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Saturday, Jul 13, 2024

CUSTOM CONTENT: Are You Still Operating Business As Usual? GROWING RISKS FOR LAW FIRMS


Teena Hostovich, Partner/EVP

Managing risk has become increasingly complex for law firms as they continue to evolve into large, global practices and face similar issues as any Fortune 500 multinational corporation. While they recognize their risk exposure transcends far beyond malpractice, managing partners are discovering gaps in their risk and insurance programs after being hit by a security breach, a discrimination claim or allegation of negligent due diligence that threaten their firm’s reputation and financial viability.

Strategically partnering with a risk management advisor and considering the top growing risks law firms face today can help firms assess where to best invest their time and money to protect against potentially catastrophic losses.

Cyber Risk. Just three years ago, law practices were still skeptical of cyber coverage, assuming that most of the major risks would be covered by their lawyers’ professional liability policy (LPL). This is only partially true. LPL coverage applies to cyber risk under certain circumstances and with proper modification of the policy. However, a large number of situations are only covered by a separate cyber policy, such as first party loss, including business income, forensics and crisis management as well as third party liability from release of sensitive information.

It’s important to leverage all policies to respond to cyber risks, including some of the limited coverage under a property policy. Policies must be aligned and the language should be seamless to avoid blame shifting, eliminate gray areas or overlaps in coverage, and ensure proper compensation for a cyber loss. Cyber coverage is constantly evolving as new exposures and losses arise. Each coverage renewal provides an opportunity to bring a firm’s program up to the latest standards.

Employment Practices Liability (EPL). Widespread accounts of sexual misconduct and inappropriate workplace behavior, coupled with the #MeToo movement, have underscored the importance for law firms to reexamine their employment practices exposure. The recent wave of high profile cases impacting the reputations and pockets of some of the world’s largest law firms reaffirms the serious repercussions EPL claims can bring.

The most frequent claims are now coming from allegations of a “hostile work environment.” This is an environment where staff is regularly subjected to inappropriate jokes, comments or pictures, or where unwanted touching or communication is tolerated. Claims can be made not only by staff, but by third parties as well.

Fortunately, most EPL policies extend coverage to any party—employees, customers or vendor—who allege they were sexually harassed by someone at the firm. These policies cover a wide range of allegations, from sexual harassment, and discrimination based on gender, ethnicity and other factors, to creating a hostile work environment.

Few firms actively monitor risk factors in their employment practices, and instead adopt a crisis management approach using NDAs to keep matters private. Without an open culture and avenues for staff to seek help, harassment and similar problems can easily multiply. To bolster defense to EPL claims, law firms should make training a priority and reinforce management’s zero tolerance policy.

Management Liability. A whole new level of exposure opens up as firms continue to merge for leverage, expansion and improved market position. Historically, only about one in three mergers actually increase per-partner profit, and not meeting partner expectations with a proposed merger can result in claims of negligent due diligence, favoritism in profit sharing, and a host of other costly issues. Mergers can easily falter when cultures clash, creating dissatisfaction and decreased productivity, which eventually gets back to clients—the ultimate arbiters of success.

Management liability insurance for law firms protects partners and shareholders from many of the same liability risks faced by directors and officers of corporations: claims of mismanagement or negligence in the day-to-day operations, partnership agreement and compensation disputes, and claims brought by non-managing partners as well as creditors and vendors, to name a few. From small law firms dealing with vendors to large firms seeking merger and acquisition opportunities, management liability coverage is an important consideration that should not be overlooked.

The shifting challenges looming over law firms today compel managing partners to reevaluate how they do business. Their risk management should evolve from reactionary and minimal to proactive and comprehensive. Working cohesively with a risk advisor can help them sail through turbulent waters and stay on course.

A 35-year veteran, Teena Hostovich is Lockton’s Law Firms Practice Leader and a member of its Executive Committee. She also serves on the Board of Directors of USC Marshall, Los Angeles Philharmonic, and the John F. Kennedy Center for the Performing Arts.

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