Damage control

Prevention is always better than cure, and many more professionals make a living helping professional services businesses stay safe than those who help clear up after their bucket has spilled. But spills do happen, and there is a need for a few, with different skills, who specialise in the defence, limitation, or resolution of an exposure once it has arisen.

It's what I have been doing for three decades, for clients and for my own firm: curbing their monetary losses, and brand or reputational damage. Especially for lawyers - in most situations of commercial loss there will be a lawyer involved at some point in the story, and with their compulsory insurance, law firms are more commonly in the firing line than any other profession. Most professional defence lawyers are deployed by the panel law firms retained by professional indemnity insurers, to whom policyholders are usually happy - and required - to refer their exposures promptly when they arise. But not all problems are insurable, and when they are, insurers' interests are not always identical, or even parallel, to their customers'. There is a growing need for advisers who are independent, to help both with the steerage of an exposure to an optimum outcome, and with the lessons they can reveal.

Lessons to be learned

There are lessons to be learned from most 'Uh-oh' moments: how they should have been avoided in the first place, how they might have been better handled, and what locks to fit to stop the horse bolting next time. Yet the accumulated experience tends to be underused. Risk exposures are always facts-subjective, and rarely frequent enough to plot reliable patterns. It's the nature of 'war stories' that they are more often told by reporters or supervisors, inaccurately and with their own agendas, than by those who directly experienced them. The lessons, therefore, remain unlearned or ignored, and opportunities to forecast outcomes are missed.

Prescriptive rules and accountabilities are only a first stage of any regimen, yet time and again, commitments to change are driven without adequate conception of consequences, or change is put off because strategists can't decide what should replace the current status quo. I once attended a regional law commissioners' meeting to explore the merits of stricter legal duties for professional trustees. Most of the contributions from both the platform and floor were concerned with how trustees' work is done and paid for currently, and what new laws were needed to make them more efficient and accountable. There was scant awareness, and less intuition, of how the legal changes would be interpreted and practically enforced once they were in place, and when I raised comments on these lines, I discovered an attentive audience.

Claims, near misses and similar problems should attract attention from at least four angles:

• 'What, when and why?' The causes of an exposure, or failure to resolve it, at all or more cheaply. Most exposures arise from a short list of categories: bad management and technical error are the two big ones, a few arise from relationship breakdown, bad luck or dishonesty.

• 'If only …' Reflections on fate or mistakes and what should have happened instead.

• 'How much?' Claims, and most disciplinary proceedings, are driven by their value, and perceived or apprehended impacts on brand and reputation.

• 'What's to be done?' Understanding of the changes needed to prevent repetition, if any, within limits of practicality, economic viability and reputational value.

Arts and crafts

The foremost craft of dealing properly with a problem is to have an accurate understanding of the relevant causal event(s) and consequences, which minimises prejudices and wishful thinking. This should preferably be distilled into dispassionate explanatory sentences that the defaulting lawyer can confirm without semantic manoeuvres. Also important are overarching commerciality, capable management of conflicts, clear aims, with vision where necessary to explore indirect routes to solutions, and independence from internal as well as external interests.

Equally vital is the skill with which the story is told to those who need to hear it. Letters sharing bad news with a client, insurer, or stakeholder require a fine balance between a transparent report of what they need to know, while avoiding gratuitous admissions which might unnecessarily damage an interest, disparagements of self or a colleague, or defensiveness. It's vital to know the difference between what is known and what is feared or supposed, and not to say things which may not be accurate, or conceal critical information.

Most clients will not welcome being told about a problem and the inconvenience - usually costs or delays - of having to confront options prematurely, before the spectrums and relative values of those options is apparent. I think regularly of a client whose lawyer accidentally pasted a confidential private advice warning about some adverse testimony into an email to the opponent. Abundant recriminations, letters to the senior partner, and expensive engagement of new lawyers all followed before it was discovered, after elementary enquiry, that the so-called witness was a discredited fraudster who had fabricated their account.

Delay is sometimes a useful tool, but not unless it is understood and managed. Often there are opportunities to correct a mistake, maybe even to avert the damage before others need to know about it, but all these opportunities have a shelf life. Default judgments or sanctions resulting from a missed time limit are one of the commonest occupational hazards for litigators, and usually they can be resolved relatively cheaply for the costs of a rectifying agreement and court application. But, especially if published or entered onto a judgments register, the damage to the client's reputation and trading capability can be disastrous. A ready example is a haulage contractor whose lawyers allowed a relatively trivial county court judgment to stand rather than acting promptly to front up the costs and embarrassment of dealing with it. The judgment caused the client to lose credit with its fuel suppliers, leading to immobilisation of its fleet and near collapse of the business. The time and costs needed to restore confidence were considerable.

There are also important arts to manage raw emotions and maintain confidence of those affected: of an uncle with a 'there but for the grace' empathy with the perpetrating staff and witnesses; of a doctor to their superiors and the ultimate board-level owners of the risk; and of a respected representative in dealings with insurers, regulators, and other stakeholders.

The most consistently important priority is to focus on what happened, rather than who did it. Exercises of blame, shame or name rarely produce winners and invariably spread hurts wider than they need to, and anyway, they are the province of the firm's management. It is also important not to condescend, or to presume technical knowledge superior to the perpetrating lawyer or team. Contrary to reputation, most lawyers are not confident people and when something goes wrong they will often either assume disproportionate blame to themselves to protect their more culpable subordinates, or react in an opposite manner, casting responsibilities onto whomever they can pick on to deflect the dirt from themselves. In either case, truth becomes distorted and objective appraisal, of the best course for resolution and the measures needed to prevent repetition, impossible.

Causes of trouble

Modern IT processes and systemised procedures have significantly reduced the proportion of exposures arising from practical mismanagements, but the league table of claims triggers is still headed by causes which have their roots in mismanagement, especially delegations of files or tasks to inexperienced or under-supervised staff. A stark example, which I still bring to mind with a shiver, involved an apparently simple variation of a break date in a lease delegated to a newly qualified lawyer, whose small drafting error then committed the client to a variation deed which extinguished not only the break date - which had been agreed to be postponed - but also all subsequent breaks, locking the client into his lease for 25 years.

On another occasion, a lawyer tasked to draft a standard employment contract prepared terms applicable to a statute which had been supplanted by later legislation and no longer applied, exposing their client to a number of disadvantageous contracts. The risks of future losses were rapidly tackled by replacing the current contracts with new ones, albeit the lawyers at fault had to pick up the costs of some employees who opted to take independent advice on them. In a few cases, however, the employees had already been advantaged and the employer client's losses were difficult and controversial to measure.

In a recently reported decision, the Supreme Court upheld a literal meaning to a service charge provision in a tenancy agreement used many times over by a hirer of static caravans, which 'defied commercial common sense' and was substantially damaging to them.

Managing clients as (prospective) claimants

In all these sorts of cases the importance of early appraisal of the error, its consequences and reparation, and maintaining cooperation and trust of the client to mutual benefit, are critical.

Sometimes a generic error will be spotted or acted upon by just one, or a minority of affected people, who then try to exploit the situation to their own advantage by threatening widespread dissemination and consequential chaos, and holding their silence or 'discretion' to ransom. Within rules of conflicts management and proper transparency, careful negotiations and buy-off of the troublesome complaint can be a sensible 'least-worst' option.

That is not to say that bullies or opportunists should not be stood up to. A firm's reputation is its most vital asset and sometimes it will be ill-served by making gratuitous payments that are not justified by the legal issues and might be more commercially disadvantageous than confronting the claim or try-it-on claimant. Such occasions are prime tests for an insurer to support its policyholder, and for the policyholder in turn to recognise and value their own investment in their relationship with the insurer.

In a similar vein, many mishaps are an opportunity for a law firm to convert negative into positive by the manner and transparency with which they deal with them. Sometimes nothing can prevent a disaffection if, say, an insurer cannot support whatever remedial measures a client might be looking for. An example to mind is where a security of tenure provision was included in a commercial lease, contrary to the landlord client's intentions. Some of the damage was immediate, but much more was in prospect and likely to arise when the contracted lease term ended. The client wanted an open indemnity against the risks, if and when they accrued years ahead, whereas the firm's insurer wanted a current-year settlement through a one-off payment reflecting the capitalised value of the risk. The firm was obliged to adopt the insurer's approach and although the claim was duly resolved, the relationship with the client was damaged. Nevertheless, the law firm's transparent candour and persistent work with the client enabled the matter to be 'parked', and the relationship picked up again within a few years.

Parking of claims, or more particularly the measurement of the damage, if any, until the subject matter has run its course, is another aspect of claims management which can deliver useful benefits. It requires empathy with not only the insurer's approach for reserving against a risk, but also the client's own accounting methods and interests, and the relevance and benefits of the client relationship to other business. These are arts and crafts at their most subtle, and can lead to tensions if the matter drags out for longer than the firm, its client or insurers are comfortable with; and when the quantum negotiations do start in earnest, the issues can be obscured by history and the ultimate resolution driven more than it otherwise would be by commercial factors. But the benefits can be substantial, both for the insurer if the quantum hit is kept low, and in the reputation and relationship advantages for the firm and its client.

In many cases, the most difficult issues are not whether there has been error - that often is self-evident - but rather in the measurement and evidence of loss and, most problematic of all, the causal linkage. Many claimants are simply unable to recognise that there may be reasons why their loss was unavoidable anyway, and unreceptive to the legal rules. They also tend to struggle with the principles of 'loss of chance' and ignore or underestimate the factors and percentages by which the gross value of their lost opportunity should be discounted.

Key issues of fact for which the documentary evidence is indecisive and which therefore hinge on witness testimony are by definition a 50% risk, unless that balance is tipped by some extraneous factor. Yet time and again, claimants and defendants alike will stick to their guns and commit resources to a dispute they have no better than a half chance of winning. I have lost count of the number of people I have seen emerge from a courtroom indignant that the judge has preferred other witnesses' evidence to theirs.

Delays, lack of candour when there is really nothing to be gained from it, and inattention in reporting an error or responding to a claim, are all sure to antagonise claimants and discourage appeasements. Many opportunities for an early or cheaper resolution are lost because of mis-appreciations of their real grievance or disappointment, lack of apology, or failure to recognise and offer palliations for their 'loss of face' to other stakeholders. It is often vital to try to see a story from the other side's viewpoint, eradicate blindness or ignorance where it can be, appease anxieties, and defuse anger. Opportunities to resolve grievances or misunderstandings are commonly lost by failures to show conciliation when it costs nothing to do so.

If only…

The Serenity Prayer applies: 'Grant me the serenity to accept the things I cannot change; the courage to change the things I can; and the wisdom to know the difference.'

Every law firm owner facing a claim will be occupied by thoughts of what might have happened, or been done differently, if only they had not been so aggressive or assertive; been more assertive, not been so distracted by other work or affairs, exercised better supervision, or had more luck.

Reflections on some of these should be a useful spur for beneficial changes for the future in terms of supervision, technical acumen and training, and brand projections. Of themselves, claims experiences are rarely sound predications for changing systems or strategies, save where they exhibit a chronic malaise or failure within the business. Properly handled, they should not affect morale or efficiency, and although the reputation of the business - that is, other people's opinions of it - may be affected, there is little to be done about that, beyond a few specific branding opportunities, such as public assertions of capability, and sometimes contrition or apology.

How much?

The amounts claimed in damages or costs, and those proven to have been caused by an alleged error or accepted in settlement of it, are often substantially different. Responses and defence strategies are nevertheless driven, and sometimes controlled, by the financial scale of the claim and its economic impact for the firm, its insurers, and other stakeholders.

For insurers, the economics are usually decisive drivers of defence strategy and conduct. Statistics are dominant. In complex or multiple-claim exposures, the trumping decision-makers are the actuaries, not the win-or-lose strategists.

For the law firm policyholder, the policy excess, costs of cooperating with insurers, and any uninsured loss exposures are important and must be expected to impact significantly upon future insurance costs and administrative budgets. But the impact on brand and reputation, internal cohesions and trust, and stakeholder confidence, are equally, if not more powerfully, critical than the price and value of a claim. Attention to these is as important a part of the professional risks lawyer's role as assisting the technical appraisal and conduct of the claim.

Upshot

• Most exposures still arise from mismanagement or under-supervision, but technical or training failures are catching up.

• Investigation and handling, promptly, by people independent of the erroneous team, can often convert disaster into opportunity.

• Good bedside manner is indispensable.

• Early sharing and investigation always pays off, but precipitate action sometimes doesn't.

• Respectful cooperation with insurers and clients, and maintenance of long-term relationships, is always advisable and often pays dividends.

• Integrity to stakeholders is indispensable; but standing on principles can carry a high price.

• Focus on what happened rather than who did it. Blaming and naming are always secondary.

• Be patient with genuine uncertainties; and don't expect or offer guarantees.

• There is uncanny correlation between the biggest exposures and the best lawyers.

So, the next time preventative measures fail and something goes horribly wrong in your company or law firm, think back on all that I have shared here. And don't be afraid to seek external counsel to assist you with the problem.

Mike Willis is principal and director of F Mike Willis Ltd (www.fmwl.co.uk)