Law firms, protect thyselves by Janine Parker, Paragon LawSelect
This article was also featured as a column in the Februrary 2016 issue of LPM. To read the issue in full, download LPM.
For the majority of law firms the compliance burden is one that increases year on year. Outcomes focused regulation puts firms under pressure to prove results without always providing a sufficient framework within which to operate. In addition, government policy is primarily concerned with protecting the general public, an interest that is of course shared, but also often paid for by the profession in the form of PI premiums. But what about the protection for the practice itself, and the key stakeholders within it?
There are many situations firms can face that have critical impacts on business performance, and people are at the top of the list. Sustained periods of absence from work can be extremely damaging to turnover and profit, particularly if the individual involved is a key fee earner for the practice. Smaller practices are certainly more vulnerable to this threat, although no practice is immune.
Sadly, critical illness or an accident can strike anyone at any time and firms must be aware of this. Until it happens, it is something we all prefer to ignore. Furthermore, in the case of the death of an equity partner there is not only the immediate impact on the firm in terms of lost revenue, management and direction but also the issue of how to deal with the deceased’s equity stake. Often, this will transfer to the next of kin, who is not likely to want any involvement in the practice. There will be financial considerations for the firm to address, both in terms of buying out the equity share as well as dealing with the potential lost revenue.
A smooth resolution of the above would imply there is a partnership/company agreement in existence. Such an agreement must address the process for dealing with the exit strategy for partners, whatever the cause. It is interesting to speculate what percentage of SME law firms actually have a robust agreement in place – perhaps it is significantly less than one might think.
However, there is a clear insurable interest. The cost to buy out the equity of a partner unable to carry out his or her job, eg in the case of death, can be insured against. This equity protection can be an invaluable way to manage and work through extremely challenging situations.
But it is not just partners that are critical to the success of a business. Other key staff may be taken ill, which could put pressure on a business. This pressure shows not only in loss of revenue, but also on other members of staff having to increase their workload to pick up the slack of those who are absent. This can affect the quality of work, and prudent firms will want to avoid excess stress on staff.
Locum cover can be purchased to reimburse the firm for the cost of employing additional members of staff during the sustained absence of a permanent member of staff. This can have the double positive impact of allowing client service to remain unaffected and reducing any financial burden on the practice. Insurance can also be extended to cover key staff on maternity/paternity leave for an agreed period of time. These are excellent solutions to aid a practice that has staff disruptions for a number of reasons.
Many firms are not aware of the existence of these products, yet they can be essential to the management and success of a practice. Some products must contractually link into partnership agreements, but others are more simple. In either case, these products are excellent business management tools that are worth further investigation.