July 2003

Proactive Risk Management for Lawyers

by Emily Eichenhorn

Ever since lawyers were allowed to charge for their services, they have faced the possibility of being sued for malpractice. Claims activity against lawyers has either remained steady or climbed over the past 10 years. Experience also shows that claims against lawyers tend to increase in both frequency and severity in the years following an economic downturn. Thus, risk management looms important for lawyers in all sizes and types of practice.

Lawyers who are committed to proactive risk management at every stage of practice—from starting a firm through taking on clients, delivering services, and ending representations—can lessen the likelihood they will be faced with a claim. And if, despite their best efforts, they are sued, that same planning can affect the magnitude of a potential loss.

Establishing a Practice
Risk management begins with business decisions about how and where to organize your firm. One important choice is whether to share space with other independent lawyers.

While office-sharing can help make practice more cost-effective, it also can present risks. Depending on their interactions, lawyers in shared space can create de facto partnerships, possibly risking vicarious liability for officemates' torts. Office-sharing increases the risk that lawyers from different firms will inappropriately share confidences, possibly leading to disciplinary or professional-liability problems.

Managing risk in shared space demands that you adhere to internal rules and ethical guidelines, and that you know and communicate well with your office-mates.

Maintain strict autonomy of all practices in the space. Always act like the separate firms that you are, to help avoid any confusion that could lead to presumed partnership. This includes using separate letterhead for each entity, clearly indicating separation in
signage, and answering phones with individual firm names.
Do not share confidential client information with your officemates without first getting client consent, and instruct everyone to maintain strict confidentiality across firms, including not leaving case materials in common areas.

Initiating Representation
The beginning of a representation arguably offers both the greatest risk and the best opportunity to manage that risk. Here you get to establish rapport and communicate with clients in order to help limit claims grounded in confusion or misplaced expectations, weed out conflicts of interest, and exercise risk management through good client selection.

Engaging clients
Interactions with potential clients raise several risk-management issues. A primary concern is conflicts of interest. Such conflicts are both an ethical concern and a liability risk. Disputes about the expected scope of the attorney's responsibilities also account for a large number of malpractice claims. When the client's expectations differ from the lawyer's understanding about what the lawyer will and will not do, the resulting "expectation gap" can raise the risk that the client ultimately will be disappointed with the representation. Before accepting the matter, ask, "What do you want me to do?"

The pressure to generate business can result in another potential problem—acceptance of clients or matters that should have been rejected—leading to representation of certain problem individuals incapable of being satisfied, despite your best efforts.

Putting in place good policies and procedures—and following them—is essential to managing these risks.

Develop a conflict-of-interest warning system. At a minimum, include a formal data bank with the names of all former clients, current clients, adverse parties, and other information that might help identify potential conflicts. Cross-reference to the respective files.
Avoid accepting an engagement before checking for conflicts. If you do not discover a conflict until later, address the situation as quickly as possible.
Discuss the client's expectations and document the scope of the representation in writing. A straightforward, easily understandable, but comprehensive engagement letter, coupled with frank discussion with the client about its terms, provides the first and best opportunity to shape reasonable expectations.
Make accurate assessments about your available time, resources, and expertise or ability, and reject those representations you feel you or your colleagues would not be able to handle adequately.

Rejecting potential representation
While selective client rejection is a significant risk-management tool, it can present its own risks. For example, a person who comes to an attorney seeking representation may form a reasonable belief that the lawyer will act on this person's behalf, while the lawyer has no intention of doing so. Then, when the lawyer does nothing to advance the matter—believing there was no obligation to do so—the "client" claims tortious neglect.

Even with the clearest declination, delay can cause the individual to lose valuable time or legal rights. Rejected clients who delay or completely abandon their search for other counsel after your rejection of the case may claim that you led them to believe that their case lacked merit, or that there was no urgency in moving forward, when you rejected the representation.

The keys to managing risk when declining representation include:

Be unequivocal—actually say the words, "We have decided not to represent you," with reference to the specific matter or matters.
Avoid commenting on the merits of the case or its potential value, which later could be deemed to be legal advice, creating the attorney-client relationship you were trying to reject.
Confirm every declination in writing.
Include language that describes that it is possible that one or more deadlines or statutes of limitation may be about to expire, may work to bar your ability to bring your action or defense, or may work to prevent you from proceeding in the near future. If such a deadline expires before you act, you may lose valuable rights. You should therefore take steps immediately to contact another attorney to preserve whatever rights you may have.
Add the rejected client's name to the firm's conflicts database.
Respect the confidentiality of any information you received in the initial interview.

Duties by implication
Related to risks arising when rejecting a client are risks from implied duties to people you believed were not your clients. A common implied-representation scenario is where you are approached by more than one person at the beginning of the representation, but you intend to represent only one of them. Several investors beginning a business, a husband and wife seeking counsel regarding a personal-injury suit, a daughter bringing her mother in for advice regarding the drafting of a will—each situation presents the potential for confusion about your loyalties.

Prudent practice suggests that you work to dispel any misunderstanding on the part of an individual you do not intend to represent or protect.

Communicate both orally and in writing with everyone involved, clearly indicating whom you do and do not represent, and what the parameters of your responsibilities are, as you understand them.
Act consistently within the parameters established. For example, if you intend to represent only the entity's interests, don't regularly answer legal questions for an individual officer.

During Representation
While lawyers are not held to a standard of perfection, they are held to a standard of care, which requires that they exercise their professional judgment on behalf of their clients and that they perform services in a reasonably competent manner.

Avoiding administrative errors
National statistics suggest administrative errors spawn the majority of malpractice cases. Even the most talented and intelligent lawyers can make serious administrative errors. The key to reducing such errors is to have in place easy-to-follow procedures that are supported by effective systems and adhered to by everyone in the firm.

Every law office should use both a centralized, separately maintained office calendar, and individual calendars for each attorney. Having separate sources of information maintained by different people provides added protection against lost data or overlooked deadlines.
Make realistic estimates of how long particular tasks are likely to take, and block out time on your calendar to do the work you know will be required.
Review all files regularly, and document their status on a set schedule.
Make sure that everyone in the office—professionals and nonlegal staff alike—understands the importance of carefully handling client funds, and never allow any deviation from the rules.
Invest time and money in frequent and thorough training. Well-trained and appropriately motivated individuals are far more likely to spot and correct administrative errors.

Avoiding substantive errors
Perhaps the most common substantive practice error is failing to discover that a new statute has superseded an earlier one, or that a higher court has overturned an earlier precedent. Another frequent substantive error is miscalculating deadlines, typically caused by failing to accurately apply the rules in the jurisdiction, or by not taking into account a statute of repose or a case interpreting a discovery provision in a statute of limitations. Certain strategies can reduce your risk of making substantive errors:

Use checklists to guide you through your analyses and processes to ensure that you have considered each aspect of even the most familiar types of matters in your practice, and treat every representation as unique. Never assume that you know the law. Verify it, every time.
Regularly review advance sheets and professional articles, and participate in continuing legal education.
Avoid representations outside your experience. If you do decide to venture beyond your existing experience, commit to learn the law and the rules carefully and thoroughly, and consider associating with experienced counsel the first time you venture into a new practice area.
Regularly have another lawyer review your plans and conclusions. This second set of eyes may spot important strategy lapses and lend a fresh perspective to the advisability of everything from pretrial motions to witness preparation.

Avoiding intentional torts
While negligence is at the base of most lawyers' professional-liability claims, lawyers certainly also face allegations of intentional torts—including malicious prosecution, defamation, or conducting improper business transactions with clients—or other claims.

Intentional torts may be particularly problematic, because insurance carriers, in keeping with public policy, generally exclude intentional acts from professional- liability coverage. A lawyer accused of an intentional tort may, therefore, face liability without coverage.

The best way to avoid intentional torts is to be thoroughly familiar with the rules of professional conduct and the laws governing attorney-client relationships in the relevant jurisdiction, and to strive to adhere to those rules at all times.

Undertake and document steps to verify that any case you file is supported by facts and law, or by a reasonable argument that existing law should be changed to support the claims.
Maintain a professional relationship with opposing counsel. During the course of litigation, avoid engaging in vituperative letter-writing battles.
If you realize you lack actual factual or legal support for a claim, attempt to convince your client that the claim should not be pursued. If the client insists on continuing with the matter, take steps to withdraw.
Do not make statements you believe are or may be false, or which you have not verified in any fashion. Be particularly careful about any out-of-court statements, including press releases, articles in professional journals, and letters.
Have any client with whom you want to enter into a transaction obtain the advice of independent counsel. Think of every business partner as a "client" for purposes of ethical considerations, thus minimizing the potential for later accusations of undue influence.

Ending Representation
Potential problems can arise while closing a file—or long after regular activity on a matter has ended—depending on the lawyer's interactions with the client at the time the matter was drawing to a close.

Withdrawing from representation
Handled properly, withdrawal from a problematic representation can be a useful loss-control tool. Handled improperly, withdrawal can lead to professional liability or disciplinary problems.

Whether your withdrawal is voluntary or mandatory, you are obligated to protect the interests of your client. If you fail to notify the client and allow reasonable time for the client to employ other counsel, or you breach confidentiality, for instance, you may be faced with a malpractice action, even if the court had approved your withdrawal.

Often, withdrawal is prompt-ed by lack of payment. Fee disputes frequently lead to malpractice actions against the lawyer, especially if the lawyer takes action in court to recover unpaid fees.

Several actions can help you use withdrawal as an effective risk-management tool without creating new problems or exacerbating existing ones.

Set forth in the engagement agreement the possibility that you may need to withdraw in the future. The agreement also can indicate that all unpaid fees and costs are due immediately and payable upon termination of the relationship.
Seek the client's consent to withdraw, even if you are not technically required to do so. A client might be more willing to dissolve the relationship peacefully if asked.
If you must file a motion to withdraw in court, avoid stating the exact reason for seeking to withdraw. Consider preparing a separate, more detailed supplemental declaration to offer to the court in camera to help avoid improper disclosure of protected or sensitive information.
Undertake careful analysis before deciding to sue your client for unpaid fees. The cost of responding to a counterclaim for malpractice, and the possibility that you may be faced with a judgment against you, may well outweigh any potential benefit the fee-suit recovery will present.

Natural termination of engagement
You can also assume unnecessary risk if you do not achieve clear finality or closure at the natural end of an engagement. Attorneys who fail to clearly indicate the end of a matter can inadvertently extend the client's ability to bring an action. Mishandling of closed files and client materials is also a risk.

Clear communication, good documentation, and consistent handling of files and client materials can help you avoid risks at the close of a representation.

Send a disengagement letter to the client, wrapping up the representation and clearly indicating that your responsibilities have been fulfilled.
Do not offer to store material for the client, even for a fee, to avoid giving rise to a claim that you undertook continuing obligations as a result.
Save all communications or evidence of communication with the client, all agreements with the client, and copies of any final work product for the malpractice limitations period, plus five to 10 years.
Index all material returned to or rejected by the client, obtaining written receipts and confirmations from the client.
At the close of the retention period, send a last letter to the client warning of the impending destruction of the file.

Professional-Liability Insurance
Effective risk management not only can help lawyers avoid numerous potential pitfalls, but also promotes positive business practices that can differentiate firms' reputations in the eyes of potential clients. Still, there is no such thing as 100-percent risk-free practice. That's why professional- liability insurance is so important.

Legal-malpractice policies provide coverage for claims that may arise from various "wrongful acts" committed in the rendering of "legal services," when those claims are made and reported to the carrier within the policy period.

The amount of coverage you purchase should be guided by your own philosophy about risk-taking, your financial wherewithal, and the types of risk you face in your practice. Factors to consider include potential defense costs; indemnity for liability; and billable time lost to depositions, trial, or other claims proceedings. Consider the history of frequency or severity of claims in your primary practice areas; different practices face different risks.

Like most other insurance, lawyers' professional-liability coverage is provided subject to a deductible. Obviously, premium costs change with the amount of the deductible. You should confer with an experienced broker or agent, and consider your financial circumstances, your risk, and your limits when deciding what deductible you wish to have.

Protecting yourself and your firm requires both adequate insurance coverage and proactive risk-management efforts. The decisions you make in these areas are critical to the viability of your practice.

Emily J. Eichenhorn is responsible for all aspects of CNA's lawyers' risk-management services and products. Emily lectures and writes regularly about law-firm business-management, risk-management, and professional-responsibility issues. She has an undergraduate degree in communication from Michigan State University and a J.D. from Yale.

This article is not, nor should it be, construed as legal advice or opinion, whether about the availability of or indemnity provided by certain coverages under professional-liability policies or otherwise. The general information provided in this article is not intended to substitute for the advice of legal counsel or retained insurance professionals. Please work with your insurance professional to determine coverage requirements and their availability under specific policies. The statements, analyses, and opinions contained in this article are solely those of the author and do not reflect the statements, analyses, or opinions of any third party, including CNA or any of its subsidiary or affiliated companies.

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