Avoiding the claim game

Professional indemnity insurers have long been keen to encourage risk management among their clients but the absence of an acknowledged benchmark for what constitutes good management of risk has left brokers and insureds unable to quantify the value of taking it seriously.

The problem for the professional firm is how to know when their choice of risk management has met the required standard. In the absence of a clearly defined yard stick, what are the incentives for an insured to spend non-billable time on something that, to them, has no obvious financial return?

Around 20 years ago, the introduction of an ISO 9000 quality standard led many to think that a workable benchmark had arrived. However, insurers have never found a reason to believe that the ISO 9000 approach - in itself - reduces the cost of claims to them. Many of the leading professional bodies also recommend that their members adopt risk management approaches - most notably, perhaps, the Law Society's respected Lexcel system. But again, regrettably, there is no evidence, universally acknowledged by PI insurers, that these risk management approaches, by themselves, reduce the cost of claims to insurers.

Consequently, it is very difficult for a broker or insurer to persuade an insured that there is any benefit in spending time and money on risk management because there is a perception that insurers do not value it.

So what is wrong with risk management if it fails to meet insurers' needs?

Risk management has, unfortunately, become a commodity rather than an integral part of good business practice. The ubiquitous tick-box procedure, often designed to prove compliance, has caused this discipline to become detached from the human factor that is the essential prerequisite to making risk management work.

Removing human awareness of risk has deprived people of the intellectual recognition of the merits and benefits of managing it. Formal tick-box risk management, therefore, becomes a nuisance and is frequently overridden or ignored.

One of the overarching lessons learnt from more than 30 years of professional negligence claims is that the true root causes of claims are more or less the same - irrespective of the professional service or discipline. Gross errors of technical knowledge or skill are comparatively rare; the overwhelming majority of claims arise from a breakdown in communication. Poor support services, laziness, indifference, naivety, carelessness, professional arrogance and casual, intellectual dishonesty lie at the heart of many claims.

Wartime leader Major General 'Windy' Gale commanding the 6th Airborne Division is credited by General Sir Michael Jackson, in his autobiography Soldier, as having stated that "one purpose of communication is to take a thought from one human being's brain and transmit it to the brain of others with the minimum possibility of misunderstanding, confusion or ambiguity".

This could not be a more apposite benchmark as between adviser firm and its client. But what is the litmus test for effective risk management of professional firms?

Surely, it must demonstrably contribute to the successful defence of a claim. In doing so the costs to insurers - and indeed the firm - are directly reduced.

In order to help professional firms effectively and practically manage their risks, the insurance community needs to identify an appropriate starting point. Agreement on the principles of good and defensible practice could serve as this starting point. Currently, one insurer might ask five questions seeking to gauge the level of risk while another asks 50 entirely different questions. This sends the wrong message to insureds and makes it even more difficult for brokers to promote the benefits of risk management.

Yet, if the principles that have a consistent bearing on a firm's claims could be agreed upon this would form the basis of an accepted risk management benchmark.

The question is, what should those principles be?

When an insurer and his legal adviser come to prepare a defence to a claim the most important information is the audit trail of what was - or was not - said, written and done. The majority of the defence will have nothing to do with the firm's operating systems and procedures. It will concern the human factors of action, inaction, judgement, communication and the hard admissible evidence that will carry weight in a court of law.

The systems and procedures employed by the firm to demonstrate reliable and consistent working practice may form a part of the evidence, but in the vast majority of cases they are not even referred to. Consequently, management of risk must concentrate on the things that will be examined for evidence.

Arguably there are 10 principles of professional risk that every firm must be able to effectively demonstrate they practice (see box). And from the insurer's point of view, the conundrum is how many questions to ask.

The specific questions that derive from these principles are determined by the depth of the assessment required. The fewer the questions the less reliable or useful the result; the more questions there are, the less inclined the firm will be to answer them. It is a delicate balance. Insurers are understandably reluctant to make themselves less attractive to potential insureds by asking for more information than their competitors.

So is there a solution to this conundrum? Arguably, yes - one that requires insurers to strike a three-part agreement with the insured. This would encompass high level questions to determine the firm's appetite for demonstrating a commitment to a culture of managing risk; an opportunity for firms that want to demonstrate their commitment to managing risk to share an agreement with the insurers about the principles that matter and the reward for keeping it up; and a comprehensive and meaningful assessment of risk for those firms that want it.

Risk management has obvious benefits but it does require the insurers to agree on what matters and why.