), or as part of the claim notification process. The claim form and the self-assessment questionnaire pose several pointed questions aimed at generally focusing the mind of the legal practitioner (and all other stakeholders in the firm) on risk management issues and the circumstances or events in the practice that may lead to the PI claim materialising. The purpose thereof is to assist the legal practice in identifying the areas of vulnerability and, in response thereto, developing the necessary enhancements to mitigate the risk of further claims.

Many legal practices provide an honest assessment of where they perceive the vulnerabilities to be and the changes they need to make in order to avoid future claims. Surprisingly, the detail provided by some practices on the risk management measures they have in place would, effectively, almost eliminate the circumstances that led to the claim. These firms make statements that they assume the insurer wants to hear, rather than report on the factual circumstances as they exist. This form of window dressing is unfortunate and unhelpful. In some instances, the practices labour under the mistaken belief that their claims will be rejected if they provide an accurate report of the absence of the risk management measures. The opposite may be true as the provision if false or inaccurate information to the insurer could compromise the firm’s right to indemnification, whether by the LPIIF or a commercial insurer. The insurance relationship is based on the doctrine of utmost good faith (uberrima fides) and the intentional provision of incorrect information will compromise the right to indemnity.

Taking a prescription related claim for example, the practices concerned provide detail of the various internal systems, multiple diaries, the extensive levels of supervision, file audits and a number of other measures that are in place as early alert systems of the looming prescription dates. Others go as far as to describe how the measures suggested by the LPIIF to mitigate the prescription risk are implemented within the practice. On the face of it, these practices would set the benchmark for risk management. In other words, the firm self-diagnoses itself with a perfect bill of health. How, then, have all the measures supposedly implemented in the firm failed is the vexed question that then arises.

Copying and pasting risk management measurers from any source without properly applying the suggested measures and regularly assessing the effectiveness thereof is an unhelpful approach. Risk management cannot be a mere tick box exercise.

In assessing the claim, a question may arise how then, given the firm’s perfect risk self-diagnosis, a breach has occurred resulting in a claim? This is elucidated in the examination of the claim. Insurers conduct an in-depth assessment of all circumstances when they investigate claims. The examination of the practice’s office file (if available) and the consultations with the affected parties in preparation of the defence to the claim often expose a very different reality to the perfect risk management picture painted in the notification or other documents. The confidence of the practitioner in their ‘risk management story’ may also wane as the matter progresses and more information on the underlying circumstances that resulted in the claim is uncovered. The reality of having to testify in an open court and the prospect of the narrative not withstanding cross-examination also play a part.

One may then ask why the legal practitioner concerned would initially have given inaccurate information regarding the risk management measures they have in place in the practice. In some instances, the legal practitioner may persist in their inaccurate view until very late in the assessment process, despite objective evidence to the contrary. The moment that the claim is notified may be ceased on by some practitioners to set out inaccurate information that they assume the LPIIF, as insurer, wants to hear – they feel a need to paper over the proverbial risk management cracks in order to cover up the real internal breaches that resulted in the claim. The opposite is, in fact, true. The LPIIF seeks an accurate report on the circumstances as they existed in the firm when the circumstances leading to the claim arose. This enables the insurer to assist the firm (and other practices) in developing appropriate risk mitigation measures after considering the underlying circumstances that resulted in the claim and also in properly assessing the claim.

It is amazing that the legal practitioners concerned go through the effort of considering the type of claim they are faced with and then document all the suggested measures to mitigate the materialisation of the underlying risk, when the actual implementation thereof would have been more effective in preventing a claim in the first place. Some practitioners go so far to note that they will enhance the non-existent measures in place. Do not be left living in a proverbial fool’s paradise by pretending that the risk management measures, if any, in your practice are adequate and effective when they are not.

Fortunately for some of the firms concerned, the person who dealt with the claim has left the practice by the time the claim is notified. While the departure of the defaulting party is good news for the firm concerned as it limits the likelihood of further potential breaches (or the truth being uncovered), this can be a challenge for the insurer as that person is not available to assist with the defence of the claim and in assessing whether there has been any breach of the mandate or duty of care on the part of the practice. At the end of the day, the practice is at a disadvantage as the claim will need to be paid (if indemnified), eroding the available limit of indemnity and exposing the firm to the payment of the applicable deductible. The overall risk profile of the firm will also be negatively affected in the assessment of the commercial insurers.

Recommendation

The receipt of a claim where allegations of breach of mandate or duty of care on the part of the practice is an unfortunate event. It is understandable that the claim will be a source of considerable stress for the various stakeholders in the firm. However, it also presents an opportunity for the firm to do an honest introspection and assessment of the risk management measures it has in place and to consider enhancements where necessary. The LPIIF, as the insurer, will not stand in judgment of the firm but rather assist it in improving the risk management measures in place. It is in the interests of the insurer that claims against the insured practices are reduced. Proactive and effective risk management is one of the best ways of achieving the required reduction. This can, however, not be effectively achieved if some legal practices still choose to window dress the underlying problems, rather than address the problems pragmatically.

Thomas Harban BA LLB (Wits) is the General Manager of the Legal Practitioners’ Indemnity Insurance Fund NPC in Centurion.

This article was first published in De Rebus in 2021 (July) DR 4.

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