Some insurance and risk management tips for any solicitor thinking of starting a new practice

As the appointed broker for the Master Policy for solicitors in Scotland, one question that comes up regularly is: “I’m thinking of starting a new legal practice. What advice would you give?”

This is, of course, a very broad question. It’s also a very important one. Starting a new law firm is a big decision and the process requires a great deal of thought and careful examination.

There are some fundamental questions. Why do you want to start a new firm? How are you going to approach business planning and financial management? How do you plan to attract and retain clients? On a practical level, solicitors need to consider their office requirements, practice structure, financial management systems, staffing arrangements and more.

Any solicitor thinking about setting up a new firm should try to view the project objectively, thinking carefully about the advantages and disadvantages, just as they would for any piece of legal work.

Where to start?

The best place to start is the Law Society of Scotland’s Starting a Practice Guide. This will prove indispensable to solicitors during the startup and initial operational phases of a new firm. It has some very useful information and practical tips on how to start a legal practice in Scotland.

It covers eligibility, business planning, finance and cash flow, and legal aid, as well as the practice options available and the forms required for registering a new firm.

As well as the guide itself, there are other materials that can help – the Society’s online Business Support pages cover a range of issues, with links and signposting to other useful resources. There are also databases such as Lexology and LexisNexis that have some great marketing tips for firms. The Scottish Government website has information on general business planning and starting a new business, and you should contact the Scottish Legal Aid Board if you’re planning to do any legal aid work.

We also suggest that you obtain advice from those who have recently set up in practice, in order to gain an insight into the pitfalls and challenges they encountered.

Insurance and client protection

As you begin to consider what insurance cover you might need, we would always recommend you obtain advice from a good quality insurance broker to help guide you.

At Lockton we’ll be able to advise you on a range of insurance, but in respect of client protection you must carry professional indemnity insurance (PI) and this can only be arranged via ourselves, as the appointed brokers.

Professional indemnity insurance

Unlike in England & Wales, a firm does not need to purchase an individual PI policy, as all legal practices in Scotland are covered by a single PI policy, the Master Policy. This provides PI insurance cover for all law firms regulated by the Law Society of Scotland. Before your firm starts trading, you’ll need to arrange for Master Policy cover and the first step is to contact Lockton to obtain the relevant forms (0131 345 5599).

How will your premium be calculated?

Every Scottish law firm’s PI premium is based on five factors: (1) the fee income; (2) the number of principals (partners); (3) the type of work carried out by the firm; (4) any claims over the last five year period; and (5) the self-insured amount chosen by the firm (there are three different options).

As a new practice, the fee income will be your anticipated fees for the practice year ahead. If you’re a “successor practice” (i.e. a firm that is taking on the past liabilities of a previous practice), you should declare the last full year’s fees of the previous practice.

The Master Policy insurance year runs from 1 November to 31 October. In your first year of trading, your premium will be calculated on a pro rata basis from the date you start to trade, subject to a minimum chargeable premium. If your first premium is smaller because it is not for the full practice year, you should remember to budget for the full amount for the next year.

Additional cover

As explained in the Society’s guide, as a new firm you’re likely to have a range of insurance needs.

The Master Policy provides cover on a “claims made” basis, and has a minimum limit of indemnity of £2 million (any one claim). Depending on the nature and value of your work, you might want to take additional PI top-up cover, over and above the £2 million.

Similarly, given the increasing risks around fraud and cybercrime, some firms complement their Master Policy cover with additional insurance products – fidelity, crime or cyber insurance.

Of course, you need to insure your building and people, and most firms opt for some form of office insurance package which would provide cover such as employer’s liability, public liability and cover for your buildings and contents. At Lockton we have developed an Office product specifically tailored to the needs of Scottish solicitors.

If you think you might require any of these additional insurances, or for more information, please contact your usual broker or simply get in touch with Lockton.

Don’t forget about risk management

No matter what your professional background, having a clear understanding of risks associated with starting and running the business is the best way to maximise your chances of success. You should approach risk management in three stages:

  1. Understand your firm.
  2. Understand the risks to your firm.
  3. Introduce risk controls to manage those risks.

Understand your firm

It might sound obvious, but in order to assess the risks to a firm, you need to have a very strong understanding of the firm itself. What sort of work do you intend to do? How many staff will you have? How will your firm be structured? What will your client base look like? What business environment will you be operating in?

If you’re in the process of setting up a new practice, you probably have a very good idea of what you want the profile of the firm to look like. In fact, if you’ve prepared an AML risk profile for the firm, some of your broader risk management analysis will have been carried out during this exercise.

It’s important to have a clear idea of:

  • who your clients are likely to be;
  • where your offices will be and where you intend to do business;
  • the types of work/transactions you intend to carry out;
  • how your firm, and governance and reporting arrangements, will be structured.

Understanding the risks

Before you consider risk controls, it’s important you first identify the risks to the firm (including those that might seem remote). In doing so, you’ll need to decide on how best to categorise each of the different types of risk. This will make it easier to assess each risk, when it comes to introducing controls.

There is no standardised way of categorising risks but, by way of example, a law firm might agree the following risk types:

  • strategic (e.g. lack of clients, competitors merging, Brexit impact);
  • financial (e.g. firm cash flow, profitability);
  • operational (e.g. staffing issues, supplier issues);
  • compliance (e.g. health and safety, GDPR, AML, professional rules);
  • professional (e.g. practice issues that might lead to complaints or claims).

Some risks may fall into more than one category.

You might wish to make use of a risk register where you log the potential risks you’ve identified. This enables the firm to take a portfolio view of the firm’s situation.

Risk controls – policies and procedures

The next step is to prepare a comprehensive suite of policies and procedures that reflect the risk assessment you’ve just carried out.

This is a vital part of starting a new practice. These documents should underpin the firm’s operations. They can also be used as training tools, laying out guidelines for staff and managers.

Also, if there is ever a claim or complaint against your firm, having a suite of well presented policies and procedures will demonstrate your commitment to good risk management and might make the claim or complaint easier to defend.

In terms of your “professional risk” you might want to consider preparing policies that outline:

  • the types of work the firm will and will not undertake;
  • how clients and transactions are to be vetted (in line with the firm’s AML policy);
  • which individuals within the firm have overall responsibility for each area of work;
  • how letters of engagement are to be prepared;
  • how checks on conflicts of interest are to be made, and steps to be followed where a conflict is identified;
  • details of the firm’s outsourced activities, including how these activities are monitored and reviewed;
  • AML and GDPR controls and systems in accordance with legislative and regulatory requirements.

Similarly, some of the procedures that might be considered are:

  • a system to ensure client instructions are properly received and managed;
  • an effective diary scheme (so key dates are not missed);
  • arrangements to ensure that all staff are actively supervised;
  • a system to ensure that files are checked regularly for inactivity, and also reviewed and audited regularly;
  • checklists for procedural stages of transactions;
  • a system that ensures “second pair of eyes” checks are made on important or complex documents;
  • a database to highlight potential problems that arise in client matters (see the Lockton Risk Tracker).

These are suggestions only and not definitive lists. You should make your own assessment on the risk management policies and procedures that are necessary for your new firm.

Lockton risk management support

The good news is that, as soon as your Master Policy cover is in place, your new firm automatically becomes a client of Lockton. This means you can use us for risk management support. Whether you’re in the early planning stages of starting a new firm or your firm has been trading for many years, we’ll always be delighted to speak to you about risk management issues.

The Author

Matthew Thomson is a client executive in the Master Policy team at Lockton. He worked as a solicitor in private practice before joining the Law Society of Scotland in 2011, and then Lockton in September 2018, dealing with all aspects of client service and risk management.

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