The relationship between risk management and firms' professional indemnity insurance premiums, as renewal date approaches

At this time of year, do you tend to find that interest in risk management increases?

A. The run-up to renewal and the advance notification in August of firms’ claims-related discount/loading position does prompt firms to consider what strategies they can adopt to reduce their overall premium spend. With the potential for a premium loading of up to 275% (for adverse claims records) and a premium discount of up to 18% (for claims-free records), the most effective way of reducing Master Policy premiums is to aim to achieve, and then maintain, a claims-free record through effective risk management.

What does that mean in practical terms?

A. Any type of claim can lead to serious financial consequences for a firm, including increased premiums and payment of the self-insured amount. Additionally, firms can incur indirect costs such as payments to clients without recourse to insurers, write-offs, lost productivity and reputation damage. In order to reduce this exposure, firms need to have a strategy to ensure that:

  • risk management systems are in place;
  • those systems address the underlying causes of claims;
  • the systems are well understood and observed by all staff;
  • all staff are risk aware.

The last point is the most important of all. We firmly believe that training and awareness are key factors in the effectiveness of a firm’s risk management strategy.

What sort of training?

A. It’s tempting to say that any training is better than no training at all. However, our preference is for some form of interactive training – a workshop or other group discussion – which encourages active participation.

What assistance can you offer with training?

A. We can supply materials for use in firms’ in-house training or we can take a more active role as presenter of a seminar or facilitator of a workshop or other group discussion. Training materials are available to download from our Solicitors website or direct from a member of the Marsh team. Currently, materials are available for workshops including Litigation Risks; Commercial Property Risks; Conveyancing Risks; Trust & Executry Risks, and others are being added all the time. There are also materials for support staff as well as training materials based on the 2005 Risk Management Roadshow to enable firms to run a version of the Roadshow in-house.

Training materials can be devised for most areas of practice or to address particular areas of risk; for example, training on engagement issues is of particular interest to some firms against the background of the Client Communication Practice Rules 2005.

You mention risk management “systems”. What does that involve?

A. Our experience suggests that many claims and complaints arise (in whole or in part) as a result of failures in:

  • scoping the work with the client;
  • keeping the client informed of the progress of the work;
  • keeping accurate records;
  • managing the relationship with the client;
  • supervising work,

all of which have their origins in errors and omissions as a result of an absence of procedures, inadequate procedures or failure to follow defined procedures. Systems and procedures which address these aspects of handling client work, coupled with training to raise awareness of risk, will be effective in reducing claims and complaints.

How long does it take to put a risk management programme in place?

A. The truth is risk management is never finished. It involves a continuing commitment to training and awareness as well as reviewing the effectiveness of systems and procedures, and learning from claims and complaints.

Firms’ approaches to risk management differ, but there tends to be an evolutionary process starting with limited awareness of risk or limited ability to demonstrate how risks are managed. By stages, firms committed to risk management tend to develop a strategy, introduce training programmes for staff (including attendance at risk management-related events, with follow-up training in-house) and enhance their procedures from engagement through to file closure.

With those in place, firms then tend to work on “soft skills” training, assessment of training needs and the risk management “culture” within the firm, as well as risk improvement planning processes including more sophisticated risk assessment of work and clients, and in-depth analysis of the root causes of complaints and claims.

It makes sense to adopt a methodical, planned approach to risk management with incremental changes rather than trying to achieve everything in a single step. Even small improvements can have a beneficial effect.

What aspects of risk management do firms find most difficult?

A. Supervision is a critical aspect of effective management of risk but it isn’t always as easy to put into practice as it is to talk about it. As an example, most of us find it relatively straightforward checking a colleague’s work when dealing with conventional correspondence (in and out of the office), but it is more of a challenge when the correspondence takes the form of emails to and from that colleague.

Another critical aspect that tends to be more difficult to put into practice is a workable process of independent file review. The challenges include the purely practical considerations of the time commitment of those involved in reviewing a worthwhile number of files.

What aspect of risk management are you most often asked about?

A. Over the last few months, we have had many enquiries about risk management training and a number of requests for comments on firms’ risk management systems and procedures, for example on file reviews. There are reference materials addressing these topics on the Marsh Solicitors website.

What are the implications for a firm which has a very high value claim?

A. As far as the Master Policy is concerned, there is the potential for a substantial premium loading (up to 275% in certain circumstances) and possibly a doubled self-insured amount (excess) if the claim falls within one of the identified risk management categories (breach of the Conflict of Interest Practice Rules; repeated time bar claims; non-standard undertakings; conveyancing work undertaken for an “unreasonably low” fee).

Where top-up is concerned, insurers are likely to require a satisfactory risk management submission from any practice with a high value claim on its record. As part of the risk assessment and underwriting process, insurers will want to be satisfied that the firm has demonstrated that any weaknesses in its risk management have been addressed by training and awareness combined with enhancements to systems and procedures.

In commentaries at risk management events and in Journal articles, there is continuing reference to time bar claims. Is there an approach which could be effective in reducing this type of claim?

A. Analysis of time bar claims reveals the importance of (i) countdown alerts being generated by the diary system (e.g. three months before, one month before etc) for critical dates that the firm itself is required to act upon; (ii) having escalation procedures built in to address non-compliance with diary prompts; (iii) ensuring that the client is fully aware of the critical dates and understands what is required of them and the consequences of their non-compliance. It may be appropriate to have triennium, quinquennium etc dates verified by another fee earner before diarising.

Risk management is clearly a big topic. Where can solicitors get guidance on how to address the critical risks in their practices?

A. A review of previous issues of this column would provide guidance on a wide range of risk and risk management issues. The search capability within Journal Online makes this easier. Since the beginning of the year, the risk management issues addressed in this column have included IT security risks and practical risk controls; training programmes; risk management benchmarking; property/conveyancing issues; terms of engagement issues including scoping engagements and limitation of liability; cover and risk issues for solicitors acting as company director/secretary; and conducting a risk management review/audit of your own practice.

If a solicitor is planning to set up a new practice, what should he or she be doing in relation to PII cover and risk management?

A. In relation to PII, you should contact the Master Policy team at Marsh (Kirsty Galloway 0131 311 4100; kirsty.galloway@marsh.com) for a Master Policy pack. In relation to risk management, you will receive a set of guidance notes aimed at assisting newly established practices put in place policies, systems and procedures for the effective management of risk from the outset.

By providing a self-assessment questionnaire and risk management guidance notes, newly established practices are being assisted, and encouraged, to have effective risk management practices and procedures in place from day one.

MASTER POLICY RENEWAL – EARLY WARNING

Cover under the Master Policy falls due for renewal as at 1 November. It is anticipated that renewal papers will be issued on 23 September, slightly earlier than 2004 (to take account of the timing of October school holidays).

Those who have responsibility for renewal of their practice’s cover, might plan ahead by considering the following points:

  • Make a diary note in case the renewal papers don’t arrive by, say, 28 September.
  • Consider whether the holiday absence of a colleague, or colleagues, during the early part of October could hold up any part of the process and call for forward planning.
  • Claims and circumstance matters to be reported – start making enquiries of colleagues towards the end of September, particularly if colleagues are going to be on holiday when the proposal form is ready to be submitted. However, note that the proposal form declaration must not be completed/signed more than 30 days prior to 1 November.
  • Although certain changes have been made to the layout and wording of the Master Policy proposal form, the information required to complete the proposal form is more or less unchanged from last renewal.
  • As before, information is requested regarding breakdown of fee income according to areas of work. The categories are unchanged from 2004-05.

It might be worthwhile looking now at a copy of last year’s proposal form and starting to collate the information for this year’s form.

Contact the Master Policy team at Marsh if you would find it helpful to discuss how best to prepare for the renewal process or if there have been any recent changes in the practice or in your contact details.

Master Policy team contact names and direct dial numbers:

Alistair Sim: 0131 311 4283

Jennifer Scollick: 0131 311 4278

Russell Lang: 0131 311 4259

Kirsty Galloway: 0131 311 4100

Cynthia Trotter: 0131 311 4258

The Marsh Solicitors website can be accessed at www.marsh.co.uk/lawsociety. Each firm’s risk management contact has been issued with a user name. If you have any difficulty accessing the site, please contact the Master Policy team at Marsh.

Alistair Sim is a Director in the FinPro (Financial and Professional Risks) Practice at Marsh, the world’s leading risk and insurance services firm. To contact Alistair, email: alistair.j.sim@marsh.com.

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.

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