Reducing Legal Malpractice Exposure

Many legal malpractice claims share common allegations/themes that can be avoided if law firms have the proper risk management measures in place. Implementation and maintained use of some very rudimentary systems and procedures can reduce the likelihood of being sued, or in the event you are sued, can bolster your defense. Below are some basic tips law firms can utilize to help reduce their legal malpractice exposure.

Engagement Letters – Legal malpractice claims often hinge on whether or not the claimant can establish that they were a client of the attorney (or at least owed a duty of care in 3rd party claims) and that the attorney agreed to handle the matter in question. A written engagement letter prepared for each client or potential client can serve to establish the facts of the lawyer-client agreement. Ideally an engagement letter would include the following:

o Name of client

o Scope of services (and in certain circumstances specifying what services are not being performed/included is also appropriate)

o Fee amount and billing schedule, including payment expectations

o Identification of any potential conflicts of interest

o Name and contact information of primary attorney handling the matter including outline of firm’s communication guidelines (i.e. timeframes for responses to phone calls, faxes, letters, etc.)

o Client’s obligations to the attorney and/or firm

o Dispute resolution method and initiation procedure

Non-Engagement/Declination Letters – These are often the difference in getting a meritless claim dismissed. As important as engagement letters are, non-engagement/declination letters are equally important. Written documentation to the former potential client advising that you will not be representing them is critical in establishing that no professional relationship existed. Non-Engagement/Declination letters should include the following:

o Name of potential client

o Date the attorney and/or firm met with potential client to discuss representation

o Details of the potential case which were discussed

o Statement clearly advising the potential client of the attorney’s/firm’s decision not to accept the case

Disengagement Letters – Various circumstances may arise that prompt a severing of the professional relationship between a lawyer and client. This often occurs before the matter for which the attorney was hired has reached a final resolution. In such circumstances it is crucial the “disengagement” be documented in a letter to the client. If the client subsequently hires new counsel who makes an error, the disengagement letter may be the best defense to establish who the responsible attorney was at the time the error occurred. Disengagement letters should include the following:

o Name of client

o Date the attorney and/or firm are terminating their representation of the client

o Statement clearly advising the client of the attorney’s/firm’s reason for disengagement (i.e. case concluded, client request, non-payment of fees, etc)

o Successor counsel: if known include their name, if not include a statement advising client to seek new counsel

Professional Liability Insurance – Consistent use of the letters described above may help you reduce the possibility of being named in a malpractice suit, however they won’t eliminate the possibility of claims. Lawyers professional liability insurance won’t eliminate claims either, but it can serve to minimize the impact a malpractice claim might have on your firm.

When deciding whether or not to carry professional liability insurance, consider the following:

o Frequency of client claims and malpractice law suits are on the rise. The National Law Journal has reported that an attorney can now expect to be sued at least once during their career.

o Defending a malpractice claim is expensive. History tells us that approximately 35% of loss payments in professional liability claims are due to litigation expenses, so even if you prevail with your defense it will be costly.

o Your personal assets may be at risk without appropriate professional liability insurance in place.

o Many clients, especially larger companies, are now requiring proof of professional liability insurance before they will enter into an engagement.

o Many, if not most, referral services require the attorney or firm have professional liability insurance in place before they will begin referring cases.

o Some states and jurisdictions now require that you disclose to clients whether or not professional liability insurance is in place.

DISCLAIMER: The information in this article is provided for general discussion purposes only, and does not constitute legal advice. For specific advice contact your own legal, financial, insurance and/or other advisor.

How to Limit Your Legal Fees

Most of the time, the fees your lawyer will charge you can get pretty steep. However, it is possible to reduce your fees by simply being active and organized. Do not leave everything to your lawyer and say yes to all he has to say. During the entire duration of your case, he will be providing you with a handful of documents including court notices, correspondence, and other legal documents received during the proceeding.

The thing is, not all of these documents require a response from you. Furthermore, not all documents will make sense to you so it is important to carefully read and review every document you receive and get in touch with your lawyer if you have some questions. What can seem plain routine to him can be severely complicated and confusing to you.

Keeping your files organized at home is the first tip on how to limit your legal fees. It is recommended that you use an expandable file holder that has individual partitions for various types of paperwork. You could have many folder categories of documents but the two most important are a pleadings folder for any legal documents and a folder for correspondence such as memos and letters.

Sometime during your legal proceeding, you may be required to complete some requested forms and answer a number of questions. Therefore, you need to be sure that you follow your attorney’s instructions filling in forms and you must also fully understand what information is being asked for. In answering, do not withhold any information unless otherwise told by your lawyer to not answer. If you provide incomplete or disordered information, your lawyer may end up spending numerous hours in sorting through a handful of paperwork, thus wasting a lot of time while increasing your legal fees as well.

You should also make it a point to write down questions that you want to ask your attorney. Once you have compiled a sufficient amount of questions, call up your attorney and discuss them. This can reduce your legal fees since you get to ask a lot of questions at once as opposed to calling up your lawyer every time you feel the need to ask a single question or two. You should only do so if it is an emergency.

Finally, do not try to outwit your lawyer. Your lawyer is a very skilled professional and has done this a lot of times. If you try to hide your assets and delay the legal proceedings, you will only get higher legal fees in the end. Be honest with him. Do not try to cheat.

Legal Fees – Hourly or Contingency?

When faced with the decision of contingency versus hourly, generally, you, as the client, want to pay the hourly rate. And, here is why: Suppose you have a regular business tort. You paid someone $2 million for a piece of property in Mexico, and, for whatever reason, it turns out that the title is bad. Now you have discovered you do not own the property. The defendant is a deep pocket defendant; that if you can get a judgment against that party, you will actually get paid the $2 million. If you sit down with your attorney, you both go through the possible costs from beginning to end, and consider the cost of mediation versus litigation and everything in between, you will get an idea of what your overall costs will be. It might turn out to be $250,000 if you pay by the hour. As you sit across the table from your attorney, it feels really good not to have to write a check right then, but fast-forward a year or a year and a half down the road, you have a $2 million judgment, and look at the numbers. If you were working on a standard California contingency rate of 40%, if you win and the defendant pays, you pay your attorney $800,000 (2 million x.40). Thus, for taking the contingency option, you pay a premium of $550,000.

Another thing you should consider, and any good attorney will tell you this up front, is that the cost of the case is not included in the attorney’s fees. If you are working under contingency, the lawyer is going to take his 40% right off the top. Using the example above, after attorney’s fees, you will be left with $1.2 million dollars. Out of the amount left to you, you will still have to pay all of the court reporter fees, mileage fees, court filing fees, jury fees, expert fees, and everything else. After taking all of this into consideration, contingency fees from a business perspective are not an attractive option if you can afford the hourly rate.

You should always take into consideration who the defendant will be. If the defendant is someone that you suspect might not be able to pay, you might consider using a contingency agreement to minimize your business cost while maximizing your potential gain. This shifts the risk from the client to the attorney. If you get the judgment, but you cannot collect, you will have received your attorney’s work for free. If, on the other hand, the defendant does pay, you receive an unanticipated 60% of the money you are owed minus costs. Note that any decent attorney will do the exact same calculation. If it is a judgment-proof defendant, such as Joe on the corner, no levelheaded attorney would be willing to work the case on a full contingency. This leads us, naturally, to our next topic of nontraditional fee structures.

Nontraditional Fee Structures
The idea of the billable hour began in the last century. Everyone hates it: clients, attorneys, associates, bookkeepers, and everyone else. The problem was, until recently, there really wasn’t any better pay-as-you-go system for legal services other than a flat fee. However, because of the recession, people are rethinking the way they pay for legal services, and lawyers are rethinking the way they get paid. Here are a few of the more creative options:

A La Carte Fees
Here, you can pay for your case piece by piece, and pay different amounts for different parts of the case, depending on how time intensive they may be. The client pays the money up front and has the assurance that he or she will not pay more for that particular portion of the case. Many people see the hourly fee structure as equivalent to handing their attorney a blank check, which can be very intimidating for some. A la carte is not hourly; it’s not contingency. It’s a specific rate for specific pieces of work. A la carte is just an extension of a flat fee, and, because the lawyer, the client, the associate, and everyone hates the billable hour, a la carte fees provide a breath of fresh air. Here are some examples of how it could work in a garden-variety noncomplex business tort case:

1. Initial research and drafting of original complaint: $5,000
2. Opposition to demurrer: $2,500
3. Deposition per witness, court reporter cost included, limited to one day each: $5,000
4. Trial, per day: $10,000

Part of the beauty of such an arrangement is that:
a. The client obtains security in his or her cost exposure and, perhaps more important,
b. The client takes an active role in determining how the case will be built, based upon his or her own determination, after considering the lawyer’s advice.

Fee and Hourly Lids
Here, the attorney and client throw the discovery phase out of the cost calculation, and then everyone agrees that the client will not spend more than X and the attorney will not work more than Y on a particular phase of a case. Again, this is reassuring for the client because he or she knows the costs right up front. It is reassuring for the attorney because he knows he will not be held captive on an infinite project for an a la carte/flat fee amount. The added benefit of this is that if, in fact, the work takes less time than expected, the client receives the added benefit of a potential cost reduction on the work, which is not possible with an a la carte pay structure.

Blended Agreements
Another option that I see more and more frequently is the blended agreement. Personally, these are my favorite as they allow the attorney to put skin in the game, partner with the client, receive a bump in pay if successful, and provide the client with a lower up-front cost structure. Imagine a spectrum where point A is an hourly agreement at whatever hourly rate you agree upon and point B is 100% a contingency amount with whatever rate you agree to with your attorney. Then you take the ball and slide it somewhere in between points A and B. For example, let’s say the normal billing rate is $400 per hour, and the normal contingency rate is 40%; sometimes we can meet in the middle where you agree to pay only $200 per hour, and I will take only 20% if we succeed. You and your attorney can agree to slide the ball anywhere on the spectrum that works for you. This structure is frequently dependent on the strength of the case and whether the defendant can pay when the case is won.

Traditional Nontraditional Fees
Attorneys don’t always have to be paid in currency. I come from a long line of attorneys, and I am used to the Thanksgiving table stories of the criminal defense lawyers being paid with a nickel plated.45, samurai swords, or an old Mercedes. Paying for a business litigation case with nickel plated.45s would necessitate a huge amount of firepower and would probably get both you and your attorney an interview with the ATF. However, the basic creative concept can be applied in the business realm.

If you are a business, attorneys are one of the few exemptions to the rule that you cannot pay in company stock for services. The specific rules regarding this practice will vary from state to state. This is not an uncommon arrangement if a business plans on working with an attorney during a long period of time. For example, the attorney might help with a lot of different things, such as contracts or day-to-day incidents or paperwork, not just litigation.

Many clients choose to do this not because they cannot afford the hourly rate, but because they want their lawyer to have skin in the game, which is the business. The attorney gets a percentage of the business, and the client receives a reduced hourly rate. But a word of caution: There are all sorts of ethical issues to be aware of, and any attorney worth his or her salt will let you know that up front. In this instance, for the purpose of a contract, your attorney is not your attorney, but a businessman, and you must recognize that difference.