Bad practices

The number of negligence claims against lawyers is rising, putting a dent in firms' profits and sullying their reputations. Kathryn Hobbs reports on the importance of setting up safeguards

Making mistakes costs money, and a lot of money at that. It is significant, therefore, with claims against the profession on an almost exponential increase, that risk assessors still view firms as falling foul of simple preventative procedures. Claims are recession-led, and if evidential indications of an economic slowdown are proved correct, can firms really afford to be complacent when it comes to risk management?
“If you put all the professions together, who are the public going to be dealing with? The answer is medics and solicitors,” says John Verry of insurance company St Paul. Growing consumer consciousness means that people are not only more aware of their rights, they are also confident of taking action.
The days of a reverential attitude towards professionals are long gone. And in a society where litigation is advertised as readily as washing powder, those perceived as potential targets for claims are there to be mined.
The figures reinforce the argument. Judicial statistics for 2000 demonstrate the chasm between solicitors and other professions. Of the 278 new professional negligence claims in the Chancery Division, solicitors were defendants in 204 new cases. Cases against accountants numbered a paltry 15.
Verry chooses to put the figures in a historical perspective. “The disparity between solicitors and accountants in particular could be explained by the fact that accountants were going through the same problems about 10 years ago, and they've learned from their mistakes,” he says.
These lapses, such as inadequate client vetting procedures and a lack of clear instructions, are common to both solicitors and accountants. Claims against solicitors do not generally follow from errors in knowledge of the law but from service delivery problems.
Verry notes common themes that repeatedly appear as the root causes of mistakes. These usual suspects include time limits, delays, communication, supervision, delegation, undertakings, organisation and lack of knowledge. He estimates that in the vast majority of negligence cases, claims handlers will attribute mistakes to one or more of these problems.
However, none of these problems are insurmountable, so why do they crop up so frequently?
Verry puts it down to attitude, which may be all very American-sounding, but is nevertheless fundamental to minimising the risk of making costly mistakes in relatively straightforward legal work. “It's about service delivery, and everyone has to stick to it,” he says. “The first step is getting people to accept that they have to move in this direction. A lot of firms do acknowledge the need for risk management, but they struggle with time and financial constraints.”
Conveyancing remains the principal practice area in which disputes between advisers and their clients arise. High-volume, nuts-and-bolts transactions in conveyancing and personal injury (PI) work lend themselves more easily to error. According to risk analysts and brokers, small high street firms handling this type of work are most likely to generate negligence claims.
Litigation prompts a number of claims that could be avoided if proper care is taken in setting out the initial instructions. Mills & Reeve partner Guy Hodgson blames a continued reluctance to advise clients at the outset of the likely cost of a matter and the precise ambit of the instructions for the rise in claims. He observes that failing to do either or both leads to “grievances which develop into claims and allows claimants to retrospectively widen the retainer”.
Andrew Nichols, risk manager at Zurich Professional, notes that litigation generates a quarter of all claims brought to the insurance company's attention. His pronouncement is that solicitors often stumble in complying with time limits, either because they do not know about them or they cannot manage diaries sufficiently well to remind themselves. Trapped between a rock of ignorance and a hard place of incompetence, solicitors seem to be foundering.
One firm took the full three-year limitation period and an additional 49 days to issue a PI claim for a client, despite having received confirmation from the respondent's insurer that it had accepted the bulk of liability some two and a half years previously. Such dallying in simple procedures is inexcusable.
Despite the proportionately more expensive insurance premium for smaller firms when contrasted with their larger commercial counterparts, risk managers in insurance companies do not necessarily consider the work undertaken to be generically more prone to negligence. The overwhelming message from insurers is that elementary mistakes across the board, rather than specific practice areas, cause complaints.
It is not, then, automatically the more complex transactions that give rise to mistakes. Nichols says: “Negligence claims arise from fundamental omissions in what should be established processes.” Anecdotally, insurers can give examples of firms taking on work that they are ill-equipped to handle and attracting more clients than they can realistically serve. The number of such instances is negligible in comparison to basic mistakes in the simplest of matters. “There's a distinct lack of processes adopted and conscientiously applied,” asserts Nichols.
No firm, however large or small, can afford to consider itself immune to risk. Clifford Chance has a 24-hour vetting service for fresh instructions brought to the firm. One disturbing trend is the number of claims arising from commercial transactions. Verry says that at an average of approximately £150,000 per claim, mistakes in this sector make up the bulk of the larger-value claims.
Previously few and far between, commercial claims were viewed as a necessary and easily-absorbed evil that would inevitably occur every so often. Prophesying for this sector, Verry says: “When a catastrophic claim comes, I feel it's more likely to come against a commercial firm.”
Solicitors have a high duty of care to their clients. The continued rise in cases of negligence claims against them is only going to reinforce stereotypes of fat cat, money-grabbing arrogance. For smaller firms, the damage to professional reputation from perceived or actual negligence can be insurmountable.
Mistakes will be made and claims will come, but this does not mean that firms should simply rely on their insurer. The open market for professional indemnity insurance brought premiums down from the levels of the Solicitors' Indemnity Fund, but they will rise if solicitors do not put their firms in order. Where risk can be managed and simple mistakes prevented, it makes sound commercial sense to do so.

Case studies
Robin Pesskin Mishcon de Reya
Mishcon de Reya is being sued for almost £6m by Robin Pesskin (The Lawyer, 13 August) because of alleged negligence during the drafting of a contract between him and a potential investor. Pesskin, who facilitates franchising of shops and services to hospitals, hired Mishcons to negotiate investment by Innisfree. Innisfree was to invest in a holding company, HealthGate Holdings, which comprised a number of companies under Pesskin's direction.
His complaint is that Mishcons failed to spot an article in the agreement allowing Innisfree the opportunity to remove Pesskin, without reason, as a director of the holding company. An additional point of contention emerged from Mishcons' alleged inability to ensure the execution of a voting agreement between Pesskin, who negotiated a 20 per cent equity stake in HealthGate, and two other equity owners.
Pesskin's claim for £6m is based on losing the chance to obtain 39 per cent of the company if he had retained his position as director, losing the chance to sell his shares upon flotation, missed profits and managing director's salary.
Malcolm, Pamela and Brian Tucker MB Allen & Co
MB Allen & Co was found guilty of deliberately concealing a factor that could render it liable to a negligence claim.
The firm was additionally considered negligent in its conduct of a conveyancing transaction on behalf of Malcolm, Pamela and Brian Tucker.
In 1988 the claimants purchased a cottage and nearby paddock. The alleged negligence was caused by subsequent revelations that the access between the properties was not a formal right of way. The discrepancy emerged in 1992, when the Tuckers were alerted to the fact that the access route was not a public footpath as they had been led to assume.
The matter was referred back to MB Allen. On reviewing the file, it was duty-bound to alert its clients to the earlier mistake.
The court held that the firm should have appreciated the shortcomings in the conveyancing and advised the client that they might have a claim against their advisers.