The first rule of politics, according to former Chancellor Denis Healey, is ‘when in a hole, stop digging’. Anita Rice looks at the risks involved when lawyers try to rectify their mistakes


You have discovered a mistake on a file. Not great, but you know the client well. Why not just quietly put things right yourself without taking the risk of busting your insurance premiums? What can possibly go wrong?



Quite a lot, as it happens.



‘The danger is that you make the situation worse,’ warns Katherine Rees, partner in the lawyer liability group at City firm Reynolds Porter Chamberlain, ‘and then you are not going to improve things with your client or endear yourself with your insurer.’



Not only that, you could also find yourself in a position where there is a conflict of interest and, given that the new solicitors’ conduct rules state it is rare there would be no conflict in this situation, you could also find yourself with a conduct issue.



Lawyers who discover problems with files must establish whether the matter is trivial and easily remedied. If not, they must ‘notify insurers, tell the client to seek independent advice and, if you need to, continue to act in the short-term to preserve a client’s position. You must do that on your client’s behalf’, says Ms Rees.



But what if your client does not want to deal with anyone but you? The experts still advise caution because, in retrospect, your actions could be judged as largely self-serving.



‘Even if a solicitor is not urging the client towards a particular option, it could be construed as such afterwards, so you need to be careful,’ says Ms Rees. ‘I think if the firm considers it is in conflict, it can’t act and would have to insist that the client goes elsewhere.’



All straightforward then – immediately confess to your client and all will be well. Not quite, says Olivia Burren, senior risk management consultant at insurer St Paul Travelers. She adds that lawyers should contact their insurer first or risk admitting liability.



‘It is human nature to want to apologise, but we want people to contact us first – we will try to settle if it’s obvious you are in the wrong,’ Ms Burren says. ‘Sadly, there are lots of cases where insurers have made an admission of liability when there has been a case to defend.’



In fact, solicitors are obliged to notify insurers about claims as soon as possible under the rules of conduct. Ms Rees recommends contacting your underwriter immediately and using them as a sounding board.



Nick Pointon, director of broker PYV, says he understands that lawyers might try to settle claims themselves, particularly if they know the client well. Also, he suggests lawyers can be less forgiving of errors. ‘They tend to feel that mistakes are not acceptable, but they are human and they make mistakes,’ he says.



A mixture of feeling indebted by having messed up and deciding, often wrongly, you are best placed to resolve the problem can tempt lawyers to act alone.



Ms Burren remembers a case where a firm appealed against a negligence ruling without informing their insurer, only to increase its loss by £10,000 – not to mention losing all goodwill and trust from the client.



‘If they had contacted their insurers, they would have been advised they had clearly been negligent, that there was no prospect of the appeal succeeding and that the client should be advised to instruct other solicitors. The claim would have been settled as swiftly as possible.’



In another example, a partner concealed a mistake from fellow partners. The potential claim only came to light after a secretary, concerned she was being asked to lie to a client, felt obliged to tell the other partners.



‘But the saddest cases,’ says Ms Burren, ‘are where solicitors have been negligent and, instead of notifying their insurers, they try to pay the clients’ damages from their own salary.’



Phil Edwards, managing director of broker QPI, voices the frustration felt by most professional indemnity experts at lawyers dealing with issues alone in an attempt to protect premiums. ‘It ignores the fact that the biggest cost of claims accrue in dealing with them and not the premium itself,’ he says.



He cites an example where a firm discovered an employee had fraudulently removed money from a client trust account. Instead of notifying the insurers immediately, the firm repaid the client’s money and began racking up costs by paying out for forensic work and the services of a barrister.



‘The insurer was within its rights to refuse to pay costs,’ says Mr Edwards. ‘It was only because the firm had a good relationship that the insurer was lenient.’



The one thing that will really keep claims at bay is a company-wide culture that encourages staff at all levels to discuss potential problems. ‘The worst thing is a culture of fear,’ says Mr Edwards. ‘If you seek to apportion blame, you will just drive the problem underground… instead of one problem, you could have 30 or 40 to deal with.’



Ms Rees wonders whether all solicitors should be told from the outset that they will likely see at least one claim during their career. ‘If people accept that it is a fact of professional life, it might be better than presenting it as an armageddon affair,’ she says.



Brokers and insurers stress that reporting problems does not necessarily mean firms are penalised – firms which notify but do not claim are regarded as being good, risk-aware prospects.



And not only can notification mark you out as a good risk, it can even drum up business. Mr Edwards explains how one firm discovered a major problem and had to review more than 1,000 cases – an unenviable position, one would have thought. However, as it proactively dealt with cases and did not wait for the claims to arrive, the firm not only mitigated its losses but actually increased business by having to get back in contact with old clients.



‘Mistakes happen,’ he says. ‘We have to understand we are human and try to stop them happening in future; that’s what we are about as a broker. It is all about changing underwriters’ attitudes so they don’t just look at a firm’s history, but to its future.’