Business Insurance

The Top Five Things You Should Know About Protecting Your Law Firm

By Kevin Valine, Leavitt Group

If you haven’t had to file a claim with your professional liability carrier, this topic may be far from the top of your mind.  However, all law firms are susceptible to legal malpractice claims, no matter how careful or skilled they are. As a professional liability professional, I have seen how traumatic these claims can be when they do occur. Make sure your risk management process includes these five critical elements to mitigate your firm’s risk:

Client Intake

Many claims are not related to an error in legal services but rather to the selection of the wrong client.  Client intake is critical.  When selecting new clients, trust your instincts and ask yourself “am I really the right attorney for this client?”  Is the client experienced in legal matters, or might their expectations be naïve and unreasonable? Don’t let business downturns result in relaxed intake decisions, and be wary of prospective clients who have sued attorneys in the past.

Example

An attorney represented a client (who had worked with two previous attorneys) on a poorly drafted agreement, despite the fact that this client had sued attorneys in the past. When the results were unfavorable for the client, the client sued the attorney, with allegations that amount to rewriting the history of the underlying case. The attorney’s defense costs are currently in excess of $500,000, and settlement efforts have been unsuccessful.

Accounts Receivable Management

Diligence and consistency in accounts receivable management can help in minimizing the number of malpractice claims.  When firms try to collect their outstanding fees, clients often respond by filing a malpractice claim.  Claims result from accounts receivable problems as surely as “night follows day,” so maintain strict management of your accounts receivable to minimize the chances
of this occurring.

Example

Prior to working with us, one of our law firm clients discovered his insurance policy contained an exclusion which stated that if the insured instituted any legal action to collect legal fees, any counter-claims for malpractice would be excluded. The discovery came, unfortunately, after the carrier denied coverage for a new claim that arose out of the firm’s collections process. Unfortunately the law firm was forced to pay defense costs out of pocket.

It is very important that you create a culture in your organization where all of your attorneys know how to report potential claims to management and also understand the importance of doing so in a timely manner.   

Communication and Documentation

How you communicate with your clients is critical to the avoidance of claims.  Many claims arise because attorneys may do a great job dealing with legal issues but they aren’t engaged enough with their clients, they are not communicating enough with their clients, and they are not convincing their clients how much they care.  When an adverse result with a case occurs, the client may end up turning against the attorney.  If the attorney had been more communicative, the client may have accepted the adverse result without responding with a malpractice claim.

We see a surprising number of claims where lawyer and client disagree over what took place over the course of a given case. This is especially true with respect to conversations relating to litigation strategies and potential settlements. Documentation is crucial.  Here are a few things to keep in mind about documentation:

  • Advice that is not documented might as well not have been given.
  • Engagement and disengagement letters are critical documentation opportunities.
  • Take care to document what legal services you are not providing. We see a surprising number of costly claims that arise from a legal issue the law firm contends it was never handling for their client.

Examples:

  • An attorney was retained to deal with real estate problems that were mishandled by the client’s previous lawyer. The attorney was aware of the client’s dissatisfaction with that lawyer, and the subject of a malpractice suit did arise at one point. When the client later tried to sue the original attorney, the statute had run. The client then sued the new attorney for failing to warn her that the statute of limitations was running. The claim settled for $1,000,000 plus over $300,000 in defense costs. This firm now includes wording in all their engagement letters stating that they do not handle lawyers malpractice actions, and that if a client is considering suing a previous attorney they should seek counsel as soon as possible to prevent the action being barred by the statute of limitations.
  • As another example, consider the following: Debtors ask an attorney to represent them in an action from their creditor. The result of costly litigation is unfavorable to the debtors, who then bring a claim against their attorney. The claim alleges that the attorney allowed the debtor to be too optimistic about their prospects, and that he should have recommended early settlement. The file lacks clear documentation of the risks of litigation, as well as the settlement activity that took place, allowing for a “he said, she said” debate to arise.

Report Potential Issues in a Timely Manner

Many of the most serious claims appear to be nuisances early on but then develop into potentially catastrophic matters three or four years down the line. If these claims (or potential claims) are not reported properly at the outset, coverage may be denied after the claim is finally tendered.  It is very important that you create a culture in your organization where all of your attorneys know how to report potential claims to management and also understand the importance of doing so in a timely manner.

Law firms typically know they need to tender malpractice claims to their professional liability carrier when they are served with a lawsuit. What firms often overlook is the need to report potential claims early on, before a lawsuit is ever served.  It is not uncommon to see claims denied in these instances, and courts have often supported the insurance companies in these denials.

Does your management team know what constitutes a potential claim? Do all of your attorneys—from the newest associate on up—recognize the need to report potential claims? You pay significant premiums for your professional liability coverage—make sure you reap the value of that coverage by reporting potential claims early on.

Choose a Broker You Can Trust

Professional Liability is one of the most complicated and nuanced areas of insurance.  Your selection of an insurance broker should be based on the experience of the broker in this area, and as well on the level of trust he or she has earned with you.  Our greatest value to clients results when we are considered a trusted partner to the firm rather than a vendor.  When my clients bring me into the planning process and consider me part of their management team, I can help them to recognize the risks they face early on and recommend solutions while options are still available.  We often assist our law firm clients with exploration of new practice areas, or with due diligence involved in potential mergers or lateral hires.

When properly implemented, these elements in the risk management process can help protect your organization from costly professional liability claims.  To learn more about the coverage and services we provide for attorneys and law firms, please visit http://www.leavitt.com/Industries/LawFirms.aspx. You can reach Kevin directly at kevin.valine@leavitt.com. 

Kevin Valine has been with the Leavitt Group for 15 years and has over 34 years of experience in the insurance industry.  He began his insurance career in underwriting and then transitioned into insurance consulting.  Early on in his career, Kevin decided to focus his efforts and attention in the professional liability arena because of the required level of technical experience, which gives him the opportunity to work as a partner with his clients and not just simply a vendor.  Kevin and his peer Skip Reynolds have developed a professional liability and management liability practice.  They, along with their service team, are able to provide professional liability experience to their clients.
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