The hidden cost of claims

Firms naturally want to avoid professional negligence claims, investing significantly in professional indemnity insurance as protection. They also dedicate considerable time and effort to implementing risk management processes and systems—such as staff onboarding training, file audits, GDPR reminders, file supervision, and email policies.

However, mistakes can happen, and claims may arise. During the COVID-19 crisis and in the "new normal" of remote working, often implemented with little notice, any weaknesses in a firm’s monitoring, supervision, processes, and systems become glaringly evident. Additionally, individual weaknesses, such as self-motivation, issue identification, organizational skills, and the absence of learning opportunities from more experienced colleagues, are exposed.

It is unsurprising that claims are more likely now than before the COVID-19 crisis, making risk management more critical than ever. Yet, many firms are predominantly focused on the financial and practical implications of the crisis—how to return to work and stay in business—while overlooking the hidden costs of claims.

Given the increased likelihood of claims, the hardened insurance market, and insurers’ closer scrutiny at renewal, a poor claims history will not help firms in these challenging times. Firms that have proactively managed risks may benefit at renewal, but this is just one reason for a proactive approach. As this article will explain, the true cost of claims extends far beyond paying the excess. The old adage, “a stitch in time saves nine,” is especially true when applied to proactive risk management.

The Hidden Costs of Claims

In my view, there are seven impacts of a claim against a firm, each with costs that could be avoided with proactive risk management:

1. The Excess

The most obvious cost is the excess—the first amount of the claim payable by the firm. This might be £2,000, £5,000, or even £20,000. It is a clearly quantifiable cost arising from a claim.

2. Increase in Premium

The second consequence is a potential increase in premium. While I’m not an insurance broker and cannot comment on the likelihood of a premium increase from a single claim, in the current hard market, any adverse claims history is likely to have an impact. For example, I know of an accountant whose firm has paid for a fraud that occurred six or seven years ago, costing insurers a seven-figure sum. Despite having no other claims or circumstances since 2010, this history has precluded some insurers from offering terms.

3. Wasted Fee-Earning Time

The third consequence, often overlooked but potentially the most expensive, is wasted fee-earning time. The partner, and others, will spend significant time dealing with the claim—time that could otherwise be spent on chargeable work or managing the firm. Even in straightforward claims that settle early, the time spent by the firm can be substantial, easily amounting to 100 hours. At a notional rate of £200 per hour, this could cost the firm £20,000 in lost productivity.

4. Time Spent on Renewal

The fourth impact relates to the time spent by the partner in charge of the PII renewal. A firm with a clean claims history will find renewal easier than one with a chequered history. The partner will need to spend more time with the broker to secure favourable terms—or even cover at all.

5. Damage to Client Relationships

The fifth impact is on client relationships. A claim brought by a client will likely damage that relationship. While a claim handled sensitively may maintain the relationship, it is likely that most claims will irreparably damage client relationships, leading to an inevitable loss of income.

6. Impact on Staff

The sixth impact concerns staff. Dealing with a claim forces staff to focus on negativity, potentially causing a lack of confidence, bad will within the department, and hampered relationships. This can be devastating, especially when productivity and confident remote working are critical.

7. Publicity and Loss of Potential Future Income

The final impact relates to publicity. Unhappy clients are far more likely to share their bad experiences, creating a “ripple effect” that can negatively impact future income streams.

The Importance of Proactive Risk Management

It’s crucial to recognize the wider negative impacts of a claim and why proactive risk management is essential. The initial “crisis” period of remote working likely revealed flaws, and now is the time to assess and ensure that processes and systems are robust and that staff are appropriately supported.

What Does Proactive Risk Management Look Like?

You likely have processes and systems in place, but are they sufficient? Now might be the time for a review. Some professional bodies require proactive risk management as part of their regulatory requirements. Are your processes truly proactive?

In my view, proactive risk management involves three key elements: culture, training, and reporting.

Culture involves creating an environment where staff feel empowered to raise concerns early. Staff need a “safe” place to go when they feel uncomfortable about a file, enabling early identification and resolution of issues before they escalate into claims or complaints.

Training should be bespoke, addressing issues and problems relevant to the firm. It needs to be conducted at least annually, focusing on high-risk areas identified within the firm.

Reporting involves making an annual report to the board, ideally before PII renewal. The report should review issues identified during the year, training provided, and improvements made. This allows the board to decide on necessary actions before renewal.

Year by year, proactive risk management should improve the firm’s risk maturity, embedding a risk-aware culture within the firm.

The “professional risks service” provided by Karen Eckstein Limited—see the link below—is one way of proactively managing risk within a firm, but there are others. Doing nothing may increase the risk of claims, costing the firm dearly in wasted time, lost clients, and insurance issues.

If you want to discuss any of the points raised in this article, feel free to contact me at karen@kareneckstein.co.uk.

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