5 Reasons Solo Firms Fail

While law firms of all shapes and sizes can fail for any number of reasons, in my experience as a risk manager, there are a few reasons that solo law firms are especially susceptible to. The good news is that many of the reasons can be easily and responsibly addressed, thus helping to ensure the long-term viability of a solo practice. The following are my top five reasons, with a few thoughts about what can be done to mitigate each risk.

1. Falling victim to a cybercrime – In looking into ALPS Insurance's cyber claims over the past 14 years, solo firms are anything but “off the radar” of cybercriminals. Unfortunately, if a cybercrime event happens to be a ransomware attack (8% of our reported cyber claims) or a wire fraud scam (31.9% of our reported cyber claims), the consequences can be financially devastating. Suffice it to say, that over the years I have worked with more than a few solo firms where the recovery costs were far higher than they could handle.

To mitigate this risk, keep all hardware and software applications current by promptly accepting system updates and critical security patches. Never continue to use any hardware or software once system updates and/or critical security patches are no longer being issued. Purchase a cyber liability insurance policy. And since many of these policies don’t provide adequate coverage for a third-party loss of funds claim, consider also pairing this coverage with a crime policy in order to secure a broader amount of coverage. Finally, never authorize any transfer of funds without first verifying the authenticity of any request to transfer funds by way of an out-of-band communication.¹

2. Believing that malpractice insurance isn’t necessary – While accurate data is sparse at best and the numbers will vary over time and between the states, a good guesstimate of the percentage of attorneys who are uninsured in some states can run as high as 40%. The reasons why vary; but based upon my interactions with thousands of attorneys over the years, a majority of the time it’s an intentional choice to go bare. The rationalizations run the gamut from, “I’ll just declare bankruptcy if I ever get sued” to “Having a malpractice policy simply invites claims. No insurance means no one will ever sue me because there’s no deep pocket.” I just shake my head over the naivety of that belief because it simply isn’t true.

The most cost-effective way to mitigate the risk of having to face a potentially financially devastating burden of a viable claim with significant exposure is to purchase a malpractice insurance policy. Additionally, since our claims data tells us that solo attorneys who practice in the areas of real estate; civil litigation-plaintiffs; domestic relations; estates and trusts; and criminal law account for over 70% of claims reported by solo attorneys, don’t dabble in these practice areas. Finally, our data also tells us the that the most common types of errors solo attorneys make are failure to know or properly apply the law, inadequate discovery or investigation, failure to follow client instructions, failure to obtain client consent, and, unfortunately, fraud. So, again, don’t dabble. In addition, research the law, don’t take shortcuts, listen to your clients, keep your clients informed, and never run with assumptions. Oh, and for goodness’ sake, don’t “do stupid” because dishonest, fraudulent, criminal, malicious, or intentionally harmful acts are never a good idea (and they’re not covered under any malpractice policy).

3. Failing to prioritize wellness – The demands of a solo practice can be high, and for many solos, there’s never enough time to meet them all. I’ve seen it time and again. In fact, over the years, a few solo attorneys even reached out just to share that they could go no further. Each of them had decided to simply walk away from their practice. Clients were left in the dark and the responsibility of winding up their practices was left to others. Isolation, burnout, depression, anxiety, alcohol abuse, and the loss of support systems exemplify the struggles solos can face when little to no effort is put into maintaining wellness. It needn’t be this way.

Yes, this risk may not always be easy to mitigate. Sometimes the demands of a solo practice must be the priority and sacrifices will need to be made. That said, a proper mindset can help one navigate those waters. Don’t live to work. Work to have a life. Find ways to prioritize wellness in all aspects of your life. Think personal, physical, financial, professional, and even spiritual. For example, find a backup attorney and take a vacation from time to time. Schedule time to get a little exercise. Establish communication boundaries with your clients so you can protect personal time. Most importantly, don’t forget to nurture the relationships you have with your support systems, both personal and professional. If left unattended, those relationships can all too easily “die on the vine.” There’s no one right way to prioritize wellness. Just know that this is one of those things that only you can make happen.

4. Mismanaging the business – The number of lawyers and doctors I’ve met over the years who are competent professionals yet seemingly haven’t a clue about how to run a business continues to boggle my mind. Yes, the practice of law is a profession; but in order to be able to practice long-term as a solo in this honored profession, one must also be able to build and maintain a successful business. Despite what some attorneys would like to believe, good clients don’t start lining up at the door just because the shingle has been hung, nor will they be tripping over each other as they race to pay their bills on time. Knowing how to run a small business, which is something that just isn’t taught in law school, is something every solo needs to be able to do.

To mitigate this risk, you may need to develop a few new skills or hire someone to help you because solo attorneys do need to have at least a basic proficiency in business management, marketing, and accounting. Long-term success is built on staying on budget; knowing what your profit margin is; knowing when and how to hire the right people; selecting the right technology and knowing how to get the most out of it; putting sufficient time and energy into marketing, to include building a strong online presence; and knowing how to reach and meet the legal needs of your target market. Yes, this may be hard to do. All I can say is that mismanagement of the firm was the reason several major law firms in the U.S. failed over the last decade. If mismanagement can take down a major law firm, it most certainly can and will do the same in the solo and small firm space.

One quick side note: Unexpected things can and do happen. For example, over the years some of our insureds have passed away prematurely from a climbing accident, heart attack, or cancer. Some have had to live with the consequences of a life-changing event such as a stroke or an accident that left them permanently disabled. Others have had to deal with the fallout of an employee stealing firm funds, an office break-in, a car accident, a sexual harassment claim, a ransomware attack, or a client fall. Firms have also reported weathering fires, floods, hurricanes, and lightning strikes. We all live and work in a world full of risk. Given this reality, it’s worth also thinking about purchasing appropriate coverage to mitigate these risks as well.

5. Ignoring one’s duties under the Rules of Professional Conduct – Here’s a little food for thought. Sometimes money drives ethics. That’s just a reality, particularly when it comes to conflict resolution. Trust account missteps are far more common than they should be, and few fully appreciate that lack of intent, shoddy record keeping practices, and/or restitution aren’t going to be successful defenses to a misappropriation or conversion of client funds complaint. And never forget that when it comes to the actions of anyone in your employ, it’s your license that’s on the line.

Trust me, a fast track to having your practice come to a screeching halt is playing fast and loose with these rules. Unfortunately, for some of our peers, there was no game playing. It was simply ignorance about what their duties were under the rules, and as we all know, ignorance is no defense.

This risk is an easy one to mitigate. Read the Rules, take them to heart, and reach out for advice if you’re ever unclear about what a rule requires, or if and when an ethical dilemma arises and its resolution isn’t clear. Most importantly, make sure you fully understand and abide by the rules pertaining to your trust account because trust account missteps remain one of the top reasons attorneys are disciplined.

¹ Out-of-band communication – a method of challenge and response to the requestor of a transfer, payment, or delivery of money using a communication method that is separate and distinct from the communication method the requestor originally used. Its purpose is to authenticate the accuracy of the information initially received.