Remote Provision of Professional Services and E&O Risks

Suddenly, where financial services professionals had been required to be in the office to handle trades, provide investment advice, manage investment portfolios, etc., they were now being permitted to handle these tasks from home. Lawyers, who traditionally were expected to show up at the office, not only were being permitted to work from home when not required to attend to court obligations but also, in fact, were being required to appear at court conferences and even trials remotely. Further, to avoid the risks of travel, they were meeting with and interviewing clients, taking depositions, attending mediations, and doing just about everything else remotely. Health-care professionals were offering remote medical appointments. Telemedicine’s popularity exploded. Insurance brokers were scheduling Zoom calls to conduct renewal meetings and eschewing visits to client businesses out of fear of being exposed to the coronavirus. All manner of other professional services were being provided by people working from their homes.

Prior to the onset of the COVID-19 pandemic, approximately 30% of full-time employees surveyed worked remotely at least some of the time. That rose to nearly 50% of full-time employees during the pandemic. It is anticipated that this same percentage will continue to work remotely at least some of the time in the postpandemic world in which we now live (in the sense of “life after the changes wrought by the pandemic” rather than “life with the pandemic fully behind us”).

This article discusses the shift to remote work, the impact of that shift on professional services, the impact of technological advances on the provision of professional services, and the ensuing errors and omissions (E&O) risks for professionals in a remote-work environment governed by technological advances.

The Provision of Professional Services Prepandemic

Before the pandemic, there was a largely monotonous adherence to the status quo—the belief that professionals needed to go to the office to do their work. So lawyers, insurance agents and brokers, accountants, financial services professionals, real estate professionals, etc., were expected to be in the office and work at least a full day at the office before heading home. When professionals met with clients, it was in person, either at their offices or at the clients’ offices. If you had a doctor’s appointment, even the most routine, the appointment was typically held in person. This was common practice for all consulting work as well.

When practice groups scheduled meetings, they would largely be in person as well. Even where different members of a team located in different geographical areas gathered by videoconference, the professionals in one office location would all go to a single conference room and participate as minigroups. The thinking that dominated management of professional services firms was that people needed to be in the office to be productive, in-person supervision was critical, brainstorming and coordination of activities required collective activities in a joint location, the in-person office environment was a key component of mentorship of younger professionals, and the maintenance and preservation of a firm’s culture depended upon people spending their workweeks together.

The Provision of Professional Services Postpandemic

The forced adaptation to the realities of the pandemic had some eye-opening impacts. First, things actually continued to get done. Clients were serviced. Senior professionals supervised junior professionals. Client meetings took place and marketing continued. Work was performed. Bills went out and were paid. Business development continued. And contrary to what most everyone thought might happen in the meantime, costs shrank dramatically, revenue went up, and profitability was in many cases shockingly strong. Further, employees came to enjoy the lack of hours lost to a daily commute. Firms realized that they could make do with less physical space, reduced air travel costs, reduced marketing costs, etc. People realized that they could work outside the geographic limitations imposed on them by the need to be situated within a reasonable daily commute to the office.

Broadly, the impacts of a continuing remote-work environment going forward are still somewhat speculative, but research performed by McKinsey & Company suggests that a number of companies are planning to shift to flexible work spaces after their positive experiences with remote work during the pandemic. Specifically, McKinsey surveyed 278 executives during the summer of 2020 and found that, “on average, [executives] planned to reduce office space by 30 percent.” McKinsey also estimated that about 20% of business travel might never return. Additionally, a McKinsey survey of 800 senior executives in July 2020 resulted in two-thirds saying that they were stepping up investment in automation and AI either “somewhat” or “significantly.” As a result, low-wage, unskilled jobs are expected to undergo substantial reductions over time, while the share of jobs in various professional fields will increase as a share of total employment across the board through 2030.

The interest in pursuing an employment model that allows for some remote work is apparently not just confined to management. A recent article published by KPMG states that 80% of U.S. workers say they would turn down a job that does not offer flexible work opportunities. As a result, businesses are expected to invest $7 trillion in making work digital by the end of 2023. Bringing home the tectonic shift in thinking that has emerged regarding remote work, it is estimated that by 2025, 70% of the workforce will work remotely at least five days a month.

The Impact of the Remote Environment Shift on the Provision of Professional Services

As noted above, the provision of legal services has been dramatically impacted. There is very little that cannot be done remotely by lawyers. Because travel and hotel accommodations can be big drivers of legal costs, clients are requesting or explicitly instructing law firms in many instances to identify and take advantage of opportunities to forgo travel. While a lawyer needs to be sitting across from certain witnesses (such as the plaintiff or the adversary’s expert) during a deposition, where the witness is not viewed as critical, lawyers are expected to find opportunities to conduct or defend the deposition remotely. As we continue to emerge from the pandemic, there likely will be more in-person or hybrid attendance at mediations; however, with the success of remote mediations, it is anticipated that there will continue to be a significant number of remote mediations.

The ability to schedule meetings via Zoom or Microsoft Teams is going to result in fewer in-person meetings and reduced travel time. Obviously, certain medical procedures are going to require in-person interactions, but there has been a substantial uptick in remote doctor visits and remote therapy sessions. Insurance agents and brokers still want to sit across from their clients as they walk them through their various coverages, and need to at least periodically inspect their clients’ premises and business operations; however, again, remote meetings will occur when possible.

Overall, across all professions, in light of the new work patterns, firm management is taking a hard look at the office of the future. If all anyone needs to do their jobs is access to a laptop and smartphone, and they will not be going to the office every day, less office space needs to be devoted to providing each individual with a permanent office. Firms are considering whether they can make do with a smaller physical office footprint. They will instead create group spaces, with “hot desks,” where one finds a spot that’s open to dock a computer on their days in the office, and a few conference rooms and private offices for private conversations or in-person meetings with clients.

None of this is new. There are industries—such as the insurance industry—where this has been going on for years. What’s new is that it is happening in professions at a dramatically expanded pace. And it appears that there is no going back.

The concern regarding remote work is the impact on morale of person-to-person interactions and how these interactions “are also crucial to the flow of mission-critical information.” Whereas businesses that successfully ran largely remote workforces before the pandemic would tend to exhaustively document their processes and knowledge, and thereby “enable[] employees to join projects and get up to speed on their own time, without having to consult colleagues first,” this level of management wasn’t employed by the businesses that had largely in-person workforce participation because they “could afford to be sloppy.”

Further, a report published in July 2020 by the FICC Markets Standards Board (FMSB) noted that the shift to a largely remote provision of professional services could create the following risks:

• “Risk to confidentiality and client privacy if family members or housemates work for competitors”
• “Individuals feel compelled or coerced to return to offices to gain visibility or for career progression”
• “Without the natural rhythm and with no opportunity for decompression from work as [there is] no commute time, staff are often working much longer shifts and [thus] more prone to errors and to suffering mental health issues”

Additional concerns involve the loss of the ability to collaborate instinctively without preplanning, impromptu mentorship, and supervision, as well as opportunities to create personal connections among members of the firm or company. The very real fear is that these losses will lead not only to making and repeating errors but also to stunted growth in the development of younger professionals.

Equally important are the concerns that firms will be unable to impose a defining culture and that there will be a severely enhanced risk of employees engaging in improper, unethical, and/or illegal conduct with the lack of close oversight afforded by the office environment. There is also the substantially enhanced risk that people may not be reachable and immediately available when a client crisis develops. Finally, with the reliance on home and unsecured networks, there is a substantially enhanced risk that computer systems may be compromised by malware and that highly confidential business and client information could be accessed.

The Impact of Technological Advances on the Provision of Professional Services

At the same time that various professions are experiencing substantial changes in operations due to the increased prevalence of remote provision of professional services, they continue to be impacted by the rapid evolution of technology, both generally and as applicable to their professions specifically.

Lawyers. We know that in the not-all-that-distant past, a substantial portion of relevant discovery in litigation was focused on “paper” documents. Now the focus is on collecting and identifying relevant electronically stored information (ESI). ESI is constantly expanding every day, so determining how best to find, gather, sort, review, and organize ESI has become a critical aspect of lawyering—along with taking all of the necessary and appropriate measures to preserve clients’ ESI from destruction, deletion, or improper disclosure.

Additionally, lawyers need to be cognizant of the possibility that relevant video might exist on phones, dashboard cameras, security cameras, etc. And there is also a concern about computer metadata that might reveal where someone has been and when documents were created, modified, or deleted.

Lawyers also must be familiar with social media and have a plan for ethically and appropriately gathering social media that will be helpful to their case; at the same time, lawyers must caution their clients against creating new, potentially damaging social media and against destroying or deleting relevant social media postings. Once everything is gathered and reviewed, the attorney must authenticate the material, introduce it into evidence, and present it in a visually stimulating and compelling manner.

One benefit of ESI is that lawyers now have the ability to “map” what has happened with regard to disputed events in a manner that was simply impossible in the past. With so much communication happening in the form of texts and emails, details can delineate by the minute what was happening on both sides of a transaction or event, what was being said, and what people were thinking. Moreover, with respect to data at issue, such as confidential information and trade secrets, the metadata can identify when data was downloaded onto a device, when and what files were accessed, and even when flash drives were plugged into a laptop.

Furthermore, basic research can now be cheaply and quickly conducted by software programs, which sort duplicate, useless, and irrelevant data from highly relevant and critically important data. These programs also have the ability to sort and organize reams of relevant documents by name, topic area, or specific search term; cut video of depositions into usable chunks specific to areas in which witnesses are to be cross-examined; and prepare compelling graphics and video presentations, all of which can be controlled at trial by a handheld tablet.

Although all of this can add substantially to the lawyer’s work product, by the very nature of the tasks involved, mistakes can be devastating.

Insurance brokers. Brokers are also privy to dramatically expanded opportunities to find and access useful data relevant to guiding and advising their customers. However, there are risks.

Whereas brokers used to regularly sit in a room across a desk from their customer and walk through a policy application together, policy applications now are frequently completed online, either with the customer on the phone answering the questions from another location or with the customer having previously answered the questions and the broker inputting the information from notes. Instead of the broker witnessing the customer signing the application, there is no signature at all. This poses an enhanced risk of mistakes. For example, after coverage is denied because of a misrepresentation made in the application, the customer might claim that they said one thing when they said something entirely different as they were going through the application with the broker. In addition, without paper applications in hand, brokers are often denied the ability to compare the application to the quote being offered by the insurer, and thus can sometimes miss the fact that the offered coverage differs in one or more significant ways from the coverage being sought.

Another technological issue that can arise is brokers’ failure to take advantage of the increased ability to document their activities. Brokers will generally use one of a number of various document management systems, which typically allow users to make electronic notes of significant communications with regard to coverage. This can cut both ways. On the one hand, it may be easier to show contemporaneous notes that aid in the defense of a claim. On the other hand, if an insured ultimately doesn’t have sufficient coverage limits or certain coverage that was offered as an option and a loss occurs, the insured could claim that, in fact, higher limits or the optional coverage was requested—and the broker’s argument that the insured was offered and rejected the coverage at issue can be severely undermined by the absence of electronic notes to that effect.

Financial services professionals. Financial services professionals also face a world in which advances in technology can increase their E&O risks. In addition to facing the same issues that insurance brokers face in terms of promising levels of service yet failing to access increasing amounts of potentially relevant data, they are facing the increased risk that societal actions can produce odd, unanticipated results.

One prominent example is the rise in “meme stocks,” highlighted by the meteoric rise in GameStop Inc.’s (GME) price per share in early 2021, which was driven by a large group of retail investors who believed that buying and holding the stock would force a phenomenon known as a “short squeeze,” resulting in an astronomical price per share. The “hive” mind of the individuals ignored traditional indicators, such as financial statements, and disregarded GameStop’s out-of-date brick-and-mortar business model; instead, they opted to “play the stock market” to force a short squeeze. Because of the traditional indicators, the stock had been heavily shorted (betting on the price per share decreasing in order to turn a profit), and those who held short positions lost billions of dollars. In fact, at least one large hedge fund shut down after being unable to recover from the losses.

Finally, financial services professionals face huge cyber risks. Their data systems may be hacked, leading to loss of highly confidential customer information, and they may be hobbled or completely frozen by malware or other hacking attempts. The increased risk posed by email spoofing (giving the appearance of an email being from a trusted address when the actual address is that of the malicious attacker) and social engineering fraud, coupled with the ability to transfer vast sums of money with the push of a button, can have devastating impacts on a broker-dealer.

The E&O Risks Presented by This New Environment

Professionals are generally required to provide services that comport with the level of service of a competent professional in similar circumstances. While professionals do not always owe fiduciary levels of care, depending on the type of professional and the circumstances, duties of care can be deemed to be equivalent to that of a fiduciary. For example, investment advisers are generally deemed to act as fiduciaries with regard to the provision of their investment advice and handling of client assets. Insurance brokers, on the other hand, are—with the exception of a small number of states—generally deemed not to owe fiduciary duties of care. But this can change where there are “special circumstances” or the broker and the customer are deemed to be in a “special relationship.”

One impact of the increasingly remote provision of professional services coupled with enhanced technology is that professionals have the ability to much more regularly and easily convince their customers that they have highly specialized skills and experience by providing webinar content, sending out emails updating customers on developments of interest, and preparing and circulating newsletters offering insights and advice regarding relevant trends. All of this can serve to support an argument that “special circumstances” exist or a “special relationship” has developed: the professional’s repeated promotion of itself as an expert and the customer’s reliance on the professional to provide such services could lead to the classification of those services as “highly expert” or “specialized services.”

Another impact of the amount of data and information available is that modern juries are going to be more willing to reject arguments that a professional could not have known about a particular issue, could not have done anything to avoid a problem that cropped up, and could not have been expected and relied upon to provide advice or guidance regarding a specific issue resulting in a customer’s or client’s loss or injury.

All of the foregoing present challenges for professionals trying to manage their risk, as well as for the lawyers who are tasked with defending them when they are sued for allegedly failing to provide services in conformance with the requisite standard of care. It also presents substantial new and ever-evolving challenges for people who underwrite these risks and the insurance claim professionals who are tasked with monitoring and overseeing the defense of these claims.

Given the virtually certain increased provision of remote professional services, coupled with the ever-evolving technology relevant to the provision of those services, either very generally or quite specifically, everyone involved in risk management, insurance, and defense of professional liability E&O claims will be struggling to understand, manage, and ride with these challenges now and in the years to come.