Responding to Claims Against Your Law Firm

No matter how good a loss prevention program your firm has in place, it is a sad but inevitable fact of life that you will have claims. Your goal as a firm manager, therefore, is not to reduce claims incidence to zero, but rather to have a sound program in place to identify and respond to claims in a manner that minimizes your losses. Here are some thoughts on how to do that from the perspective of a trial lawyer who has spent much of the past 30 years defending law firms against such claims.

How and When Claims Come to Light

Claims can arise in limitless ways. Some red flags that may be signs of trouble brewing include: a client who abruptly leaves the firm, the service of third-party discovery on the firm relating to a matter in which the firm rendered legal services, any request for sanctions against the firm or a client in pending litigation, significant unbilled time or accounts receivable on a client matter, or a letter from a client complaining about his or her legal bills. Also, any time the firm is asked to litigate a matter arising out of the firm's own transactional work, loss prevention counsel should be asked to review the situation and be alert to any potential conflicts between the firm and the client.

Experience teaches that the sooner management is apprised of a potential claim the more likely it is that the matter will have a good outcome, or at the least damages minimized. Too often the lawyer involved in the matter giving rise to the claim attempts to resolve it by himself, thereby validating the old saw: 'a lawyer who represents himself has a fool for a client.' The most important goal, therefore, is to create a culture and a mechanism in your firm in which all attorneys and non-legal staff are encouraged to and feel comfortable immediately alerting management or loss prevention counsel to facts that may give rise to a claim.

Investigating Claims

Many managing partners I know are 'no-nonsense' problem solvers who like to get to the bottom of things quickly. If you are one of those types of managers and a claim comes to your attention, you may be inclined to immediately launch an internal investigation to figure out what happened and evaluate the firm's exposure. That investigation may result in the creation of various e-mails, interview notes, file memos, and other documents.

Why wouldn't you do that in every case? Isn't that simply good management? Good loss prevention? Here's why: When the eventual malpractice case is filed you will be served with a document request seeking production of all those notes and e-mails. And the question your outside counsel and, ultimately, a court will need to decide is whether the firm may refuse to turn the documents over to the plaintiff on the ground that they are protected by the firm's own attorney-client or work product privilege.

The good news is that it is pretty well established that a law firm has an in-house privilege it may assert in this context. Firms don't need to retain outside counsel in every instance in order to get confidential advice about an ethics issue or potential malpractice claim. The law is also pretty well settled that if the claimant is a non-client or former client at the time these intra-firm communications occur, they are fully protected. The problem arises when the potential claimant is a current client and the claim arises out of a pending matter. In that circumstance, a number of courts have held (wrongly, in my view) that the very occurrence of the intra-firm communications creates an inherent conflict of interest between the firm and its client, which waives the firm's own internal privilege.

To be safe, your firm should take certain precautions. First, any investigation should be conducted by a designated 'claims counsel' who has had no prior involvement with the client or the matter in question. Under no circumstances should anyone's time spent on the investigation be billed to the client, or any resulting documents placed in the client's files, where they become the client's property. In some circumstances, the firm should immediately retain outside counsel to conduct the investigation. Because of the uncertainty about whether a claim of privilege will be upheld, the less put in writing the better, especially during the early stages of an investigation. Attorneys in the firm should be especially cautioned against the use of e-mail to discuss pending claims.

Notifying the Firm's Professional Liability Insurer

Your mantra here should be 'give notice early and often.' First, most malpractice policies require prompt notice of claims or circumstances which may give rise to claims. As a practical matter, I can think of no downside to giving prompt notice. On the other hand, I can think of many downside risks that may result from a failure to give timely notice, including a denial of coverage or the loss of coverage in the event the firm switches insurers between the time the events occurred or the claim arises and the time notice is given. Finally, many carriers have experienced, in-house claims attorneys or adjusters who can assist the firm in evaluating the claim, selecting outside counsel, and limiting the damage resulting from a claim.

Preserving Evidence

Anyone who hasn't been living in a cave for the past few years knows that we live in a brave new world ' the world of 'e-discovery.' One of the hottest topics in the e-discovery debate has to do with parties' obligations to preserve relevant evidence. The failure to preserve evidence can result in sanctions ranging from fines, to orders precluding witnesses from testifying, to (in an extreme case) a default judgment against your firm.

As soon as litigation against the firm is reasonably anticipated, management or claims counsel needs to initiate a 'litigation hold,' instructing attorneys and staff to preserve relevant electronic and paper files. Second, claims counsel needs to communicate with the 'key players' involved in the underlying matter, and specifically discuss the need to preserve and produce relevant information. Finally, depending upon the nature of the case, the firm may need to take special steps to identify, preserve, and retrieve relevant computer backup media. Many firms have created e-discovery 'SWAT Teams' consisting of attorneys, paralegals, IT personnel, and outside e-discovery vendors to assist their clients in treading through the e-discovery minefield. Those teams can also provide invaluable assistance to the firm itself when it is faced with a claim.

Tolling Agreements

These are agreements to suspend the running of the statute of limitations in the hopes of either resolving a claim or avoiding one entirely. A typical example where a tolling agreement makes sense is one in which the client is exposed to litigation arising out of transactional work the firm performed. If the litigation has a good outcome, the client is satisfied and no claim results. On the other hand, the client does not want to risk losing its right to pursue a claim against the firm if the underlying case goes badly.

I have made good use of tolling agreements in representing my law firm clients. A few tips with respect to such agreements: First, they should have a finite duration, such as one year, with the possibility of renewal if the parties agree. Second, they should describe with reasonable specificity the claim that is subject to the agreement. Finally, most professional liability policies require the insurer's consent prior to entering into a tolling agreement.

Early Settlement of Claims

There are many factors that can and should influence a firm's decision whether to settle or fight. These include the firm's assessment of its liability, its damages exposure, and the limits of its insurance and self-insured retention. Firms also should consider the toll claims have on the attorneys involved, both the psychological and emotional toll as well as the loss of productive time. On the other hand, in my opinion, firms should not fear taking defensible cases to trial out of concern about juror bias. The common perception that jurors 'hate' lawyers is simply not true, in my experience. One factor that can and often does tip the balance against a law firm is when the plaintiff has a colorable argument that the law firm engaged in a conflict of interest. Finally, firms need to consider the collateral damage that can result if claims are not resolved promptly. Adverse publicity is one such example. In addition, many plaintiffs will file a parallel disciplinary complaint against their lawyer as a means of obtaining leverage in a malpractice case.

Alternative Dispute Resolution

ADR comes in two flavors: mediation and arbitration. In my experience, mediation works well when both sides recognize that a claim has some value but need some objective assistance in determining that value. It also works best when there is some event (such as a summary judgment hearing or trial) looming that will dramatically affect the outcome of the claim one way or the other. As Samuel Johnson said: 'nothing focuses the mind like a hanging.'

I generally do not favor arbitration as a means of resolving claims against law firms. The perceived benefits of arbitration, including cost savings and confidentiality, often prove illusory. On the other hand, the downsides include the inability to get a claim dismissed prior to trial on motion and the absence of any meaningful appellate rights.

Conclusion

In modern society, claims against law firms are inevitable. Follow these simple tips and minimize your firm's exposure.

Richard M. Zielinski is a director of the law firm of Goulston & Storrs. He is a general trial lawyer who frequently defends law firms in professional liability matters.

No matter how good a loss prevention program your firm has in place, it is a sad but inevitable fact of life that you will have claims. Your goal as a firm manager, therefore, is not to reduce claims incidence to zero, but rather to have a sound program in place to identify and respond to claims in a manner that minimizes your losses. Here are some thoughts on how to do that from the perspective of a trial lawyer who has spent much of the past 30 years defending law firms against such claims.

How and When Claims Come to Light

Claims can arise in limitless ways. Some red flags that may be signs of trouble brewing include: a client who abruptly leaves the firm, the service of third-party discovery on the firm relating to a matter in which the firm rendered legal services, any request for sanctions against the firm or a client in pending litigation, significant unbilled time or accounts receivable on a client matter, or a letter from a client complaining about his or her legal bills. Also, any time the firm is asked to litigate a matter arising out of the firm's own transactional work, loss prevention counsel should be asked to review the situation and be alert to any potential conflicts between the firm and the client.

Experience teaches that the sooner management is apprised of a potential claim the more likely it is that the matter will have a good outcome, or at the least damages minimized. Too often the lawyer involved in the matter giving rise to the claim attempts to resolve it by himself, thereby validating the old saw: 'a lawyer who represents himself has a fool for a client.' The most important goal, therefore, is to create a culture and a mechanism in your firm in which all attorneys and non-legal staff are encouraged to and feel comfortable immediately alerting management or loss prevention counsel to facts that may give rise to a claim.

Investigating Claims

Many managing partners I know are 'no-nonsense' problem solvers who like to get to the bottom of things quickly. If you are one of those types of managers and a claim comes to your attention, you may be inclined to immediately launch an internal investigation to figure out what happened and evaluate the firm's exposure. That investigation may result in the creation of various e-mails, interview notes, file memos, and other documents.

Why wouldn't you do that in every case? Isn't that simply good management? Good loss prevention? Here's why: When the eventual malpractice case is filed you will be served with a document request seeking production of all those notes and e-mails. And the question your outside counsel and, ultimately, a court will need to decide is whether the firm may refuse to turn the documents over to the plaintiff on the ground that they are protected by the firm's own attorney-client or work product privilege.

The good news is that it is pretty well established that a law firm has an in-house privilege it may assert in this context. Firms don't need to retain outside counsel in every instance in order to get confidential advice about an ethics issue or potential malpractice claim. The law is also pretty well settled that if the claimant is a non-client or former client at the time these intra-firm communications occur, they are fully protected. The problem arises when the potential claimant is a current client and the claim arises out of a pending matter. In that circumstance, a number of courts have held (wrongly, in my view) that the very occurrence of the intra-firm communications creates an inherent conflict of interest between the firm and its client, which waives the firm's own internal privilege.

To be safe, your firm should take certain precautions. First, any investigation should be conducted by a designated 'claims counsel' who has had no prior involvement with the client or the matter in question. Under no circumstances should anyone's time spent on the investigation be billed to the client, or any resulting documents placed in the client's files, where they become the client's property. In some circumstances, the firm should immediately retain outside counsel to conduct the investigation. Because of the uncertainty about whether a claim of privilege will be upheld, the less put in writing the better, especially during the early stages of an investigation. Attorneys in the firm should be especially cautioned against the use of e-mail to discuss pending claims.

Notifying the Firm's Professional Liability Insurer

Your mantra here should be 'give notice early and often.' First, most malpractice policies require prompt notice of claims or circumstances which may give rise to claims. As a practical matter, I can think of no downside to giving prompt notice. On the other hand, I can think of many downside risks that may result from a failure to give timely notice, including a denial of coverage or the loss of coverage in the event the firm switches insurers between the time the events occurred or the claim arises and the time notice is given. Finally, many carriers have experienced, in-house claims attorneys or adjusters who can assist the firm in evaluating the claim, selecting outside counsel, and limiting the damage resulting from a claim.

Preserving Evidence

Anyone who hasn't been living in a cave for the past few years knows that we live in a brave new world ' the world of 'e-discovery.' One of the hottest topics in the e-discovery debate has to do with parties' obligations to preserve relevant evidence. The failure to preserve evidence can result in sanctions ranging from fines, to orders precluding witnesses from testifying, to (in an extreme case) a default judgment against your firm.

As soon as litigation against the firm is reasonably anticipated, management or claims counsel needs to initiate a 'litigation hold,' instructing attorneys and staff to preserve relevant electronic and paper files. Second, claims counsel needs to communicate with the 'key players' involved in the underlying matter, and specifically discuss the need to preserve and produce relevant information. Finally, depending upon the nature of the case, the firm may need to take special steps to identify, preserve, and retrieve relevant computer backup media. Many firms have created e-discovery 'SWAT Teams' consisting of attorneys, paralegals, IT personnel, and outside e-discovery vendors to assist their clients in treading through the e-discovery minefield. Those teams can also provide invaluable assistance to the firm itself when it is faced with a claim.

Tolling Agreements

These are agreements to suspend the running of the statute of limitations in the hopes of either resolving a claim or avoiding one entirely. A typical example where a tolling agreement makes sense is one in which the client is exposed to litigation arising out of transactional work the firm performed. If the litigation has a good outcome, the client is satisfied and no claim results. On the other hand, the client does not want to risk losing its right to pursue a claim against the firm if the underlying case goes badly.

I have made good use of tolling agreements in representing my law firm clients. A few tips with respect to such agreements: First, they should have a finite duration, such as one year, with the possibility of renewal if the parties agree. Second, they should describe with reasonable specificity the claim that is subject to the agreement. Finally, most professional liability policies require the insurer's consent prior to entering into a tolling agreement.

Early Settlement of Claims

There are many factors that can and should influence a firm's decision whether to settle or fight. These include the firm's assessment of its liability, its damages exposure, and the limits of its insurance and self-insured retention. Firms also should consider the toll claims have on the attorneys involved, both the psychological and emotional toll as well as the loss of productive time. On the other hand, in my opinion, firms should not fear taking defensible cases to trial out of concern about juror bias. The common perception that jurors 'hate' lawyers is simply not true, in my experience. One factor that can and often does tip the balance against a law firm is when the plaintiff has a colorable argument that the law firm engaged in a conflict of interest. Finally, firms need to consider the collateral damage that can result if claims are not resolved promptly. Adverse publicity is one such example. In addition, many plaintiffs will file a parallel disciplinary complaint against their lawyer as a means of obtaining leverage in a malpractice case.

Alternative Dispute Resolution

ADR comes in two flavors: mediation and arbitration. In my experience, mediation works well when both sides recognize that a claim has some value but need some objective assistance in determining that value. It also works best when there is some event (such as a summary judgment hearing or trial) looming that will dramatically affect the outcome of the claim one way or the other. As Samuel Johnson said: 'nothing focuses the mind like a hanging.'

I generally do not favor arbitration as a means of resolving claims against law firms. The perceived benefits of arbitration, including cost savings and confidentiality, often prove illusory. On the other hand, the downsides include the inability to get a claim dismissed prior to trial on motion and the absence of any meaningful appellate rights.

Conclusion

In modern society, claims against law firms are inevitable. Follow these simple tips and minimize your firm's exposure.

Richard M. Zielinski is a director of the law firm of Goulston & Storrs. He is a general trial lawyer who frequently defends law firms in professional liability matters.