Category: Cash Flow – Finances
Insurance rates are based on three elements:
1. Losses. Carriers normally allow 5% to 10% for claims payouts, or losses.
2. Reinsurance. The cost of reinsurance, where the primary carrier passes some of the risk of their policies to other insurance companies, called reinsurers.
3. Investment income. Carriers normally invest their cash reserves in stocks, bonds and other income producing products to increase their own net profit or return for the benefit of shareholders.
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I’m currently involved in a meeting at the State Bar offices in San Francisco. The focus of the meeting is to understand the availability and affordability of malpractice insurance.
Interesting that there is no consensus on the definition of affordability. The professionals in the room suggest that some lawyers will say that no amount of premium is affordable. My contention is that a 1 or 1.5% of gross receipts would be affordable. But 5, 6, or 10% of gross revenues is outlandish.
The discussion is also framed in the context that the malpractice insurance market today is "soft," that there are almost 30 carriers in the market … But, insurance rates will rise in the not too distant future. Premiums are based on loss experience, reinsurance availability and investment income. With the current financial crisis, investment income will decrease and this will dramatically impact insurance companies and their financial health … and then increase the premiums! No such decision should be based solely on this fact. The Bar needs a longer term perspective.
The Board of Governors has adopted the Rule of Professional Conduct requiring disclosure if the lawyer has no malpractice insurance coverage; thus, the focus of this group is how to help lawyers comply … that is, how the Bar can ferret out insurance premiums that are as small a percentage as possible of gross revenues (affordability).
The net result of the meeting is a mandate to do a survey to find out what lawyers think is "affordable." Hopefuly, the survey will produce meaningful information.
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West LegalEdcenter will host a one hour teleseminar on Selected Aspects of the Economics of Law Practice in today’s chaotic environment. Ed Poll will be your host. I hope to "see" you there.
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Clients seek to control the costs of their legal challenges. According to a study by the Association of Corporate Counsel, as noted by Larry Bodine, corporate general counsel do so in the following ways:
"The most common methods to control outside legal spending during the past year were: case/matter budgets (52.9%), discounted/alternative fees (52.9%), re-allocation of work to firms with lower rates (43.7%), billing guidelines/ spending rules (43.7%), and electronic bill reviewing and auditing (34.6%)."0
While reallocation of work seems to be an obvious choice, I’ve always wondered why more law firms don’t do this. If you have several choices among quality law firms, why wouldn’t you go with the less expensive? Perhaps because business is often based on relationships, and if there is a good relationship between client and counsel, the legal work may not go into play to find out whether there is a less expensive option available. This is often called "loyalty," the most desired state of affairs for vendor-partners.
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Bill padding is the perfect crime, according to William Ross. There are many examples lawyers can point to in their own firms. However, there may be an element that some are overlooking. That is the obligation to “snitch” on one’s peers if they suspect the practice is being committed by a colleague.
Obviously, such practices are difficult to detect by clients. The question is whether such practices can be detected by a colleague and then, if suspicion exists, what needs to be done about it. Must the lawyer report the suspected practice to the firm? Must the lawyer report the suspected practice to the client? Must the lawyer report the suspected practice to the State Bar disciplinary board?
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Big Law freezes salaries for 2009 … and bonuses will be reduced for 2008! Clients are demanding that rates remain constant, no rate increase for most, though some will be able to get away with modest increases.
Clients, in general, are becoming more demanding. Lawyers need to "get over it." Lawyers are not entitled to continuous increases and must realize that we are in competition, not with other lawyers so much as with other service providers by way of comparison. And clients will leave if they are not happy with how we relate to them, serve their interests both economically as well as responsiveness.
One example happened to me just this morning. I asked my lawyer a question by email. He called me to respond rather than responding to me with an impersonal email. He asked a simple question or two and provided me with a very simple, yet effective answer that addressed my issue completely. I’ll pay at least 1/4 hour (or his minimum if higher), but my issue of the moment was addressed completely. That’s effective, efficient service.
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The economic crises has finally hit home. People I know are talking about October and November as being months when the world stopped! … and they couldn’t get off. No one seems to know what is going to happen next.
I met yesterday with managing partners of several major law firms in my Managing Partners Roundtable.
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Do you want to be a banker or lawyer? See LawBiz Tips current edition for one perspective.
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I have warned about the dangers of law firms paying staff salaries and even partnership draws by using their bank lines of credit. In a credit line arrangement, the firm borrows and repays at will up to the amount of the credit line, which the bank regularly reviews and extends, increases or terminates as circumstances warrant.
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Complete your time sheets daily, every day.
The best practice is to keep a running log of time (software-based or otherwise) of everything you do as you do it. If you’re a scrap-of-paper person, then you need to aggregate and compile the list for your billing program before leaving the office that day. Even if your memory rivals that of the elephant, you will miss things if you don’t do this every single day.
One missed 10th of an hour each day translates to 23 lost hours a year. And failure to keep current, proper time records will usually result in more than just 1/10th of an hour lost … DAILY … and MANY thousands of dollars in lost billable revenue!
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