Protexure Lawyers Blog

How Law Firm Management Affects the Cost of Malpractice Insurance

Written by Terry O'Dekirk | May 5, 2020 2:00:00 PM

 

While you may not realize it, your law firm is actually a business. 

When you opened your legal practice, you jumped through many difficult hurdles – you earned a doctoral-level education, passed the notoriously difficult law exam, and committed to multiple ethical and legal requirements – but learning how to run a business was not part of the process. 

After all, a Juris Doctor (J.D.) degree is not the same as a Master of Business Administration (MBA). Law school teaches you to think like a lawyer, not how to start and run a business.

But when it comes to underwriting your law practice, the underwriters must consider your law firm’s insurability and the risk of loss posed by it, just as they would for a business. 

At Protexure, our in-house underwriting team takes a look at  how the firm is managed and considers your operational and management pressures when determining premiums. 

Below we explain how law firm management and makeup affects the price of professional liability insurance. Our goal is to help you get a better understanding of how your premium is determined and what you can do to potentially lower your costs.  

 

Managing Risk with Business Administration

 

Not only do underwriters consider the nature of the legal services you provide, but they also think about losses that can occur, not only from liability claims, but also losses that can arise from a practice’s operational, clerical and support expenses. Losses can come from:

  • Docketing mistakes and misfiling errors
  • Missing statutes of limitation and other filing deadlines
  • Drafting errors
  • Miscommunication
  • Wrongful payments and distribution

Lawyers typically have little – if any – training or experience in business administration, so these are the areas where underwriters often see losses. 

Because losses are common in these areas, malpractice insurance providers often incentivise good practice management and risk management strategies with a reduction in premium.

When insuring a law firm, the underwriters must consider not only the attorney’s professional competence and experience, but also the areas of practice the law firm deals with, the firm’s jurisdiction, and its loss history. 

Underwriters must evaluate all the operational aspects of the practice and their impact on the attorney’s professional responsibilities. These considerations differ depending on the size of the firm.

 

Firm Size Affects Degree of Risk

 

When insuring the firm, a sole practitioner with no support staff can present a greater degree of risk, depending on the nature and volume of the practice. In addition, areas such as litigation or administrative practices that involve considerable out-of-office time raise the issues of coverage and caseload management.

Large cases and a heavy volume of casework require more intensive activity and support services. Adding clerical or paralegal personnel to support large case volumes means also taking on training, communication, oversight and management – matters that distract an attorney from handling his or her cases and clients. 

All these issues present risk factors that underwriters must weigh when determining insurance premiums.

Adding attorneys or support staff to the firm also means your operations get more complex. With more staff, you’ll have to deal with new issues, including: hiring, client intake, conflict checks, decision-making authority, work distribution, quality control, schedule coordination, personnel interaction, filing oversight, personnel performance management, turnover, and billing and receivables management. 

When you have to juggle all these moving parts, you can’t do your real job: “lawyering.”

When you add more personnel, you’ll also need to double-check their activities, which leads to more distractions. If your circumstances change – enter into a merger, relocate, add more offices, change staff or practices, or install new technology systems – all these mean you have more to manage.

Sharing staff, resources and overhead with another firm raises issues about shared responsibilities. And sharing boosts the potential for unwanted exposure and unanticipated liability.

The larger a firm becomes, the more complicated these issues become. A successful one-person firm with just clerical support is one thing, but when an attorney has the same practice but takes on associates, needs additional clerical staff, and maybe even a paralegal or two, everything changes. When your firm grows, you’ll naturally need more trained office staff.

You have to ask yourself: At what point is growth cost-effective? Firms with somewhere between five and 10 attorneys have a completely different operational profile from a practice with one attorney working alone.

All these management issues take on added significance. This is when you have to think about hiring an experienced manager to make staff and business decisions to keep the office running smoothly. 

When you have a manager, someone usually must take on the role of managing partner, making things even more complicated. More complexity means more risk.

Is your caseload so large that you have to use paralegal or secretarial staff? If so, you must provide technical training, oversee their work, and perform quality controls, which can be problematic too.

Underwriters are especially concerned about real estate purchases and sales, collections, and other transaction-type practice areas. 

Is the nature of your case inventory compatible with the available attorneys’ experience? Do you have enough staff to handle your large caseload? Or does your practice have a “mill”-type atmosphere where you and your colleagues are churning out work at high volumes? How is the workflow managed, and how do you ensure the quality of your work?

 

Identifying The Cause of Claims and Losses

 

Many claims and losses result from operational, managerial, and clerical mistakes and inaccuracies. Missed filing dates, wrongful distributions, cybercrimes, etc., are good examples of what can go wrong when you’re working at too fast a pace and without enough quality checks and management in place.

Often, major professional errors are not the result of a lack of knowledge or mistakes in judgment. How a law firm operates is as important as what the law firm does. 

Professional liability insurers not only analyze claims, but look at what causes them and the very nature of the firm. Your price for coverage reflects that analysis.