Risk Management Review: A CFO's Approach

Set aside some quiet time every year to think through your insurance and risk management programs with someone knowledgeable in the field. Law firm administrators are mostly not insurance experts, and unless there is some crisis, tend not to give this area the attention it needs. Crisis time may be too late.

Get a Knowledgeable Broker

The key to effectively controlling risk and carrying the right amount of insurance at the right price lies in a knowledgeable broker. Take your time in selecting a broker; interview several, get comfortable with their knowledge of insurance in general and the service industry in particular.

There is no such thing as a stupid question in this arcane area. Insurance policies can be borderline impenetrable reading, and you need someone you can trust to help you determine which policies are right for your situation.

Insurance is not a commodity product; policies covering the same peril differ, and most policies can be tailored to a firm's needs.

Balancing Insurance with Loss Prevention

There is a lot to consider.

The law requires a minimum of insurance in some areas (eg, workers' comp, fidelity bonds), and most firms carry more than the bare minimum. Insurance is obviously prudent in other areas, such as malpractice. You should insure risks that would be disastrous to your firm should they occur. You must make your own assessment of what constitutes disaster, and how much of a disaster the firm is willing to bear before it asks the insurer to pick up. The extent the firm may wish to self-insure or carry high deductibles will depend on its own assessment of the likelihood of an event occurring and the ramifications of that event. A higher deductible generally results in meaningfully lower premiums.

The best insurance is an effective loss prevention program. Many insurance carriers are willing, even eager, to work with policyholders to minimize the likelihood of loss. It's worth taking the time to listen to your carriers. Workers' compensation carriers can provide ergonomic advice, point out hazards in the firm's offices, and help the firm minimize its exposure to property loss as well as to worker injury. The Attorneys' Liability Assurance Society, the malpractice carrier for many large law firms, has a very active loss prevention program which they strongly encourage firms to adopt. Other malpractice carriers have their own programs.

Even without formal programs, it makes sense to take precautions to prevent theft or accidental loss of the firm's assets. Procedures like backing up computer files and storing tapes or other electronic media off-site should be promulgated, written down, and followed. Much of what has been written about disaster recovery in the wake of 9/11 simply represents sound, prudent business practice – which often gets neglected in the heat of day-to-day operations. Sure, there's a cost to doing this, but consider the risk of not doing it.

Avoiding Unexpected Gaps

Be sure you understand what you are getting with each type of coverage. Your broker can help here; but even with a knowledgeable broker, you should understand the policies well enough to be sure you are getting the coverage you think you are getting. Risks frequently are included or excluded by riders, or endorsements, to the policy rather than in the policy itself. Be especially sure to read the list of exclusions carefully; the very peril you most want to insure may be excluded from the policy.

Law firms operating as partnerships or LLPs need to be aware that most insurance policies are written with corporations in mind. In addition to covering officers, directors and employees, you may need an endorsement to cover partners.

Read your malpractice policy carefully. Just because the law firm participates in an activity doesn't mean it is covered under the policy. So-called “ancillary” services are frequently excluded, or are included only after separate underwriting, at an additional premium. Come clean with your broker or carrier about what you do within the law firm besides practice law, or you could find yourself without coverage when an issue arises. You may need a separate errors and omissions (E&O) policy to cover these activities, particularly if they are done for clients who are not also clients of the law practice in the matter in which the ancillary service is rendered.

Other types of insurance may be appropriate in given circumstances.

Is anybody going to Peru on client business? You may need a foreign rider to your package policy, and a separate kidnap and ransom policy.

Anyone on a client's board? Consider directors and officers liability insurance to protect the firm should it be named in litigation over the board member's actions.

Employment practices liability insurance is worth considering, especially for those firms without a labor and employment law practice.

An umbrella policy can provide higher commercial liability limits than most package policies.

Avoiding Duplicate Coverages

Some coverage is included in package policies, then again in specialized ones. If you need a specialized policy for some reason, be sure the package policy excludes that coverage, or at least that you aren't charged a premium for it.

Duplication of coverage is not always obvious, however, so be critical. For example, valuable papers coverage sounds like a must-have for law firms, but what would really happen if your file room burned down? Your property coverage would replace the physical assets. The legal work product is likely on your computer system, which – if properly backed up and stored – shouldn't be lost, even if the computer burned with the file room. Any attorney time needed to replace the files would be covered under a business interruption policy designed for a professional services firm, which insures against loss of billable hours. About all that's left is the out of pocket cost to replace necessary materials that came from external sources. Ask yourself how much of your files you would really need to replace at all.

Consider an Independent Benefits Consultant

Most firms offer group insurance plans for medical costs, life insurance, long-term disability and the like to partners and staff. You may need a specialized independent benefits consultant to help you here. Select a consultant with the same level of due diligence suggested for the insurance broker.

Given the high and escalating cost of medical care, and the constantly changing rules of this game, the firm should carefully review its plans with an expert at least annually. Your goal is to get the highest value for the considerable cost outlay.

Plans can be tailored to the firm's objectives. The firm can determine how to allocate the cost between the firm and its partners, staff, and families. The larger the firm, the more likely self-insurance will make sense – with an appropriate stop-loss insurance policy to cover high-dollar losses, whether individual or aggregate.

Conclusion

Risks to the firm should be evaluated at least annually to ensure that the firm is properly covered in the event something bad happens. The savings from this review can more than offset the cost of the broker and benefits consultant.

Set aside some quiet time every year to think through your insurance and risk management programs with someone knowledgeable in the field. Law firm administrators are mostly not insurance experts, and unless there is some crisis, tend not to give this area the attention it needs. Crisis time may be too late.

Get a Knowledgeable Broker

The key to effectively controlling risk and carrying the right amount of insurance at the right price lies in a knowledgeable broker. Take your time in selecting a broker; interview several, get comfortable with their knowledge of insurance in general and the service industry in particular.

There is no such thing as a stupid question in this arcane area. Insurance policies can be borderline impenetrable reading, and you need someone you can trust to help you determine which policies are right for your situation.

Insurance is not a commodity product; policies covering the same peril differ, and most policies can be tailored to a firm's needs.

Balancing Insurance with Loss Prevention

There is a lot to consider.

The law requires a minimum of insurance in some areas (eg, workers' comp, fidelity bonds), and most firms carry more than the bare minimum. Insurance is obviously prudent in other areas, such as malpractice. You should insure risks that would be disastrous to your firm should they occur. You must make your own assessment of what constitutes disaster, and how much of a disaster the firm is willing to bear before it asks the insurer to pick up. The extent the firm may wish to self-insure or carry high deductibles will depend on its own assessment of the likelihood of an event occurring and the ramifications of that event. A higher deductible generally results in meaningfully lower premiums.

The best insurance is an effective loss prevention program. Many insurance carriers are willing, even eager, to work with policyholders to minimize the likelihood of loss. It's worth taking the time to listen to your carriers. Workers' compensation carriers can provide ergonomic advice, point out hazards in the firm's offices, and help the firm minimize its exposure to property loss as well as to worker injury. The Attorneys' Liability Assurance Society, the malpractice carrier for many large law firms, has a very active loss prevention program which they strongly encourage firms to adopt. Other malpractice carriers have their own programs.

Even without formal programs, it makes sense to take precautions to prevent theft or accidental loss of the firm's assets. Procedures like backing up computer files and storing tapes or other electronic media off-site should be promulgated, written down, and followed. Much of what has been written about disaster recovery in the wake of 9/11 simply represents sound, prudent business practice – which often gets neglected in the heat of day-to-day operations. Sure, there's a cost to doing this, but consider the risk of not doing it.

Avoiding Unexpected Gaps

Be sure you understand what you are getting with each type of coverage. Your broker can help here; but even with a knowledgeable broker, you should understand the policies well enough to be sure you are getting the coverage you think you are getting. Risks frequently are included or excluded by riders, or endorsements, to the policy rather than in the policy itself. Be especially sure to read the list of exclusions carefully; the very peril you most want to insure may be excluded from the policy.

Law firms operating as partnerships or LLPs need to be aware that most insurance policies are written with corporations in mind. In addition to covering officers, directors and employees, you may need an endorsement to cover partners.

Read your malpractice policy carefully. Just because the law firm participates in an activity doesn't mean it is covered under the policy. So-called “ancillary” services are frequently excluded, or are included only after separate underwriting, at an additional premium. Come clean with your broker or carrier about what you do within the law firm besides practice law, or you could find yourself without coverage when an issue arises. You may need a separate errors and omissions (E&O) policy to cover these activities, particularly if they are done for clients who are not also clients of the law practice in the matter in which the ancillary service is rendered.

Other types of insurance may be appropriate in given circumstances.

Is anybody going to Peru on client business? You may need a foreign rider to your package policy, and a separate kidnap and ransom policy.

Anyone on a client's board? Consider directors and officers liability insurance to protect the firm should it be named in litigation over the board member's actions.

Employment practices liability insurance is worth considering, especially for those firms without a labor and employment law practice.

An umbrella policy can provide higher commercial liability limits than most package policies.

Avoiding Duplicate Coverages

Some coverage is included in package policies, then again in specialized ones. If you need a specialized policy for some reason, be sure the package policy excludes that coverage, or at least that you aren't charged a premium for it.

Duplication of coverage is not always obvious, however, so be critical. For example, valuable papers coverage sounds like a must-have for law firms, but what would really happen if your file room burned down? Your property coverage would replace the physical assets. The legal work product is likely on your computer system, which – if properly backed up and stored – shouldn't be lost, even if the computer burned with the file room. Any attorney time needed to replace the files would be covered under a business interruption policy designed for a professional services firm, which insures against loss of billable hours. About all that's left is the out of pocket cost to replace necessary materials that came from external sources. Ask yourself how much of your files you would really need to replace at all.

Consider an Independent Benefits Consultant

Most firms offer group insurance plans for medical costs, life insurance, long-term disability and the like to partners and staff. You may need a specialized independent benefits consultant to help you here. Select a consultant with the same level of due diligence suggested for the insurance broker.

Given the high and escalating cost of medical care, and the constantly changing rules of this game, the firm should carefully review its plans with an expert at least annually. Your goal is to get the highest value for the considerable cost outlay.

Plans can be tailored to the firm's objectives. The firm can determine how to allocate the cost between the firm and its partners, staff, and families. The larger the firm, the more likely self-insurance will make sense – with an appropriate stop-loss insurance policy to cover high-dollar losses, whether individual or aggregate.

Conclusion

Risks to the firm should be evaluated at least annually to ensure that the firm is properly covered in the event something bad happens. The savings from this review can more than offset the cost of the broker and benefits consultant.