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It may come as no surprise to the attorney that as many as 25% of attorney malpractice claims involve fee disputes. With this figure in mind, it is obvious that the topic of legal fees and billing is highly relevant to legal malpractice risk management. However, the use of effective, consistent legal fee, billing and collection procedures can significantly reduce the law firm's malpractice exposure.
Law firm suits for fees generate a significant number of malpractice claims. The reason for this is that once the suit is filed, the answer will often include a defense and an affirmative counterclaim stating that the fee was not paid solely due to the fact that the attorney's performance was deficient. The counterclaim becomes for all practical purposes a malpractice claim against the law firm.
The surprising aspect of this process is the large number of malpractice claims which originate in this manner. It is estimated that approximately 25% of all malpractice claims originate as counterclaims to suits for fees. Of crucial importance is the estimate that approximately 50% of all suits for fees will generate a malpractice counterclaim. The perversity of this situation is that the most likely result of a suit for fees is not the successful collection of the amount owed, but rather a malpractice claim with all of its attendant problems.
Following are a number of loss prevention considerations and techniques applicable to law firm fee disputes.
The firm should not allow an outstanding fee to become so large that a suit to collect it would become necessary. When the fee reaches a certain amount, an agenda of alternative choices and strategies on how to proceed should be instituted. If the fee cannot be collected at a certain point, withdrawal from representation should be considered. However, this course of action should be weighed carefully, as a malpractice claim by the client for improper withdrawal may result.
Suits for fees should be avoided. Alternatively, filing a suit should only be considered as an absolute last resort, and only when forced by the totality of circumstances.
A procedure should be instituted in which dual partner or committee review and approval is mandatory prior to filing any suit for fees.
Lines of communication should be kept open with the client. The firm's client may be unable to pay due to lack of funds, or may be genuinely unhappy with some aspect of the fee or representation. If this determination can be accurately made prior to filing suit, the likelihood of a malpractice counterclaim can be more precisely assessed.
Incontrovertible documentation of the services performed and how fees are calculated are essential prior to filing any suit. Evidence should include time sheets and/or other appropriate billing documentation.
The decision of whether to file a suit for fees should be purely a business decision, and should be handled accordingly. A suit should not be filed out of anger, resentment or vindictiveness.
No business or professional practice collects 100% of its justified billings. A professional law firm should accept that on some occasions it will not get paid money that is rightfully owed it. If an offer is made to settle for part of the outstanding fee owed the firm, consideration should be given to accepting. Even if the offer is for substantially less than the full amount of the fees owed, settling the matter will allow the firm to move on.
One method of avoiding fee and billing related malpractice claims is to develop and use effective fee, billing and collection procedures. Additionally, this is an area where sound risk management and loss prevention procedures provide many additional desirable benefits to the firm. In this instance, the main benefit is collecting more money over a shorter time frame.
At the outset of representation, the following information should be clearly communicated, understood and agreed to by the client:
Billings should be in a standardized format and should contain the total amount of the bill, deadline for payment, dates work was performed, breakdown of amounts by hour, or by work performed, and the name of the attorney who performed the work.
If clients are not paying their fees, the threat of withdrawal from representation by the firm can be a strong inducement to pay. In some cases, withdrawal in compliance with ethical guidelines may be preferable to continuing to work for a non-paying client, provided the fee agreement clearly states the firm's right to withdraw under these circumstances.
The single most effective step which can be taken to minimize the chance of a Lawyer's Professional Liability claim is the development and maintenance of harmonious relationships with the firm's clients. Since a favorable client relationship has so many other benefits for the firm, this should clearly be an area that is emphasized in all aspects of the firm's management.
This area is extremely important since a large number of malpractice claims can be attributed to problems involving client relationships. Yet almost all of these claims can be avoided, for the simple reason that a client who likes the attorney or firm from a personal standpoint is much less likely to file a malpractice claim than a client who is unhappy with the treatment he has received from the firm.
Following are the major categories of common client relationship problems and breakdowns:
Attitude: The number one determinant of the quality of the client relationship that becomes established is the attitude of the attorney and the staff towards the client. Any apparent lack of courtesy or any appearance of a condescending, arrogant or pompous attitude can turn any client into an actual or potential adversary very quickly. A hostile or condescending receptionist or secretary can create an army of disgruntled clients in a short period of time.
Client Handling: This is an extremely important area and includes a variety of aspects of how clients are treated. It is important for the attorney to be available when the client is available. Keeping clients waiting and not returning calls of clients will invariably lead to a variety of malpractice and other problems including loss of revenue to the firm.
Firm Appearance: The appearance of the firm and the firm's office facilities have a tremendous impact on many aspects of the firm's operations. A firm that appears unorganized and inefficient will be perceived to be so by its clients. Everything a client observes at the firm sends an irretrievable message to the client. A firm that can cultivate and project an image of being knowledgeable and authoritative in an inoffensive way is less likely to incur malpractice claims.
Initial Interview: Many problems originate from the failure to have a successful initial interview with the client. At the initial interview, a working and general rapport with the client must be established. Failure to identify and clearly define the goals and needs of the client at this time often leads to problems at a later point.
Client Expectations: It is essential that both the client and the attorney have a clear understanding of what services the attorney will provide. The attorney must always be careful not to create or encourage unrealistic expectations in the client.
Keeping Client Informed: Failure to keep clients informed about the status of their case is a major cause of problems. When clients do not hear anything at all, their immediate assumption is that their attorney is not doing anything for them. Related problems in this area include failing to advise the client of alternative courses of action, and not explaining things in a way that is easily understandable to the client.
Client Confidentiality: A harmful breach of client confidentiality generally involves situations such as staff gossip about client affairs rather than an intentional confidentiality breach by an attorney.
Failure to Obtain Client's Informed Consent: Many claims could be avoided if the attorney had obtained the client's informed consent to an action. There are many situations in virtually every area of the law where the documentation of clients' consent will be an effective defense to a malpractice claim. The consent should always be in writing, since the burden of proof will always be on the attorney to prove the client actually consented.
Handling Matters Outside the Firm's Area of Expertise: Attempting to handle matters outside of the firm's experience or expertise will almost certainly lead to problems. The reason for this is that the result the client wants and expects will seldom be achieved efficiently, if at all. Aggravating this unhappy situation is that a lot of frustration, time delays, and other forms of inconvenience to the client will inevitably precede the unfavorable result. The typical end result is a disgruntled client and a potential malpractice claimant.
It's a problem that's attracting growing attention from the popular media: as the new year rolls in on January 1, 2000 ("Year 2000," hence "Y2K"), computers around the world may stop functioning, or may do strange things to bank accounts, utility bills and the like. The cause of the problem is a leftover from the early days of computers, when memory was so scarce and costly that it seemed like a good idea to represent a year, such as "1997," by just its last two digits: "97". After all, this shorthand representation is in common use anyway, and everyone would understand what it means.
The difficulty, of course, is that the computer won't understand what this means as of January 1, 2000. For example, does "99" refer to 1899 or 1999 - or even 2099? When encountering this dilemma, some computers will make a "best guess," which may be right or wrong, and others will simply freeze up and cease functioning. Unfortunately, there is no quick fix for the problem; it requires manual scrutiny of millions of lines of computer code, often written in archaic programming languages. A recent Lloyds' of London estimate puts the cost of remediating the problem at $800 billion.
The possible consequences range from the prosaic (calculating interest on a bank account, for example) to the stuff of science fiction (computers controlling nuclear power plants stop working, for example). While some companies say they have solved their internal Y2K problem, most have not, and many observers believe that there will be widespread chaos and disruption in commerce and communications as the 21st century begins.
One conclusion about the effects of the Y2K problem seems obvious: there will be an avalanche of litigation. The same Lloyds' study projects total insured and uninsured liability costs (over and above the cost of remediation) in the range of $2 trillion.
As the magnitude of the problem begins to sink in, many in the legal profession are becoming increasingly concerned about the legal malpractice exposure created by the Y2K problem. At the most obvious level, how many computerized docket and calendar systems will fail, causing lawyers to miss critical deadlines? Less obviously, how many lawyers will be sued by clients who claim that their lawyers failed to adequately advise and protect them in transactions impacted in some way by the Y2K problem?
The more obvious docket control issue may be the easiest to deal with. Many of the most recent computer docket control programs are Y2K-compliant, and will handle January 1, 2000 without a glitch. Older, non-compliant systems can be fixed or replaced, and there is ample time to implement a manual back-up system if one is needed.
The tougher questions arise in the context of advice and representation of clients' interests. Of course, a lawyer representing a client in the purchase of a critical new software system is unlikely to miss the issue of representations and warranties concerning Y2K compliance. But what about the lawyer advising a trustee in connection with the selection and monitoring of an investment adviser and depositary whose computer systems may fail?
There is certain to be much more written in the next two years about this topic. For now, lawyers who are just becoming aware of how the Y2K problem may affect them should consider the following steps:
1. Actively seek out continuing legal education programs dealing with the Y2K problem.
2. Check out all law office computer systems that are calendar-dependent for Y2K compliance, and if necessary update or replace them.
3. Develop a Y2K checklist for all ongoing and future matters
4. Perform an internal audit of closed files for possible Y2K liability problems.
5. Designate a person in the law office to be in charge of the Y2K project,
and schedule regular progress updates.
Since California adopted legislation in 1995 enabling professional firms to organize as "Limited Liability Partnerships" (LLP) there has been a rapid growth in interest in this form of organization, and many law firms have already converted to this new structure, or are actively studying such a change. The reason for this phenomenon is easy to understand: law firms which comply with the LLP legislation and the related State Bar rules may be able to effectively limit the vicarious liability of partners for the professional and other errors and omissions of other attorneys in the firm.
In a general partnership (the form traditionally used by most law firms), each partner is jointly and severally liable for all of the parnership's liabilities arising in the ordinary course of its business -- including malpractice claims. Therefore, each partner in a law firm general partnership is potentially liable for malpractice judgments even though he or she had no contact with the client. If the firm's insurance and other assets are insufficient to satisfy the claim, the personal assets of partners are at risk.
Lobbying efforts by large accounting and law firms have resulted in the adoption by many states - now including California - of legislation which creates a new type of business organization, the LLP, in which the owners enjoy the tax and other benefits of operating as a partnership, as well as a limitation on personal liability similar to that enjoyed by shareholders in a corporation. The legislation provides a simple method for existing firms to convert to LLP status by filing certain documents with the Secretary of State. However, to qualify for the protection against joint and several personal liability of partners, the firm must also carry certain minimum amounts of professional liability insurance, or post comparable "security" for such claims in other forms. The vast majority of firms converting to LLP status choose to meet this requirement with insurance.
The law establishes a formula to calculate the minimum limits of liability that an LLP must carry. The basic formula is $100,000 multiplied by the number of "licensed persons" rendering professional services on behalf of the LLP; however the maximum limits are capped at $7.5 million no matter how large the firm. The law is silent about deductibles.
Does the new law mean that a firm with ten lawyers is now adequately protected if it carries a $1,000,000 limit? Not necessarily. First, the new law does not place any limitation on the liability of lawyers actually involved in the error or omission, who remain personally liable with out any limitations. Second, if the firm should add an eleventh lawyer during the policy period, an argument would likely be made that it fell out of compliance with the law and therefore is not protected by the statute.
These and other questions will undoubtedly be decided by the courts in the coming years. For now, if your firm is interested in converting to an LLP you should familiarize yourself with the new law. Copies of the statute and State Bar Rules are available online, or by calling KVI at (415) 296-2515.
The experience of the insurance industry with the modern claims made policy for professional liability insurance since the 1970s has been positively affected by the efforts of numerous professional groups to educate their members in claim prevention and risk management. Although there is no way to measure the number of claims that were not made as a result of such efforts, there is ample statistical support for these basic conclusions:
Claim prevention for lawyers requires an organized, structured effort to adapt procedures and patterns of practice to the perceived likelihood of claims that could result from the particular area under discussion. The following is a brief summary of major areas of interest and attention in a risk management program for lawyers.
Substantive competence: When lawyers fail to keep up with current developments in their areas of practice, or accept engagements which require expertise or levels of commitment of time, personnel and administrative support beyond the capabilities of their offices, claims are more likely to occur. The State Bar of California and its Sections, as well as many local bar associations and private vendors, offer many educational programs and materials to help address this area of concern.
Time Management: Every business and professional practice must manage time and deadlines; the law practice perhaps more than any other, since valuable rights of clients may be lost or prejudiced by failure to meet deadlines. Poor time management practice also lead to stress and disorganization within the law office, which enhance the risk of claims of all types. The essential objectives of a good time control system include (1) centralization, to make sure that all key dates and events are entered, (2) redundancy, to make sure there is a "fail-safe" backup to alert responsible lawyers even in the absence of regular personnel, (3) cross-checking on a regular, frequent basis, to be sure that all calendars reflect the same dates and events, and (4) follow-up, to be sure that all dates and events are actually communicated to the responsible lawyer(s) as intended.
Widespread availability of inexpensive personal computers and software for time management (much of which is tailored specifically to the law practice, and even to particular areas of practice) makes it more feasible, and thus more important, for the law office to develop and maintain time control systems.
Ethical Considerations: Effective procedures to identify and avoid conflicts and other ethical problems can prevent claims. The State Bar of California provides its Members with a toll free "Ethics Hotline" from which members can obtain references to authoritative sources dealing with particular ethical issues. The toll-free number in California is 1-800-2-ETHICS (in 415 area code call 241-2150). In addition, The State Bar publishes the California Compendium on Professional Responbibility, a compendium of interpretations and opinions on ethical issues that can offer invaluable guidance.
Administrative Management: In many ways a sound office management system is the underpinning for claim prevention. Claims are more likely to arise where the practice fails to deal effectively with such seemingly mundane matters as handling of mail and telephones, filing and record keeping. Sound administrative management systems and procedures are also key to effectively dealing with other critical risk management issues such as Time Management and avoidance of conflicts.
One valuable tool for maintaining high quality administrative management practices is the Law Firm Administration Manual, which sets forth in detail all of the essential systems, procedures, and rules for conduct of the firm's practice. The Law Practice Management and Technology Section of The State Bar offers programs and materials on practice management, including a model Law Firm Administration Manual. Help is also available through The State Bar's Law Office Management Assistance program - call (800) YES-LOMA.
Financial Management: Numerous claims arise because the firm does not properly manage its receipts and disbursements, or adequately account for them. Fee disputes with clients are a particularly fertile source of claims, and one of the best ways to avoid such claims is to avoid having large outstanding receivables. Doing so requires effective timekeeping and billing procedures, as well as regular and prompt attention to overdue items by a responsible person within the firm.
Professional Education and Development: Proper selection, training and supervision and continuing education of both lawyer and non-lawyer personnel can help to avoid claims. All California attorneys must meet minimum continuing legal education requirements in order to maintain active membership; however, the lawyer's emphasis should not be merely on meeting the minimum requrements, but on developing and maintaining knowledge and skills that will support high quality legal services for clients.
Lawyer Assistance Programs: Lawyers with personal difficulties such as stress, financial, family or substance abuse problems, are more likely to engage in behavior that leads to claims, whether by neglect of professional matters or errors in judgment resulting from preoccupation with personal issues. The State Bar offers free, confidential advice and counseling on such matters through its Lawyers Personal Assistance Program. The toll-free number in California is 1-800-341-0572. Many health insurers and other organizations offer similar programs.