Risk management

The true cost of claims

Getting fee-earners and partners to accept the need to comply with risk management procedures is not always easy.


Often, such procedures are regarded as bureaucratic and, by some, as simply a waste of time. Having to dissuade members of the firm of such thoughts can be difficult.


One way of concentrating minds is to talk about money, and claims cost a great deal. Costing a claim can be a salutary exercise for a firm. Therefore, the following factors need to be taken into account:

Management time. Invariably, it is a partner who deals with the claims administration within a firm, and this can take considerable time. The partner will have to placate an angry client, speak to the fee-earner, peruse the file, complete a report form, ascertain what has happened, liaise with insurers, and so on. In nearly all such cases, the partner will not be paid for undertaking such work.

The excess. Most firms carry excess, which is the part of a claim that must be met by the firm before the insurer has to pay. Insofar as the firm is concerned, such payments provide no benefit, and indeed, for all the good they do the firm, the partners might as well draw the money out of a bank and burn it on the pavement.

Return of fees. Where there is a substantiated claim, invariably fees will have to be repaid, depending on whether there has been a total or partial failure of consideration. Often these refunds can be considerable.

Loss of a client. While some clients may take a philosophical view of their matter ending up as a negligence claim, many do not, and vote with their feet and take their business elsewhere. This may well result in a loss of future fees, and in some cases, these losses may be substantial. Another factor here is that clients often talk about their bad experiences with a service supplier and this can result in the loss of potential new clients and the firm's failure to get on to a tender list.

Increase in premium. When underwriters look at a proposal, the firm's claims history is something they focus on closely; have a substantial claim, and it will impact the firm's premium and result in an increased premium being payable. If it is a large claim, there is the risk that the firm may be declined on renewal, and indeed have problems placing its insurance in the market. The worst-case scenario is ending up in the assigned risk pool and, as a consequence, being liable for the punitive rates that are imposed on firms that suffer that particular fate.

If fee-earners or partners are prepared to ignore the need to manage risk and expose the firm to such large financial risks, then one has to question their commitment to the firm.


This column was prepared by Alexander Forbes Professions, a division of Alexander Forbes Risk Services Limited