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4 bad financial habits that may increase your policy premiums and your malpractice risk

Ineffective billing and collections practices affect more than the bottom line. They ultimately may determine what the firm has to pay for malpractice coverage.

To an underwriter, poor financial habits are just like poor legal habits—they spell high risk for malpractice claims, says Dan Knise, president and CEO of Ames & Gough, a McClean, VA, specialty insurance broker. If a law firm’s chances of getting paid its legal fees are low, the need to sue for the return of their fees may be high. This ultimately means the chance the client will answer with a counter-claim for legal malpractice is almost a certainty.

It’s not uncommon for a law firm to reason “we didn’t do anything wrong, our work was good” and sue their client for return of fees “and a week later there’s a countersuit for malpractice,” says Knise.

Underwriters view every suit for fees as a yellow flag that there will eventually be a counter claim for malpractice, adds senior vice-president Eileen Garczynski. They count each fee suit and “if there are too many made by the firm, they may not provide coverage terms and or will do so at a very high premium price.”

What are best practices for billing and collections? To a great extent, they are the basics. But they are the very elements underwriters watch for when they determine a firm’s malpractice insurability and set the cost of the coverage.

Here are four bad habits that will get a firm into trouble.

Bad habit #1: Accepting the wrong clients

“Good billing and collections practices begin with the client selection, says Garczynski. “The largest number of fee suits are made against bad client, e.g., the ones who do not pay.”

Knise and Garczynski suggest that a credit check and even a Dun & Bradstreet report aren’t enough. Go further. Get the names of the client’s vendors and the names of other firms that have represented that client. Ask them if they got paid and how quickly they got paid. They may well mention problems that don’t show up on the credit report.

For small business clients, do more than check the credit worthiness of the company itself. Check the personal credit of the principals or major shareholders.

While the business itself might have acceptable credit, the individuals behind it may not.

And Knise adds an oft-ignored precaution: “With larger clients, find out who does the accounting—and beware the big operation that’s working with a three- person accounting firm.”

The disproportionate link-up could suggest that the larger accounting firms won’t do business with the company, possibly because they are suspicious of its business practices. Or the company may want to be the big client at the small accounting firm so it can manipulate that firm.

“There’s no way to prove that,” he says, “but it should send up the firm’s antennae.”

One more checking element that rarely gets followed: find out about the organization hierarchy and if the business representative who engages the firm is authorized to sign the fee agreement. Otherwise, three months of work could go by, the bill goes to the CEO, and the response is “we didn’t hire you.”

Bad habit #2: Not having an effective engagement letter

In addition to the firm’s client selection process, underwriters look at whether there’s an engagement letter. A lot of firms don’t use them, Knise says. Or they have a letter but not one that communicates the payment requirements effectively.

The letter needs to cover the full payment picture:

  • The scope of the representation—including a statement of what the firm will not do;
  • Who the billers will be;
  • The fee and how it’s calculated;
  • What expenses the client will have to cover;
  • When payment is due—weekly, monthly, or whatever;
  • The consequences of nonpayment. Where state law permits, this should include the lawyer’s right to withdraw from the matter. “Often that gets left out,” Knise says, “and then the attorney is left with a non-paying client and an ethical responsibility to continue the work”;
  • An outline of the dispute resolution procedures that will be followed if there is a dispute over the bill;
  • The retainer amount;
  • A statement that the retainer is not the total fee but a down payment; and
  • A statement that the retainer is for the last payment. “Don’t deduct the first payment from the retainer,” Garczynski says. “The money is for the last payment. It ensures the firm gets paid for all the work.”

To eliminate any questions about those terms, go over the agreement with the client and have the client initial each point.

Bad habit #3: Sloppy billing practices

Equally as important to getting paid—and not getting sued—is the way the billing is done. There are three essentials underwriters look for.

1. The firm needs to review each bill to make sure it follows the terms of the engagement letter. Having a disclaimer on the bill, referring back to the terms of the original engagement letter, is even more ideal, says Garczynski.

2. The bills have to go out frequently, and they have to go out on time. As for frequency, the minimum is once a month. As for timeliness, there needs to be some encouragement for the billers to turn in their hours by a specific time, perhaps a hold-up on their salaries or draws if they are late.

3. The billing descriptions have to be detailed and accurate. “Listing hourly charges with no description is an invitation to a challenge,” Knise says.

In addition, Garczynski says, “Every attorney whose work is covered in the bill should get a copy of it.”

Nothing is more disconcerting to a client than to ask the attorney a question about the charges only to get an answer of “I don’t have a copy of the bill. You’ll have to call the billing department about that.”

The client’s logical response is going to be “I didn’t hire the billing department to do the work. I hired you.”

Bad habit #4: Waiting too long to pursue outstanding accounts

With collections, the key is speed, Garczynski says. “It’s good business to pursue payment aggressively, because waiting decreases the chance of getting paid—and increases the chance the firm will have to sue for the money.”

On the firm’s side, get the bills out on time—on whatever schedule the engagement letter calls for.

On the client’s side, don’t wait until the 60-day mark to find out what’s going on. Get in at 30 days with a phone call. Cover the big four hold-ups:

  1. Did you get the bill?
  2. Did you understand the bill?
  3. Were you happy with the services?
  4. Is there anything wrong that we need to know about?

Then follow up with a letter.

At 60 days, it’s time for the managing partner and the biller to get personally involved.

And if they intervene and change the billing, they need to document what has happened and send that information to the billing department so another hold-up doesn’t appear next month.

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