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Navigating the Challenges Facing Attorneys and Law Firms in 2013 Can ERM Provide Some Answers?

E I L E E N G A R C Z Y N S K I , E S Q .

D A V I D I . G R E E N B E R G , E S Q .

July 20, 2013

What is Risk?

“Risk is the uncertainty caused by the occurrence of an event that might affect the achievement of

objectives.”

“Risk comes from not knowing what you're doing” ― Warren Buffett

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U.S. Law Firm Risk Environment

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U.S. Law Firm Risk Environment

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U.S. Law Firm Risk Environment 5

Frequency of Malpractice Claims is Steadily Increasing

The frequency of legal malpractice claims has risen sharply. Seventy-one percent of all insurers polled saw a claim frequency rise in 2012. Law firms can typically expect a surge in malpractice suits as their own clients see a dip in revenue, experience a loss in earnings, and tighten their belts to make their companies more profitable. When these same clients experience a decrease in earnings, they are more likely to sue their legal counsel as a way of recovering losses. The economic downturn of 2007-2009 was no different. Because malpractice claims tend to have a four, five, or even six year development pattern, however, many of these legal malpractice claims have only recently settled and/or are still working their way toward resolution.

Severity of Malpractice Claims Has Increased Dramatically

Six of the seven insurers in the survey have seen an increase in the number of claims with a reserve (including loss and expenses) of more than $500,000 in the past year. On a percentage basis, three of the six insurers reporting an increase in the number of large claims indicated the number of these substantial losses was up to 10 percent more than in the prior year, and one each responded that the number was 11 – 20 percent higher than the previous year, 21 – 50 percent higher, and more than 50 percent higher.

Large Claim Payouts Have Increased

The share of claims resulting in multi-million dollar payouts has grown exponentially. Four of the seven insurers indicated their company had paid or had participated in paying a claim of $100 million or greater and another had a payment between $50 million - $100 million.

Largest Number of Claims Come from Four Main Practice Areas

Real Estate Corporate & Securities Estate, Trust & Probate Business Transactions

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From what areas of practice are you seeing the most claims? (Please choose no more than 3)

A&G Survey Shows Conflict of Interest Most Common Error

Five of the seven insurers cited conflict of interest as either the first or second most frequent cause of malpractice claims.

What type of malpractice do you see the most? Second Most?

Most Malpractice Claims (Choose 1)

Second Most Malpractice Claims (Choose 1)

Conflict of interest 4 1

Failure to file timely 1 0

Inadequate discovery or discovery sanctions 0 1

Failure to calendar/Follow-up 0 1

Clerical error 0 1

Choice of Law 0 0

Procedural Error 1 1

Other 1 1

What is ERM?

Enterprise Risk Management (ERM) provides a framework for risk management, which typically involves:

(1) Identifying particular events or circumstances relevant to the

firm’s objectives (risks and opportunities);

(2) Assessing them in terms of likelihood and magnitude of impact;

(3) Determining a response strategy; and

(4) Monitoring progress.

By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their shareholders, employees, and clients.

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ERM Cycle 12

(1) Identifying Law Firm Risks 13

Top Five Risks Identified as Facing Law Firms

(Order of Severity)

Bankruptcy or acquisition of significant clients

IT security

Pressure on fees

Conflicts of Interest

Errors made by staff/lawyers on complex, high-value transactions.

- Insurance Journal 2009

(1) Identifying Law Firm Risks 14

Identifying Risks Can Be Done In a Variety of Ways

Risk Workshop Pros: Good way for participants to share views and create enriched discussions.

Popular due to efficient use of time and sharing opportunities.

Cons: High level of facilitation skills required. Voting required. Limited by geography.

Structured Interview Pros: Creates conversations; face-to-face contact promotes ERM culture

Cons: Limited by geography. High level of interview skills required. No opp. For dialogue among fellow colleagues.

Formal Survey Pros: Can cover a larger number of participants; well documented.

Cons: Quality of responses can be an issue. No conversations – opp. for sharing lost. Prep time.

(1) Identifying Law Firm Risks

Risk Types Example Risks Key Roles

Practice Management Professional Responsibilities (including malpractice, conflicts, litigation

support); Professional Development Risks; Managing the Engagement

(Engagement/Disengagement/Non-Engagement/Scope of

Engagement); Client Relations; Bad Clients; Lateral Issues, Rogue

Lawyers; etc.

Practice Leaders, Management

Committee, General Counsel or Legal

Officer; Directors of Conflicts,

Litigation Support, Library, Knowledge

Manager, Records Manager

Financial Transparency and Disclosure; Internal Controls; Anti-Money

Laundering; Credits; Firm Investments; Portfolio Risks; Audits;

Bankruptcy or acquisition of significant clients; Pressure on Fees, etc.

CFO, Practice Leaders

Strategic Reputational, Marketing, Markets, etc. Managing Partner, General Counsel

Firm Governance Firm processes; customs, policies, committees, management structure,

etc.

Management Committee, Managing

Partner, General Counsel

IT/Cyber Confidentiality, Data Security & Ethical Walls, Data Recovery, Issues

with Third Party Suppliers and Outsourcing.

CIO, Technology Manager, General

Counsel

Operational Employment (Talent – Lateral and New Hires), Fraud, Damage to

Assets, etc.

HR, COO, General Counsel,

Management Committee

Environmental Natural Disasters, Epidemics, etc. COO

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Conflicts

All attorneys have an affirmative duty to identify and address conflicts of interest. This responsibility exists in every phase of client representation, beginning with an initial meeting with a client and lasting beyond conclusion of the representation. This issue is best addressed on the front end by carefully screening new clients, seeking advance waivers (where appropriate) and clarifying who the client is for any given matter.

I. High Costs of Violating Conflict Rules

Bar disciplinary complaint Withdrawal from both representations Disqualification from representation Disgorgement of compensation Malpractice Liability

II. Identifying Conflicts Can Be Challenging Corporate family Trade association Individual interests Lobbying Merger or practice group acquisition Lateral hiring—attorneys and staff Late-identified conflicts

At Engagement At Non-Engagement Define the Scope of the agreement + Picking the right client; rejecting the wrong one

Who is the client? + The non-retention letter

Keeping the firm informed + Keeping the firm informed

Who speaks for the client?

What services will you provide

and which services will you not provide

LPL Premium credit for Engagement

& Disengagement Letters

At Disengagement – Firing Your Client Before and after completion of services

Disposition of client files

Production of client’s electronic data

The Engagement, Disengagement & Non-Engagement Agreement

(2) Assess Likelihood Using Key Risk Indicators

Financial Risk

KRI # 1: > % loss in firm revenue

KRI # 2: Open Line of Credit

KRI # 3: Compensation Commitments

KRI # 4: __% of clients = __% revenue

KRI # 5: # Account Receivables > 90 days

KRI # 6: Unfunded Pensions

KRI#7: Insufficient Insurance Limits

Practice Management

KRI # 1: 2 + Open Malpractice Claims

KRI # 2: Non-use of Engagement &

Disengagement Letters

KRI # 3: Outdated Conflict System

KRI # 4: Outdated Client Intake

Procedures

KRI # 5: Zero Use of Ethical Walls

Cyber

KRI # 1: Outdated Software

KRI # 2: iPads; Thumb drives; etc.

KRI # 3: Inadequate Cyber Ins.

KRI # 4: Unsecured Conferencing

System

KRI# 5: Zero use of Ethical Walls

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(3) Determining A Response Strategy

Role & Composition of Executive Leadership in Oversight and Implementation Provide a Holistic top-down view of risks faced by the firm

Reinforcement of transparent, firm-wide view of risk management

Encourage firm culture (‘tone @ the top’) of ERM awareness in everyday decision making

Dedicated Oversight/Audit Committee Diverse Group

Trained on firm’s fundamental operations

Relevant Industry Expertise

Report on strategies, procedures, implementation and success of ERM process both across the organization and upward to the leadership.

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(3) Future: Risk Register/ERM

# The Risk:

What can

Happen and

How Can it

Happen

The

Consequences

of an Event

Happening

Adequacy of

Existing Controls

Consequence

Rating

Likelihood

Rating

Level of

Risk

Risk

Priority

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Evidenced By

Solid Firm Governance/Culture

Financial Strength

Collegial Environment

Selective Lateral Hiring

Low Partner Turnover

Well written/executed Partnership and Management Agreement/Plan

Small or no Line of Credit

Varied client base

Frequent and timely billing

No unfunded pensions

No compensation commitments

Monitoring Progress 21

Evidenced By

Practice Management

Operational

Strong Client Intake System

Conflict Avoidance Procedures/Walls

No Outside Interests

No Suits for Fees

Engagement/Disengagement/Non-Engagement Letters

No Malpractice Claims

CLE Requirements met

Strong institutionalized long-term clients preferred

Lateral Hire/Talent Management Review

Clean File Audits

Monitoring Progress 22

Benefits of ERM

Loss Prevention

Cost Savings

Insurance Premium Savings

Departmental Efficiencies

Competitive Edge Growth in Lateral Talent

Retention of Clients

Quality of Client Relationships

Alternative Fee Arrangements

Quality of Working Environment

Reputation

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Questions? 24

Q. A. Eileen Garczynski, Esq. Vice President Ames & Gough egarczynski@amesgough.com

David I. Greenberg, Esq. David I Greenberg, PLC david@davidgreenberglaw.com