Charles Attwell is a solicitor and risk consultant who works alongside some 20 lawyers across the Travelers claim, risk and underwriting teams. He helps law firms to identify and avoid professional indemnity insurance risks. (1 June 2020)
Here he explains some common errors in wills, trusts and probate work and how to avoid them
Wills, trusts and probate work ranks third in our data showing which areas of work in law firms generate the most negligence claims. It is fourth in terms of the value of the claims.
The most frequent cases involve drafting errors in wills and codicils and the distribution of assets. The highest value claims involve tax errors.
The remaining areas of work – settlement, inheritance claims, investment management and asset realisation – generate relatively fewer claims.
This article highlights some of the more common issues, and how your firm can reduce the risk of a claim.
1. Agreeing the retainer
Some claims reflect a serious mismatch between what the client believes has been agreed and what appears in the documentation.
- A husband and wife case - the wife instructed the law firm to sever their joint tenancy so that her share of their house could pass to their child. No severance took place, so on her death the share passed to the widower.
- Are instructions clearly agreed from the outset?
- Do you document these in a well structured retainer?
- Are the client’s intentions and assumptions checked?
- Are the client’s expectations (including timescales) established and then managed?
- Do you establish all the relevant facts in an organised way?
2. Drafting errors
Drafting errors are often the result of not establishing the retainer in the first place. But errors and oversights can happen in any case. Perhaps the wrong precedent was used, or frequent or complex changes to instructions were inadequately recorded, or the client was particularly demanding.
- A will left the deceased's house to the widow for life and thereafter on the trusts set out in the will. The will provided that the residuary estate was to be divided into 8 equal shares of which 3 shares were left to the deceased's daughter, 3 shares to the deceased's son, and 4 shares to the deceased's four grandchildren. So the will purported to divide 8 shares into 10.
- Can you spot fee-earners who take on excessive workloads?
- Are these fee-earners adequately supported in these situations?
3. Lack of file notes
File notes can be vitally important in case of any dispute about what was said. It is not uncommon for beneficiaries to challenge the testator’s intention on a particular point.
- A will provided for the testator’s house to go to his children and the residue to grandchildren. The gift of residue was challenged by one of the children beneficiaries, but the firm’s file notes were inconclusive about the instructions received.
- Do you produce clear attendance notes and maintain orderly files?
- Are timings and participants of the discussion noted?
- Do the notes record what was discussed and any advice given?
- Are there effective work handover and file closure processes?
4. Managing estates, managing trusts
There can be a tendency to relax a little once a case is at this stage. Key points can be overlooked.
- A firm failed to pursue rent from occupiers of estate property over several years, causing loss to the estate.
- A firm failed to act impartially or with unanimous authority in exercising their powers over discretionary trusts, including a breach of fiduciary duty (conflict of interest), and was negligent in drafting a deed of easement.
- Do you regularly refer back to your work plan and retainer?
- Do you maintain an issue log as a way of keeping track of issues raised and ensuring they are addressed?
5. Deadlines and timing
Any timescales, including tax-related timescales, need to be anticipated and planned for from the outset.
- A firm failed to action instructions for a 90 year old client who wished to change his will and give his residuary estate to his daughter that otherwise would go to a charity. An inexplicable delay in execution of the new will was such that the testator died and a claim was pursued by his daughter.
- A wife wanted her husband to remain in her property for his lifetime and her share would then go to her friend. The wife’s will was prepared and she signed a notice of severance of joint tenancy, but she died shortly thereafter. The firm had not served the notice on the husband before her death, so her friend received nothing from the estate.
- A firm failed to advise beneficiaries to enter into a deed of variation within the two-year time limit, in order to reduce the IHT liability.
- Do you use a multiple diary system and task planners for each fee-earner and each case?
- Are potential causes of delay identified and communicated to the client as soon as possible?
6. Distribution of assets
This is another area where busy people make mistakes.
- A firm overpaid a beneficiary by £15,000 and then sought to reclaim this money.
- A firm made distributions under a will that was unsigned and therefore invalid.
- What checklists do you have in place for preventing mistakes?
- Do you have clear systems in place for the verification of payees’ identification and the authorisation of payments?
7. Tax advice
Tax advice is a particular danger area for law firms. The rules are complex and mistakes can be expensive.
- A firm completed an IHT return for the client and gave incorrect information regarding the tax rate band. HMRC saw the disparity between the incorrect answer and account submitted along with the form and imposed a penalty on the client due to the “careless" mistake.
- A client made gifts to a discretionary settlement. The firm’s documentation effecting the gift was defective. The seven-year IHT taper only started to run from completion of the rectification process, increasing the period of exposure to the tax charge.
- When distributing the sale proceeds of a property, a firm failed to account for IHT on the life interest of a deceased person. The IHT was payable in any event, leaving the firm liable for penalties and interest due to the delay.
- Do you have a tax expert with oversight over all tax matters?
- Are your fee-earners trained to recognise potential tax issues when they arise?
8. Legal advice
Poor legal advice often comes down to lack of skill, lack of time, lack of care, or lack of supervision.
- A woman with a daughter had a will that provided a specific legacy of money to her sister and left the residue to the daughter. The residue was a half share in the home the woman owned with her daughter. On death, there were insufficient funds to meet the sister’s legacy and the daughter could not raise a loan to do so. Without explaining the potential consequences, the firm advised the daughter to pay the legacy by transferring the mother’s share of the house to the sister, rather than sell the property. The daughter sustained a loss when the half share in the house turned out to be worth far more than the legacy.
- A firm acted in relation to the wills of Mr and Mrs W in relation to their home, which was held as joint tenants. There was a clear intention to sever the tenancy. Despite having appreciated what was needed, the formalities were never dealt with.
- Is adequate supervision in place?
- Do you have an “Open door” culture, encouraging discussion of challenging cases and issues?
- Do you promote knowledge exchange, through regular opportunities to raise and discuss questions, to tap into colleagues’ knowledge, and linked with ongoing regular training or knowledge updating?
- Is there a mentoring scheme?
- Are the workloads of individuals managed, to prevent the excessive pressure that might impair judgement due to stress or fatigue?
We also see some dishonesty cases – these are infrequent but have proved challenging and costly to resolve.
- Monies were transferred to personal bank accounts of deceased clients where the individual held a power of attorney. Recovery of the assets became necessary.
Improving risk management
When taking steps to reduce the risk of having to make a professional negligence claim against your PI insurance, it may be useful to think in terms of these four headings:
- People – whether clients or those within the firm providing the service.
- Process – the steps in delivering the retainer, dealing with the matter to completion.
- Systems – that underlie all the work that the firm does – file opening, client due diligence, IT, HR, communications within the business, diaries and file closure.
- Risk management – the extent to which good practice in risk management is followed in the firm.
Start with a thorough ‘onboarding’ process, to identify the client’s legal needs. Take a statement from the client, setting out the facts of the matter. Use headings such as the ones below to provide clarity and structure to these facts. Adopting this project management approach will help you to plan and control the matter (and its profitability) through to completion.
- Initial business case – the purpose of the matter.
- Scope – the activities to be performed, the resources needed, and the outcome (eg a trust deed, will or codicil).
- Deliverables – specific tangible outcomes that satisfy specific named objectives.
- Assumptions – assumptions that the client can confirm are correct (eg a particular property is owned by X; or a particular document has not been superseded by another document).
- Dependencies – a series of steps to be taken in sequence, including the question of what happens if a step does not take place (what is critical, what is not?).
- Limitations – on the scope of the legal advice, based on the information available and the areas of law to be covered (eg is tax advice covered, or IP law?).
- Unknowns – factors where there is no information, which could affect the outcome.
When progressing a matter, use systems like these to keep control of the various issues:
- Issues log – a straightforward log of things that arise which may have an impact on the project (eg marriage or partnership status, dependants, beneficiaries, tax, valuations).
- Risk control log – any checks or solutions that need to take place (eg changes in dependants/beneficiaries/partnership status will usually require a follow-on action).
- Revision history – changes to the matter and why they were made (eg where new information means that the original plan needs tweaking).
- Change control – a way of preventing mission creep, so that if a matter materially changes the firm can then reset the budget, resources, timings and expectations of the outcome (eg if a seemingly straightforward transaction is revealed to be a complex one).
- Earned value – a cost-benefit analysis carried out during the course of the matter to check that the original commercial logic still stacks up in light of any changes (eg the tax implications of any changes in assets and the intended distribution to beneficiaries or the management in accordance with any trust).
NOTE COVID-19: The rules around writing and witnessing wills are in a state of flux, given the impact of COVID-19 and the ongoing discussions between the MoJ, the SRA and The Law Society. The SRA keeps this guidance page up to date: www.sra.org.uk/sra/news/coronavirus-qa/. The Law Society has issued some best practice Q and As and has updated practice notes on execution of documents by virtual means and execution of a document using an electronic signature in the context of the Covid-19 restrictions. Always check the latest guidance and recommendations from your regulator and professional body to ensure compliance. When the crisis has passed you may choose to see the clients again and if necessary re-sign the wills.
There are countless different situations that can lead to a PI insurance claim from a law firm, but hopefully this note has given you helpful ideas about where to focus your risk management efforts and the sort of controls you can use.