Adding Value, Minimizing Risk

Toran, Phil B.; | May 26, 2008

INSIDE THE MINDS

The Current Climate

New federal legislation following the Enron and WorldCom cases has affected the number of claims, matters, and lawsuits against professionals. However, of greater concern than the frequency of claims is their increasing severity. The plaintiffs' bar typically chases the market. With increased capacity in the insurance market, the plaintiffs' bar seizes what they view as a potentially lucrative opportunity.

Plaintiff attorneys are focusing their efforts on the acquiring expertise in discrete areas of professional liability. Often, you will find practitioners focusing on subspecies of professional liability. For example, an attorney may only pursue claims against accountants who provide audit services. Another practitioner may only pursue claims against attorneys who provide estate planning advice and services. In order to adequately defend against claims brought by members of the plaintiffs' bar with sophisticated knowledge and infrastructure, defense attorneys must also concentrate in those same discrete areas to create a formidable force to counter the plaintiffs' bar in those types of claims. According to the presenters at a recent conference, the number of claims over the past three years has increased, with the largest percentage rise in claims against defense counsel. Within our own firm, the largest growth seems to be occurring in consumer, or fair debt collection practices (FDCPA) cases: claims against accountants and consultants, and in securities matters. The increase is related to the volatile market of recent years, which has resulted in increased claims against broker/dealers, registered representatives, and what the public would call stockbrokers.

Many interests compete for a finite share of money, including shareholders, policyholders, and attorneys. We would not be servicing our clients if we did not evaluate the financial risk associated with any claim. We attempt to ascertain our clients' goals and objectives within the context of the financial interests and a finite pool of money.

Adding Value, Minimizing Risk

In the past, I would start every risk management seminar I gave by saying that I am the first guy you would want to go to the ballgame with, but the last guy you want to have a professional relationship with because, if you do, it means you have a problem. Today, I say that you do want to have a professional relationship with me, but you want to have it before you have a problem, because consulting with professionals should help you with appropriate risk management to avoid future claims. Our clients interact with us as consultants, asking what they can do to prevent claims, what they can do internally, and how they can decrease the potential for claims through their internal controls. We consult with many clients on that basis, as well as with underwriters who manage various risks and accounts. We have accompanied underwriters on site visits to a proposed risk to discuss how better management of risk and implementation of internal controls will stave off claims. We are seeing a greater business savvy from various firms, in terms of approaching risk head-on and working with professionals to stave off the risk.

A large function of our professional liability department is defending professionals associated with business transactions. Those claims will always be there to a greater or lesser extent. Traditionally, professionals are significantly more involved in defending litigation, so they take it personally because their reputation is on the line. We are counselors in the law, and we have to be involved with our clients to reassure them that sometimes people do make mistakes. Along those lines, we take our role as counselors to heart.

Securities Cases

As a result of market performance over the past five years, we are seeing more securities cases. The public is under the impression that if you lose money in the market, you can sue your broker or the brokerage house and you will automatically be entitled to money. At the other end of the spectrum are legitimate suitability claims, which are on the upswing. Suitability claims concern the notion that an investment strategy suitable for an eighty-year-old person is different than for a widow with three small children, and both are different from a thirty-year-old single person. These claims are predominately litigated in arbitrations before the National Association of Securities Dealers (NASD) pursuant to contract.

In our firm alone, we currently have matters in front of the Securities and Exchange Commission (SEC), the NASD, and the Pennsylvania Commission. These claims include a licensing component whereby the dealer's license may be subject revocation. Moreover, disciplinary matters and administrative proceedings are on the rise. The NASD cases are hotly contested because a finding against a registered representative or a broker becomes a permanent public record that runs with the professional's license.