ARE YOU AT RISK? The Biggest Malpractice Claim Risks and How to Avoid Them
Survey the legal landscape of the past two or more years and you’ll see a lot of litter. As we all know, several very prestigious law firms have gone belly up. In other firms, lawyers have lost their jobs. Revenues are down. Growth is stagnant. And budgets have dried up—including marketing budgets, with many law firm leaders having taken an ax to business development efforts as a way to cut spending. That is, the shortsighted ones have. The more sagacious firms, on the other hand, saw the economic downturn as an opportunity.
Here’s a quick pop quiz. Of all the malpractice errors that lawyers can commit, what is the most common one? If your answer is a failure to know or apply substantive law, you are correct. However, if you also believe that particular error accounts for the majority of legal malpractice claims, you would be wrong. In fact, no one single error accounts for the majority of claims, although as a general category, the substantive-related kind are your best bet for falling on the wrong side of the malpractice line. Other major categories of lawyer errors? Administrative errors, client relations errors and intentional wrongs.
Why should you care what the biggest malpractice claim risks are? The answer should be obvious. Understanding where and why claims happen can help you proactively take steps to reduce the likelihood a claim will be made against you. To accomplish this, there are some universally applicable lessons that can be learned from legal malpractice carrier claims data, which we’ll explore in the following pages. But first, it will be helpful to understand where information on malpractice claims comes from.
Getting a True Picture of Malpractice Errors
Getting good across-the-profession data on legal malpractice errors in the United States is virtually impossible for two reasons: There are multiple legal professional liability insurance carriers operating in all but one state (Oregon), and many U.S. lawyers don’t have any malpractice insurance at all. However, the Profile of Legal Malpractice Claims studies prepared by the ABA Standing Committee on Lawyers’ Professional Liability are among the best sources of information on U.S. claims. These studies include data from many insurers across many states and are conducted every four years or so. The most recent study covers 2004-2007.
In contrast, in Canada it is possible to get a complete picture of malpractice errors because all lawyers in private practice must have malpractice coverage. Law Society-affiliated insurers provide this insurance on a provincial and territorial basis, so each of those insurers has a full picture of all claims that happen in its respective province. (Note that Oregon has similar data, being the only U.S. state where malpractice insurance is mandatory, with that insurance provided by the state bar association.)
My employer, the Lawyers’ Professional Indemnity Company (LawPRO), provides coverage to Ontario lawyers. The comments in this article result from both LawPRO claims data and combined data and comments in the 2004-2007 and 2000-2003 ABA Profile of Legal Malpractice Claims studies (the LPL studies), as well as from information I’ve come across from other legal malpractice insurers. While there are some differences in law practice between the U.S. and Canada, and some variations in the terminology used by different insurers to describe malpractice error types, on the whole the claims data makes it clear that the reasons for malpractice claims—and the steps that can be taken to avoid them—are more or less identical in both countries.
The following sections describe examples of some of the specific errors that occur in each of the four major categories of malpractice claims—substantive errors, administrative errors, intentional wrongs and client relations errors—along with suggestions for how you and your firm can steer clear of them. See Figure 1 for a glance at the most common errors overall, as found in the LPL studies. To gain an appreciation of the relative proportion of errors that fall under each of the four major categories, see Figure 2, which also shows error categories by firm size to make another key point—which is that lawyers in solo, small, midsize and large firm environments make roughly the same type and proportion of mistakes. So if you are a large firm lawyer, don’t fall prey to the common misconception that you are less likely to make a mistake that could lead to a malpractice claim.
When grouped together, substantive-type errors account for over 46 percent of reported claims in the LPL studies. The most obvious error in this category is a failure to know or properly apply substantive law (i.e., a lack of sufficient or current knowledge of the relevant law on the matter the lawyer was working on). At 11.3 percent of claims, this is the most commonly reported error in the LPL studies.
Another rather obvious error is the failure to know or ascertain a deadline (as in a limitation period). Additional substantive-type errors include planning errors regarding choice of procedure; errors in public record searches; failures to anticipate tax consequences; and inadequate investigation or discovery of fact, which we’ll discuss further in a moment. First, though, let’s address the issue of the top error reported in the studies.
• Failure to know or properly apply the law. Over the past few decades, legislation has become more complex and the law has become far more complicated. This means more lawyers now tend to specialize in a given area of law, with fewer general practitioners in the mix. Today, too, there are increasingly more regulations and new case law is coming out of the courts at an increasingly rapid rate. Clearly, this makes it essential that lawyers regularly participate in CLE programs to maintain a current knowledge of the substantive law so they can avoid errors.
An additional issue is that in some areas of practice, law-related mistakes can be more common. Take family law as an example. With extensive federal and provincial legislation, as well as voluminous case law, failures to know or apply the law are the most common error for Ontario family law lawyers, representing more that 21 percent of LawPRO’s family law claims in the past 11 years.
Claims further indicate that “dabblers,” or lawyers acting outside of their usual practice area, are far more likely to commit failure to know or apply the law errors. Too often, lawyers who are asked to handle a legal matter for a family member or friend seem to feel obliged to help, and then find themselves dabbling in an area of law they don’t know. And, given the relationship, it can also be difficult or awkward for the lawyer to give a family member or friend independent legal advice. The lesson: Dabbling is dangerous—don’t do it. Send the family member or friend to another lawyer.
Likewise, lawyers should tread carefully when giving advice or working on matters relating to law for a state where they are not admitted or for non-U.S. law. Not only is there a greater opportunity for making an error—your malpractice policy likely will not cover you in the event you make a mistake. Read your policy to confirm this.
• Inadequate investigation or discovery of facts. This is another substantive error that deserves special attention, since it’s the second most common error in LawPRO’s claims portfolio (at 14.1 percent) and third in the combined LPL studies (at 8.8 percent).
In a real estate deal, this type of claim might involve not delving into the client’s long-term plans for the property, and then failing to follow up on appropriate zoning or bylaw searches to ensure the client can use the property as intended. In a family law, will or estates planning matter, it might involve not digging into more details about the status of past marital relationships, other children or stepchildren, or the amounts of assets or liabilities. In a merger and acquisition matter, this error might arise when shortcuts are taken in due diligence work.
Perhaps overall it’s a symptom of “BlackBerry legal advice”—meaning quick questions and answers without context being exchanged between people in a rush. The critical issue is that this error goes to the very core of what lawyers are supposed to do for their clients—give legal advice tailored to the client’s specific circumstances—and basically involves the lawyer not taking a bit of extra time or thought to dig deeper and ask appropriate questions on the matter. To avoid this type of claim, you have to take the time to read between the lines so you can identify all appropriate issues and concerns. Ask yourself: What does the client really want? Does everything add up? What issues or concerns should be highlighted for the client? If something doesn’t add up, you need to ask more questions and dig deeper.
Taken together, administrative errors—which include tickler system errors, clerical and delegation errors, lost file or document errors, and procrastination—account for 28.5 percent of reported claims in the LPL studies. A failure to file documents is the top administrative-type error in the studies (at 8.6 percent). A failure to calendar (i.e., a limitation period was known but not properly entered in a calendar or tickler system) is the fifth most common error in the LPL studies. A related, but less common error is the failure to react to a calendar system (i.e., the limitation period was correctly entered but missed owing to a failure to use or respond to the tickler reminder). Clerical and delegation errors include things such as simple clerical errors (e.g., filing a document in the wrong file), errors in mathematical calculations and work delegated to an employee that is not checked. Here is how many of these errors can be averted.
• Delegation and calendar advice. Delegation of tasks to knowledgeable support staff is an essential part of the operation of every practice. Ultimately, however, the lawyer is responsible for the delegated work and has to take steps to ensure that delegated work is reviewed appropriately. Extra care is especially warranted if there is something different or unusual about the matter. In addition, you should make sure staff members feel there is an “open door” policy any time they have a question or concern about the work they are doing for you.
But beyond that, with good time management skills and the proper use of tickler systems, administrative types of errors are probably the easiest to prevent. Practice management software programs such as Amicus Attorney and Time Matters are excellent tools for helping lawyers and their staff manage deadlines and tasks.
• Procrastination pointers. Lawyers at firms of all sizes seem to have a dusty file or two that sits on the corner of their desks for far too long, and this makes procrastination-related errors the seventh most common error in the LPL studies. If you have one of those dusty files, you need to deal with it. To determine how, first ask yourself this: Why are you avoiding this particular file?
Is it because you are uncomfortable with a point of law? Then do some research, get help from another lawyer, or transfer the file to another lawyer if you are not comfortable handling it. Is it because the client or the lawyer on the other side is especially difficult? Letting the file sit won’t make the related parties any less difficult. If you don’t think you can or want to deal with them, refer the matter to another lawyer.
Or, is it because the task just seems too big and you can’t seem able to clear the needed hours to work on it? Remember that baby steps will get you there. Break it into smaller tasks and set aside the time to work on them one by one. You can and will get it done.
In addition, taking practice management CLE courses can help lawyers in every type of setting learn how to manage their time, tasks, firm and staff more effectively and efficiently. Unfortunately, because some states still do not offer CLE credit for practice management courses, too many lawyers don’t take the kind of courses that would teach them the things they need to know to avoid these types of malpractice errors.
In the LPL studies intentional wrongs constitute 12.3 percent of claims. Intentional wrongs include fraudulent acts by the lawyer, malicious prosecution or abuse of process, libel or slander, and violations of civil rights. As a category, these types of claims may be the most shocking.
On a percent-of-claims basis, fraud ranks number 10 in the LPL studies data and number 11 in LawPRO’s data. And unfortunately, we are continuing to see more frauds by firm lawyers and staff. The sad fact is that even senior lawyers and the most longstanding and trusted employees can go astray when they are struggling to deal with financial issues or other personal crises. Therefore, regardless of firm size, it is important that every firm implement appropriate internal controls to ensure that funds in trust accounts are handled properly and that all transactions involving client monies are properly documented.
For a detailed discussion of motives, means and prevention steps relating to fraud and embezzlement in law firms, see the feature “Thinking about the Unthinkable” in the June 2009 Law Practice.
Client Relations Errors
Our final category of claims is client relations errors, which constitute 12.3 percent of claims in the LPL studies. There are several types of these claims, which all tend to arise from lawyer-client communication problems.
The first type is failure to follow the client’s instructions. Often these claims arise because the client says one thing about what was said or done, or not said or done, and the lawyer says another. These claims tend to come down to credibility, and they can be very difficult to successfully defend if the lawyer has not documented the instructions with sufficient notes or other documentation in the file.
The second type is failure to obtain the client’s consent or to inform the client. These claims involve the lawyer allegedly doing work or taking steps on a matter without client consent—for example, seeking or agreeing to adjournment, or making or accepting a settlement offer. Such claims also involve the lawyer failing to advise the client of all the implications or possible outcomes when decisions are made to follow a certain course of action—for example, pleading guilty on a criminal matter, or exercising a shotgun clause.
The third type is poor communications with the client, which involves a failure to explain to the client information about administrative things like the timing of steps on the matter, or fees and disbursements. This type of error also arises when there is confusion over whether the lawyer or client is responsible for taking a certain action during or after the matter—for example, sending a lease renewal notice to a landlord, or renewing a registration or filing.
• Relationship Improvement Tips. While it’s bad news that client relations errors are too prevalent, the good news is that they are also easy to prevent. You, and every lawyer in your firm, can significantly reduce exposure to these types of claims simply by controlling client expectations from the very start of the matter, actively communicating with the client at all stages of the matter, creating a paper trail that carefully documents instructions and advice, and confirming what work was done on a matter at each step along the way.
Consistent use of practice management software will go a long way in better managing client communications and relationships as well. More CLE courses in this area would be invaluable, too.
Conflicts of Interest
Conflicts of interest claims deserve special attention. While noting that many resources treat such claims as a type of substantive error, others (including this author) consider them a type of client relations error, so we’ll consider them from the latter perspective here.
There are basically two types of conflicts malpractice claims, the first of which arises when conflicts occur between multiple current or past clients represented by the same lawyer or firm. The second type arises when a lawyer has a personal interest in the matter. Since they regularly act for multiple clients or entities, real estate and corporate commercial lawyers experience more conflicts claims than other areas of law. Litigators, however, seem better able to recognize conflicts and have a relatively lower rate of conflicts claims.
To avoid conflicts of interest, make sure your firm has procedures in place for checking conflicts at the earliest possible point in time. This should, ideally, involve an electronic system that includes not only client names, but also individuals and entities related to the client, including corporations and affiliates, officers and directors, partners, trade names and the like. This will flag more real and potential conflicts.
Unfortunately, even when firm systems do catch conflicts, decisions are sometimes made to overlook those conflicts, either to please the client (at the client’s request to avoid the extra fees) or to keep the matter for the firm because of the fees it will generate. But, of course, these decisions often come back to haunt firms and can lead to complex and costly malpractice claims.
Note, too, that another hot button issue is a rise in conflicts relating to the lateral hirings of partners and associates. Unfortunately, such conflicts are often addressed very late in the process, when the transfer is all but done. At this late stage, all have such a strong desire to complete the transfer that potential conflicts are often ignored or overlooked. But beware: An all-too-frequent result is that the firm will have to part with two clients—an existing client and one that came to the firm with the new lawyer—and in this case, the firm faces the potential of two malpractice claims.
For more on hot button issues pertaining to conflicts problems today, see “Beware These Special Dangers” in this issue.
Avoiding a Claim: Your Marching Orders
Ultimately, according to the LPL studies, only 13.3 percent of reported claims involved either the commencement of a suit with a settlement or a judgment for the plaintiff. In 12.2 percent of claims, suits were dismissed with a judgment for the defendant. In 18.2 percent, there was a settlement payment with no commenced suit. In 56.3 percent, there was no payment and the claim was abandoned.
Nonetheless, dealing with any type of malpractice claim is probably one of the most unpleasant tasks that can face a lawyer. And that is why it invariably makes sense to do everything you can to avoid the stress, time and cost of dealing with a malpractice claim.Fortunately, there are significant opportunities to reduce your exposure to some of the biggest claims risks. Yes, a thorough knowledge of the substantive law is important, but don’t forget that improvements in client relations (read better lawyer-client communications) and in task and deadline management can significantly reduce the likelihood you will face a claim, too. See the “12 Tips” in this issue to get started. But the final word is that taking proactive steps to address all the types of claims covered here is your easiest and best opportunity to reduce your claims exposure.
About the Author
Dan Pinnington is Director of practicePRO, a claims prevention initiative at the Lawyers’ Professional Imdemnity Company that helps lawyers avoid malpractice claims and practice more successfully.
RISK MANAGEMENT AND CLAIMS PREVENTION RESOURCES
HOT WEB SITES
ABA Commission on Lawyer Assistance Programs . CoLAP provides educational resources concerning alcoholism, stress, depression and other emotional health issues, with links to state and local programs.
ABA Standing Committee on Lawyers’ Professional Liability . A great collection of malpractice insurance information, including a state-by-state directory of insurance carriers, malpractice insurance FAQs, and several risk management resources.
Freivogel on Conflicts . William Freivogel’s site is essentially an online textbook that can answer just about any conflicts question.
Law Practice Management Advisors . Many states and some local bars have a practice management advisor, or PMA. They are excellent sources of information about running a law practice. If your state’s lucky enough to have one, this should be your first call.
practicePRO . LawPRO’s risk management initiative provides a variety of resources, precedents and checklists that will help you take proactive steps to avoid a legal malpractice claim.
Avoid a Claim . This practicePRO blog tells you where claims happen, why, and what you can do to avoid them.
The Boundaries of Legal Marketing . Will Hornsby’s personal blog on the rules and policies that govern client development for legal services.
The Ethical Quandry . A legal ethics and litigation blog featuring posts by several Hinshaw & Culbertson LLP attorneys.
LegalEthics.com. Professor David Hricik’s and Peter Krakaur’s blog about the ethical issues associated with the use of technology by legal professionals.
Risk 411 . This open forum created by the Attorneys Liability Protection Society (ALPS) covers professionalism, ethics, risk management and technology.
BEST OF BOOKS
Risk Management: Survival Tools for Law Firms, 2nd Edition by Anthony E. Davis and Peter R. Jarvis (ABA, 2007). This book provides a self-audit tool that will help you evaluate your firm’s state of risk management and show you how to develop strategies to control risk and create a risk management policy.
Legal Malpractice: The Law Office Guide to Purchasing Legal Malpractice Insurance, 2010 Edition by Ronald E. Mallen (West, 2010). A comprehensive review of everything you need to know when purchasing legal malpractice insurance, including a listing of policy provisions.
MALPRACTICE INSURANCE HOTLINE
The ABA Standing Committee on Lawyers’ Professional Liability’s hotline can assist in finding an insurance carrier, determining insurance costs, analyzing policy coverage, avoiding gaps in coverage, and hotline staff can help answer questions about what to do if you have a special coverage problem or if you might have a claim ( www.abanet.org/legalservices/lpl/hotline.html or (800) 285-2221, ext. 5755 or 5754).
12 TIPS THAT WILL HELP YOU AVOID A LEGAL MALPRACTICE CLAIM
Knowing substantive law is important, of course, but from a claims prevention point of view you get more for your risk management efforts by focusing on improving client communications and by getting things done on time. Here are top tips for avoiding a malpractice claim.
1. Start out on the right foot with a written retainer agreement. It should clearly identify who the client is, what the terms of your engagement are, and what you are retained to do.
2. Get the money up front. At the time you are retained, get a retainer that will cover all initial work that needs to be done on the matter. Replenish retainer funds before they are exhausted. Set up your accounting system to remind you when the amount in trust is getting low. Stop working on the file if the retainer is not replenished. Working on credit greatly increases the likelihood you will not get paid for your work. Of course you should do pro bono work, but only when you choose to do it.
3. Control client expectations at all times. Clearly and accurately communicate to your clients the available courses of action and possible outcomes, all implications of any decisions, how long things will take, and the expected fees and disbursements involved.
4. Document everything (almost). It is not practical to document everything on every matter, but you should document as much as you can in some contemporaneous manner. Letters are fine, but e-mails, detailed time entries, and marginal notes on documents can be equally effective. In particular, you want to record advice or instructions that involve significant issues or outcomes, and major client instructions or decisions. Memorialized communications help confirm what was said or done for the client should you ever need to look back to explain why or what work was done, to justify an account, or to defend yourself in a malpractice claim. Always keep in mind that claims can arise long after the work is completed. (See “Aging Claims” below.)
5. Meet or beat deadlines. Set realistic deadlines for completing tasks and delivering things to clients. Underpromising and overdelivering by getting work done earlier than promised will make clients very happy. Don’t leave things to the very last minute, as unexpected events beyond your control (blackouts, snowstorms, the lost taxi on the way to filing documents) can prevent things from happening as required. Giving yourself an extra day or two by setting your deadline before the real deadline can be a lifesaver.
6. Don’t do any of the things that most annoy clients. This includes all the things that would annoy you, too—failing to return calls or e-mails, long periods of inactivity, and surprising a client with bad news or a large account.
7. Don’t handle a mater with which you are uncomfortable. If you are unsure about handling a matter for any reason—you’re unfamiliar with the area of law, a potential conflict exists, it’s a matter for a relative or friend, or a demanding or difficult client—get appropriate help or refer it to another lawyer.
8. Don’t wait until after the file is closed to ask how you did. Ask clients for feedback as the matter progresses, at milestones or when interim accounts are rendered. Talk to major clients at least once a year, and do this off the clock!
9. What goes around comes around. Your reputation will precede you. Be civil all of the time, to your client, the counsel and client on the other side, judges and court staff.
10. Send interim and final reporting letters. They should confirm what work was done, and the successes obtained for the client. For example: Retainer terminated, futures steps, and so on.
11. Don’t sue for fees. This almost guarantees a counterclaim alleging negligence.
12. Document everything (almost). Read tip number 4 again. It is the best way to avoid a claim.
Do all these things and you are sure to have happy clients. And remember, happy clients don’t tend to sue their lawyers.
FIRM SIZE DOESNT MATTER WHEN IT COMES TO MALPRACTICE ERRORS
Most lawyers could easily come up with dozens of ways big law firms are very different from their small and solo firm counterparts. But despite all these differences, solo, small, midsize and large firms face more or less the same type and proportion of legal malpractice claims. (See Figure 2 below.) People mess up and systems break down in the same ways, regardless of the size of the firm. The good news is that the steps that can be taken to avoid claims are also the same for everyone.
That is not to say that all individual firms are the same. On the contrary, on an aggregate basis, malpractice error types and proportions can vary significantly from firm to firm. Sometimes this is a reflection of practicing in different areas of law, but it can also very much reflect a firm’s culture, calendaring procedures and time management practices. For example, firms that do a poor job of managing tasks and deadlines have more time management and missed deadlines-related claims. To reduce claims risks, firms need to proactively identify and address shortcomings in their operations, practices and procedures. For example, one large Toronto firm seems to have kept conflicts claims very low by implementing excellent conflicts checking procedures and increasing sensitivity to conflicts claims through an annual conflicts education program that is mandatory for all lawyers and staff.