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Reality check - not Big Brother

15 August 05

Some things even practices with a good claims record should look out for when reviewing their risk controls and whether these are being observed

by Alistair Sim


If your practice is consistently claims-free, that certainly reflects well on its approach to risk and risk management and tends to suggest that the practice’s risk controls are effective. But does that justify complacency? Could there be gaps in the practice’s risk controls? Is it possible that observance of the risk controls is not entirely consistent and that not all of these controls are being observed all of the time?

It is useful to have some means of assessing the firm’s risk controls and whether they are being complied with. But how do you do that? There are various approaches but in essence these are:

  • reviewing the controls that the practice operates to ensure that they are as comprehensive as they need to be with no major gaps;
  • conducting some form of audit to establish whether colleagues are observing the practice’s risk controls.

Reviewing risk controls

The objective of conducting a review of risk controls is to establish whether there is a system or procedure to address areas of exposure to potential errors or omissions (some of which are detailed below; for others, refer to previous risk management articles, for example “Omissions cause most claims”, May 2002).

There will inevitably be differing degrees of detail in practices’ systems and procedures. Some will have very prescriptive procedures covering what they hope is every conceivable area of risk. Others will adopt a lighter touch and a more selective approach to documented procedures.

Whatever approach is currently adopted, it would be beneficial in conducting a review of existing systems and procedures to establish that there are controls (preferably documented) aimed at addressing regularly recurring causes of claims. As highlighted at the Risk Management Roadshow 2005, these causes consistently feature in the claims experience. They include:

Lack of effective/consistent diary systems

There are still significant numbers of time bar claims being intimated and instances of repetition of missed time limits.

Lack of other risk controls to prevent critical dates being missed

The claims experience discloses that it is prudent to adopt a belt and braces approach to preventing critical dates being missed – file reviews, file audits and case review meetings may be effective risk controls in this area.

Lack of reliable file notes

Many claims turn on the issue of credibility of the client or solicitor. A lack of attendance notes or other corroboration of the solicitor’s version of events may mean that the claimant’s contrary version is preferred.

Lack of clarity in terms of engagement

Where terms of engagement are silent/unclear as regards scope of engagement (e.g. failure to make it clear that the solicitor will not be advising on tax issues in a property transaction), the risk of misunderstanding between solicitor and client is increased.

Lack of clarity about non-engagement

Claims arise in situations where non-clients (e.g. guarantors) allege that a solicitor has failed to protect their interests.  Solicitors could perhaps minimise these risks by issuing “non-engagement letters” making it clear that the solicitor is not acting for the non-client and that the non-client should take independent advice.

Failure to attend to outstanding aspects of transactions

Claims have arisen because of failure to follow up implementation of outstanding undertakings, deal with funds consigned on joint deposit etc. Arguably this occurs because of failure in the file closing process – a checklist (or a file audit) might prompt appropriate action.

Failure to reconcile plans/ descriptions/title deeds

The majority of conveyancing claims arise out of problems concerning discrepancies in title areas/ boundaries/conditions. Could these risks be minimised by the use of checklists, site visits or by having plans/descriptions verified by clients?

Failure to ask for/verify critical information

Various types of claim arise as a consequence of failing to ask for/verify critical information, e.g. date of accident, destination in title, identity of defender, unauthorised property alterations, spouse’s pension rights, correct address (including fax number) for sensitive/ critical communications – checklists/ questionnaires may assist a solicitor.

Conducting an audit

Having established that there are appropriate controls in place, it makes sense to perform checks to establish that the controls are being observed and work in practice.

That process may highlight inconsistencies between fee earners, areas of practice, department, offices etc and may identify the need for training or for refinement of existing controls, all with a view to improving compliance.

In practice, an audit will require to review a series of points, many of which will have applicability across the whole firm. Depending on how detailed the firm wishes to make the process, the questions can deal with general risk controls right down to practice-specific issues.

In addition, it should highlight any systems which do not work at a practical level, whether further training is required for individuals, and increase standardisation of procedures and approach (minimising the risk of inconsistent practices causing a claim). It will also provide a benchmark against which to assess progress with development of the practice’s overall management of risk.

Sample checklist points

The following gives an idea of what you might consider including in an audit or review:

  • On first contact with a client, is consideration given to whether there is sufficient time available to complete the work within the client’s timescale?

Why? Client dissatisfaction can arise from a failure to meet expectations. Minimising this risk at the outset is desirable (see, for example, “When clients ask and expect too much” Journal, August 2000).

  • If terms of engagement are not issued at the outset of each new matter, are the reasons why not documented? (e.g. because the firm acts under a master agreement /protocol for that client or due to other specific circumstances).

Why? Under the new Client Communication Rules (see box), letters of engagement are mandatory. Letters of engagement are vital in managing risk. If they are not issued, the reasons why not should be obvious from the file.

  • Is there a system in place governing the handover of files between partners/other fee earners/departments?

Why? If files are handed over without sufficient instruction (e.g. as to time-critical issues), there is a risk that the file can be forgotten about or client not kept properly advised.

  • Is there a file closure procedure to be followed which ensures that outstanding matters are attended to, that there are no outstanding balances and that the client has been advised of matters such as post-completion critical dates?

Why? Loose ends can cause claims and it can be easy to collect the final fee and fail to consider, for instance, whether the client expects the firm to issue a reminder in a year’s time relating to the exercise of an option (see, for example, “Loose ends can lead to claims”, Journal, September 2001).

  • Is there a system directing how incoming faxes will be dealt with in the absence of the addressee?

Why? In the event of a time-critical communication not being seen and actioned, a claim may result.

  • Is there a procedure requiring critical dates to be verified by a colleague prior to being entered into diary systems and on files?

Why? A double check on dates may help prevent omissions. Some firms may rely on support staff to double check, others may have a case management system to help.

  • Is there a requirement for all fee earners regularly to conduct a physical review of their files?

Why? Regular physical review helps avoid omissions – it provides a visual trigger for action that review of an inactivity report may not.

  • Is there a system in place for the monitoring of email inboxes of absent colleagues?

Why? Time-critical correspondence could be lying unactioned. Unless practices are diligent about management of email, there is a real risk of critical dates being missed.

A risk management audit need not be a formalised, extensive, bureaucratic exercise with overtones of Big Brother. The reality is that audit provides a valuable tool for firms to assess whether they are taking steps to minimise the chances of a successful claim being made against them. The important result for the firm is to establish whether there are risk controls in place to cover common causes of claims and where there are controls, whether these are being operated correctly.

Letters of engagement – the new rules

As from 1 August, all firms should have been complying with the Solicitors (Scotland) (Client Communication) Practice Rules 2005. These Rules require solicitors to provide certain information in writing to clients (rule 3). The information must be provided when tendering for business or at the earliest practicable opportunity upon receiving instructions, and include:

  • details of the work to be carried out;
  • an estimate of the total fee to be charged (including VAT and outlays) or the basis on which a fee will be charged for the work (including VAT and outlays), unless the client is in receipt of legal aid or advice and assistance;
  • where the client is in receipt of advice and assistance/legal aid, details of the contribution required (and an indication of factors which might affect the contribution) and, if relevant, details of the effects of preservation or recovery of any property;
  • the identity of the individual(s) who will principally be undertaking the client’s work;
  • details of whom the client should contact if they are concerned about how the work is being carried out.

These Rules set out the minimum requirements for information to be provided to clients, and firms may well wish to give additional information based on their understanding of the risk management benefits of letters of engagement (see, for example, “Get engaged”, Journal, June 2005).

There are three exceptions to the necessity to provide rule 3 information – clients giving regular instructions (although the information must be provided at least on the first occasion); where there is no practical opportunity to give the information prior to conclusion of the work; children under 12 (rule 4).

Solicitors should make themselves familiar with the Rules and take steps to ensure compliance.

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. Marsh Ltd is authorised and regulated by the Financial Services Authority.