Law as Risk Management: Identifying, Analyzing, Communicating, Mitigating, and Monitoring

What is the purpose of law? What is the “value proposition” of an attorney? These questions are integral to our work at LexPredict. And our response to these questions rests on one word: Risk.

For Hammurabi and the sailors of Rhodes, they managed the risk inherent in commercial contracts and natural disasters. Plato and Locke and Hobbes set out to manage the risk inherent in mankind itself, and in its social contracts between present and subsequent generations. For today’s legal professionals, specialization in society and the economy has driven an ever-increasing number of risks and combinations thereof. From tax treaties and anti-trust to self-driving cars, peer-to-peer insurance, and data privacy, risk is everywhere and it has become steadily more complex. While insurance and finance have taken a larger role in recent history, law is the original risk management solution.

Vexingly, we often think of risk management as limited to the transfer of risk. Insurance might be the easiest example, where the insured transfers risk of loss due to certain perils to the carrier or pool. In law, contract attorneys spend much of their time transferring risk and negotiating indemnification or “additional insured” clauses. However, good risk management necessitates a view much broader than only transfer. Good risk management spans the identification, analysis, communication, mitigation, and monitoring of risk.

This expansion of the meaning of risk is obvious upon closer inspection. Risk is not risk of loss alone. Rather, risk is “the potential for gain or loss.” A deal partner who facilitates their client’s M&A activity provides risk management services just as much as an insurance defense partner before the Court of Appeals. The word risk has a general negative connotation of loss, but in our opinion, it is no coincidence that the laws of probability and statistics were largely the product of scholars trained in the law. Fermat, Leibniz, and Karl Pearson all received their doctorates in law, and Fermat and Leibniz even practiced as judges and counselors throughout their lives.

Viewed through the lens of this definition of risk, the practice of law becomes much more clear. When we review contracts or research regulatory trends, we are identifying and analyzing different risks for our clients. In some cases, these risks portend loss, such as the increased risk of litigation in the wake of weakened mandatory arbitration clauses. In other cases, these risks present an opportunity for gain, such as the introduction of a new regulatory exemption or a novel legal theory in defense of a common counter-party claim.

Especially key to the practice of law is communication of these risks. Much of what distinguishes the best counsel above other counsel is not their capacity to identify and analyze risks. Rather, it is their ability to communicate risk to clients that makes them stand out. Any law student can recite common causes of action and defenses for commercial litigation, but a good attorney knows how to translate these concepts into descriptions of real world situations and their solutions. As the modern world progresses toward increased specialization and complexity, this challenge grows ever more difficult.

Arguably, attorneys are also the most important engineers of risk mitigation and monitoring in society. In some cases, the risks are still distant. For example, counsel for B2C firms may mitigate the risk of future litigation by using mandatory ADR clauses. But when a plaintiff has already filed and been granted standing, their outside counsel should shift focus to mitigating the risk of loss in the active matter. Mitigation may take a wide range of forms, from acceptance of risk to complete avoidance of it. This latter response may lead counsel to recommend a business cease all operations to be safe. Sometimes this leads to the oft-repeated caricature of legal as the “Department of No”. This caricature, though, is only a superficial representation of what’s really going on.

It can be hard to appreciate this perspective of law as risk management. But if we step back for a moment and put things in context, we can better serve our clients and society.