Smith: Culture changes need to go deep
Large losses at law firms have been “trending up” and firms should look at their culture to address often simple errors caused by stress, pressure or fatigue, a leading professional indemnity insurer has said.
Paul Smith, senior risk management consultant at Travelers Europe, said commercial work accounted for 50% of damages claimed and was “a clear outlier in the severity and frequency of its risks to firms”.
Mr Smith reviewed data relating to solicitors’ firms between October 2000 and September 2023 to gather “a significant data set” of large loss claims, defined by insurers as claims for over £250,000.
He found that large losses were “persistent, becoming more costly, and happen for law firms of all sizes”.
There had been “a high number of claims for large losses in recent years and the total severity of those claims has been trending up”. Claims tended to be spread across all sizes of firm.
Commercial work led the way in driving large losses, representing 30% of claims notifications and 50% of damages claimed, followed by commercial litigation, commercial property, residential property, and trust and probate.
Mr Smith said there were “patterns in the kinds of errors that lead to claims for large loss”, tending to involve “more failures of advice than in the overall book”.
The most frequently notified errors arose from “retainer management failure”. He explained: “These errors are often very simple, such as not following instructions, taking the wrong step in a process, or missing a time limit.”
Dishonesty has also been on an upward trajectory since 2020 and involved “a mix of methods, such as identity theft, fraudulent sellers, or the interception of payments and the changing of bank details”.
Mr Smith continued that retainer management errors were often “simple mistakes and tend to be the result of human error, such as distraction, in turn caused by stress, pressure or fatigue”.
Where slips and lapses in procedure occurred, firms should ask whether this was “possibly a reflection of the culture of a firm as a whole and whether steps could be taken to address or improve the work environment”.
Mr Smith went on: “While many firms have taken steps to support the mental wellbeing of their employees, recent research has found that these changes haven’t gone deep enough.”
“Lawyers who are often tired and feel pressured to work are more likely to make mistakes.” Poor sleep could disrupt the way the body functioned over a 24-hour cycle.
“That disruption can have adverse effects on our physical and mental health. It can set the stage for distraction, as well as affecting our decision-making ability. In extreme cases, it can warp an individual’s moral compass.”
Dishonesty claims tended to involve “poor systems particularly with regard to cyber security, or reduced awareness of the nature and scale of cyber threats”, and could happen when high work-related pressures combined with lack of supervision.
Mr Smith added that law firms were “inherently high-pressure environments”, which could lead to large losses.
“The firms that take a step back to assess the reasons for those losses, and make changes can strengthen their foundation against the economic headwinds that may debilitate other firms.”
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