Serious claims against a law firm may have a devastating effect, going far beyond the actual dollars involved. The impact includes large amounts of time lost, deteriorating relationships between and among partners, and, in many cases, repercussions within the firms' client community.
The impact on the fabric of the Partnership itself is a case in point.
It is not at all unusual for the Partner most involved with the matter which led to the claim to leave the firm entirely. In our Risk Reviews we have found that in almost 65% of those matters involving serious claims, the Partner most involved with the case which led to the claim had actually left the firm within 18 months of the issue having arisen. Clearly, the impact goes far beyond the financial side.
Our observations of law firms which have suffered serious losses indicates that the impact of these losses have to be carefully considered in ways separate and distinct from dollar damages. Not at all unlike a patient who has experienced a serious trauma, law firms tend to want to immediately forget about their professional liability problems. It's very much a case of "denial" in the classic sense. The firm wants to pretend that the matter never arose even though the repercussions are still very much in evidence. You could make the argument that the partner involved in the matter, as a continuing reminder of these difficulties, is almost "cast out" from the Partnership. In this way, the firm enables itself to believe that the de- parting Partner was actually the concern; not the real problem which is the way that the firm handles its business on a continuing basis.
The only way that a firm, once it's experienced a serious claim, can avoid costly mistakes in the future is by analyzing and coming to grips with what has happened in the past.
That's why an objective review performed by a third party can be so helpful. It allows the law firm to focus on the details of the occurrence and hopefully learn from it. This kind of review assists the firm in not only dealing realistically with its problems but, even more importantly, developing and implementing a strategy to see to it that the problems do not recur.
There are some Practice Standards or "Rules of the Road" to use in order to measure the ability of a law firm to manage itself effectively.
These are standards which we have developed to create measurable objectives. It allows us to review a firm and report on the ability of the firm to handle its affairs in a professional and risk adverse manner. In part they include:
The Agreement should have provisions setting out duties and responsibilities of the Partners. It should set out a basic compensation scheme which provides for compensation to those Partners who are responsible for not just the billable hours but also for doing other things important to the overall health of the firm; things like training associates and supervising staff. These may not make money in and of themselves but they help provide a setting in which money can be made. In the long run, particularly in a Risk Avoidance context, they are just as important as billing.
It is just this simple: law firms which have a clearly defined structure with duties and responsibilities set out, do not have the claims problems of firms which do not have such a structure.
Firms that have an effective Management Structure are less likely to have claims, not because they have better lawyers, but because they have created policies which are well considered and then carried through.
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 in their present form.
The notion that a firm can be all things to all people does not work well for most law firms. It is the reason that so many small and medium sized firms have experienced so many claims.
Law firms must set standards for their case work just as they do for their finances and for their compensation. They must also determine the way in which the firm accepts new matters: how they're approved and who must sign off on them. Case Standards and Procedures need to be in place before the case arrives in order to be effectual. Those standards must be determined by the Partnership. Individuals who will not accede to those standards must be controlled.
Law firms must address the ethical issues of their practice in their Partnership or Shareholders agreement. Beyond that, systems must be developed (Mechanics of the Practice), which will isolate potential conflicts and make them known to the Partnership, not to just the individual attorney. More than one opinion should always be brought to bear in a potential conflict situation.