What is legal risk and how can I manage it?

What is legal risk and how can I manage it?

I am constantly surprised by how often I hear other lawyers say “If only my client had contacted me earlier, this whole problem could have been avoided”, and 99% of the time they are absolutely right!

Legal claims do not ‘just happen’.  They arise because someone connected to your business has a complaint, a cause of action, or a grievance.

The risk of legal claims arising is commonly referred to as legal risk.  You will find a legal risk component in most insurance policies, including those covering public liability, product liability, professional liability, employee/workers liability, directors & officers liability, business continuity and related costs.

But insurance cover does not minimise or prevent legal claims arising.  It only provides a level of financial compensation for the cost of a claim after the event occurs.  And the cover will rarely repair relationships, restore damage to your reputation, or win back business lost following a legal disaster in your organisation.

To minimise or prevent claims, you have to identify and mitigate the risks themselves across your business, and that involves early attention to critical legal issues.

Increasingly organisations of all types and sizes are adopting legal and management processes to minimise and control their legal risk exposure.  Legal risk is a subset of operation risk and, like all risk categories, it is very manageable.

“You are wrong if you think suffering a legal claim is just ‘bad luck’.  In most cases it will be because you have left yourself exposed to being sued, prosecuted or penalised by third parties connected to your business.”

Legal risk management is the process by which organisations identify legal risks affecting their operations, set and prioritize their tolerance levels for each of those risks based on their commercial objectives, and manage and mitigate risk across all of their activities.

Large organisations with corporate legal departments, general counsel and external legal teams are generally very aware of their legal risk exposures and they develop and implement sophisticated responses to legal risk problems within their organisational processes.

Small and medium firms however often do not.  They generally rely too much upon their insurance policies and upon their ability to manage problems ‘hands on’, and they often do not call upon lawyers for help unless and until problems get ‘out of hand’.   Hence, the phrase I often hear lawyers say, as stated at the head of this article.

It is easy to understand why this is so.  Legal help for big problems can be expensive and in small growing businesses the budget often simply does not allow it.

 

So where is the best starting point if you are new on this journey and you want to avoid big problems arising?  Like all things, start with baby steps ..

Here is a useful way for organisations to think about legal risk.  I call it my “Legal Risk Wheel” and I developed it before I joined Creevey Russell.wheel

You see, legal risk arises from the people connected to your business.  Whether they materialise will generally depend upon whether those people initiate a claim, prosecution or penalty.  All businesses have relationships of varying degrees with the following groups:

Think about who you deal with most.  Think about what might go wrong with each of those relationships.  Study the statutes, contracts and dealings/transactions that define the relationships.

With this knowledge, what legal risk events might arise from the relationships?  Will they require an urgent fix?  Will they be serious/catastrophic, or will they be manageable?

Now, rate the risks in each category as follows:

RISK RATING MATRIX

Urgent

Non-Urgent

Serious

A

B

Non- Serious

C

D

 

Then see your lawyer about what can be done for each of those risks in that order of priority.  Start with the urgent and serious risks (A) and work your way down to the non-urgent and non-serious risks (D).  You may be surprised at how quickly and cheaply some of the ‘fixes’ are.

And if you are satisfied with the advice, you will have a lawyer on hand who is familiar with your business and your legal set-up and who can help you in the best possible way when a claim does actually arise.

In a complex legal landscape, you need to be legally prepared in order to succeed, and that means being ready in your documents and processes to handle legal risk events when they arise.

Article written by Stuart O’Neill, Principal at Creevey Russell Lawyers.