5 Ways To Reduce Post-Pandemic Legal Malpractice Exposure

By John Johnson
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Law360 (May 27, 2020, 5:28 PM EDT) --
John Johnson
John Johnson
In the past few months, we have all been faced with relatively new concepts, such as social distancing, quarantine, and essential and nonessential businesses — terms that few people thought about six months ago.

The pandemic has left many individuals, as well as businesses large and small, uncertain about their economic viability post-pandemic. There is currently no precise sense as to the scale of the economic fallout given the suddenness of the crisis. The stock markets have fallen dramatically, crude oil is in negative territory, forbearance agreements abound, and nonessential business in many states have not generated revenue in months. Manufacturing is at a standstill, the future of commercial real estate is questionable, and insurance contracts will be closely scrutinized.

While many will look to the law profession to sort out their issues and concerns, history tells us that many others will look to their legal professionals and their insurance carriers as a source of recovery. When the economy is humming along and people are prospering, we see fewer incidents of people turning on their lawyers. When the economy turns down and people are unhappy, lawyers and their law firms are often targets for clients' frustration.

Sadly, this is often not a reflection of the quality of the representation provided by the lawyer, but rather a means for clients to seek recovery for their losses — with the clients viewing their lawyer as having failed to protect their interests.

History reveals that malpractice claims rise following economic downturns. We only need to look back as recently as the economic recession of 2008, and the market contraction of 2011, to confirm this phenomenon.[1] Further evidence can be found in the years following the savings and loan crises in the 1980s.

Typically we can expect to see claims arising from commercial and residential real estate transactions, bankruptcy filings, family law matters, estate transactions, mergers and acquisitions matters, as well as other financial institution-related transactions. A study by the American Bar Association found that between 2008 and 2011, real estate matters were the most frequent subject of malpractice claims (providing allegedly bad advice with respect to transactions), overtaking personal injury claims as the leading point of contention.

As in the past, with the current situation we can expect a lag before the uptick in claims, as people are focused on their immediate need to stop the bleeding, and courts need to catch up on the backlog of cases and establish protocols for moving dockets forward.

While it is yet to be seen what areas will generate the most litigation, the significant interruption of almost every form of business will certainly provide a rash of malpractice litigation surrounding contract- and insurance-related issues. The question of whether a client had contractual protection against the harms of the pandemic will most certainly be hotly contested.

While a certain percentage of the legal malpractice claims will be unavoidable, there are prophylactic steps that can be taken to help "flatten the curve." Five ways to revisit your risk management strategies to avoid unnecessary exposure and reduce claims against your firm are discussed below.

1. Stay in your lane.

The current pandemic has upended the legal industry in ways never before seen. Many firms have been forced to cut salaries, defer or withdraw partner compensation, and/or lay off attorneys and staff, all of which puts pressure, either real or perceived, on firm attorneys to generate new business.

This can lead to attorneys accepting work that falls outside their area of expertise simply in an effort to keep themselves or others in the firm busy. Lawyers must resist the temptation to take on cases they are not qualified to handle or that fall outside their sphere of expertise.

When a new or potential client makes contact with an attorney, it is essential that the attorney honestly and accurately assess his or her ability to handle the matter in a professionally competent way. Where lawyers get in trouble is when they dabble outside their area of expertise or competency simply to gain new business.

Rather than accept a new matter that a lawyer is not proficient in or does not have the time or resources to become proficient in, the lawyer must decline the representation to avoid treading on dangerous ground and producing unsatisfactory outcomes and risking a potential legal malpractice claim.

2. Define the scope of the representation of your engagement letter.

An engagement letter is a crucial piece of any firm's risk management strategy. While most states require engagement letters under their rules of professional conduct, reducing malpractice exposure is an important driver of this risk management tool. Clear and concise engagement letters define the parameters of the relationship and representation and remove any doubt or confusion about such things as who the client is and who the client is not, clearly establishing to whom the lawyer owes a duty.

The engagement letter should explain the type of services to be provided and exactly what the lawyer has been hired to do. The letter should also spell out how far a representation shall go and how long the representation is expected to last.

For instance, it should make clear whether a litigation engagement will include appeal, whether a real estate engagement will include security filings long after closing was complete, etc. This specificity prevents selective memories at later dates, which invariably result in the client expanding the scope of services initially contemplated.

Engagement letters should also specifically identify the fee arrangement, how the fees are calculated, how the fees are separate and distinct from costs, who is responsible for costs, and if and when fees may increase. In the event the engagement is on a contingency basis, the precise terms should be set forth on what percentage of any recovery goes to the attorney, and if different percentages apply at different levels of recovery, when those differences apply.

Engagement letters should also discuss and explain the conflict of interest checks run by the firm and potential conflicts that could arise during the representation, as well as the attorney's right to withdraw from the representation for nonpayment.

A sloppy, imprecise engagement letter will lead a client to believe that the lawyer represents the client in all of their legal issues for all time, creating what can be considered an indefinite duty to the client. As noted above, no one can guarantee a client will not at some point initiate a legal malpractice claim, but a well-written engagement letter executed by the client will go a long way in limiting the more common claims asserted by clients sounding in legal malpractice or breach of fiduciary duty.

3. Communicate frequently with clients and properly manage expectations.

It is especially important in a down market that lawyers properly screen potential clients, and communicate frequently once engaged to properly manage expectations. In order to minimize the risk of malpractice, a lawyer needs to make sure that the client has realistic expectations from the outset. Those expectations should then be reinforced with frequent and honest communications through which realistic outcomes are discussed at length. Guaranteeing particular outcomes is a no-no, and communicating the full range of strengths and weakness in each client's case is a must.

Lawyers should not create a situation where they can easily be second-guessed, and therefore should communicate early and often to set forth all the information available at the time and create a paper trail. Responsiveness to a client's needs and demands in a timely fashion will keep clients happy and informed.

When clients are not kept in the loop, they are more likely to bring an action against their lawyer if they don't get the results they expected. Making a contemporaneous record protects against one person's word being pitted against the other later on.

Finally, lawyers must proceed with caution when asked to assign value to a particular set of facts. Often it is very difficult to predict the value of a claim, and once a number is assigned, it becomes the absolute rock bottom value in the client's eyes.

In this situation, the client usually perceives any deviation from the attorney's initial value opinion to be a result of the attorney's failure to perform — no matter how much the facts change during the course of discovery in the matter. Thus, any recovery short of the initial evaluation will provide fertile ground for a malpractice claim.

4. Keep your receivables on a short string.

If there is one thing that all legal malpractice attorneys can agree on, it is that collection actions breed legal malpractice counterclaims. It is estimated that approximately 40% of lawsuits filed for the collection of past due receivables result in counterclaims sounding in negligence.

The coronavirus pandemic is causing economic damage to a degree not seen since the Great Depression. The resultant slowdown in payment from clients on law firm invoices is a virtual certainty. This is not the appropriate time to play the role of the lenient banker, but rather it is a time to be diligent in your collection activities and realistic about moving forward on matters where clients have not paid their bills (see engagement letter above).

5. Institute a comprehensive docketing system that assures the proper calendaring of events and deadlines.

Courts nationwide have instituted COVID-19 scheduling changes, which effectively delay proceedings, stay deadlines, and in some cases prohibit new filings. In many courts, statutes of limitations have been tolled and filing deadlines extended. With each court and jurisdiction instituting different and distinct orders regarding filings and deadlines, it becomes more incumbent upon the attorney to stay abreast of all new filing deadlines.

It is axiomatic that the most frequent allegation in legal malpractice actions is failing to meet a filing deadline. As it relates to risk management, firms and attorneys must be cognizant of all of the different orders being implemented by the various courts to assure compliance with deadlines so as to reduce exposure for legal malpractice.

The most productive and efficient way to deal with problems related to court deadlines is to institute a docketing or calendaring system that effectively alerts all responsible parties of upcoming dates and deadlines. Most large firms now use docketing systems with computer software readily available on the market, which provide multiple alerts to attorneys of upcoming dates and requirements.

Implementation of a docketing system is relatively simple, requiring very little effort to input information on crucial deadlines. Despite the simple remedy, many firms and lawyers fail to implement a system, which often leads to missed deadlines.

The problem with failing to adopt a proper docketing or calendaring system is magnified by the work-from-home issues being felt by all lawyers in areas under quarantine orders. This fact clearly suggests that a system of docketing and calendaring, if not previously undertaken, is now a necessity.

John P. Johnson Jr. is a member at Cozen O'Connor PC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] "Recession and Recovery: The impact on lawyers professional liability exposures," Aspen Insurance, October 2013 citing Anthony P. Spain, "Possible Impact of the Current Economic Downturn on Lawyers Professional Liability Claims," Mendes & Mount, http://www.cnapro.com/pdf/largelawyerseconomicdownturnlplclaims_4-24-09.pdf.

For a reprint of this article, please contact reprints@law360.com.

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