The Risk Manager, Fall 1999

When law firms consider merging the primary effort usually focuses on financial and practice issues: How well do the two firms match up in expertise, client base, referral business, geographical reach, and assets? How will the new firm be organized and managed? What will it be named and where will it be located? How should compensation, retirement, and withdrawal plans be structured?

What can happen under the press of these critical concerns is that risk management of the merger process gets lost in the shuffle. Review of ethical considerations, malpractice exposure, and professional liability insurance coverage are just as important as any other merger issues. They must be thoroughly evaluated prior to merger.

The ABA/BNA Lawyers’ Manual On Professional Conduct recently published an excellent short analysis on firm mergers that focuses on merger ethical considerations (Merger of Law Firms at 91:901, 7/21/99). Client confidentiality and conflicts of interest are the major ethical concerns when merging. The Manual covers them in the context of pre-merger, post-merger, resolving conflicts, and screening issues. While confidentiality of information issues can arise in several ways, confidentiality is most often the cause of a conflict of interest between clients of the firms considering merger. The Manual recommends using these questions to identify and resolve merger conflicts:

  • Is a current client of one firm suing a current client of the other firm?
  • Is a current client of one firm engaged in litigation with a person or entity related to or affiliated with a client of the other firm?
  • Is a current client of one firm adverse to a client of the other firm in a matter, even if not yet involved in litigation?
  • Is it necessary to advocate a legal position on one client’s behalf that is at odds with the position to be taken on another client’s behalf?
  • Is a current client of one firm engaged in a negotiation or transaction with a current client of the other firm?
  • Will a current client of one firm receive limited representation because of responsibilities to a current client of the other firm?
  • Is a current client of one firm adverse to a former client of the other firm in a matter substantially related to the former representation?
  • Is a current client of one firm adverse to a former client of the other firm in an unrelated matter about which the other firm has confidential client information that could be useful in the litigation?
  • Will any lawyer’s own interests limit the representation of a client of the other firm?" (ABA/BNA Lawyers’ Manual On Professional Conduct, Merger of Law Firms 91:901 at 904)

In addition to an ethics review a careful review of each firm’s risk management program and malpractice claims history is essential. Are there open claims? Are there claims that have not been reported to the professional liability insurer? Going forward, how will the merged firm be insured for professional liability? How much coverage and what deductible is appropriate for the merged firm? What is the risk management program for the merged firm? What work control and conflict check procedures will be followed? Are computer systems and data bases susceptible to smooth integration to avoid start up glitches that lead to missed deadlines?

You get the idea – there is a lot of detail to parse through to avoid gaps in insurance coverage and practice foul-ups for the newly merged firm. Longer term a comprehensive risk management program is essential. The new firm is bigger with a more players. The exposure to malpractice risk rises in geometrical proportion the larger a firm gets. Lawyers Mutual stands ready to help when the urge to merge hits you. Give us a call!