Lawyer Malpractice Claims on the Rise

Economy, Fees Countersuits and ‘Door Law’ Changing E&O Climate

The economy has taken its toll on all businesses today and law firms are no exception. They have experienced downsizing, pressure to change specialties in order to compete for new business, and other cost cutting measures, according to industry insiders.

“It’s hard to pay bills. Firms are really having to trim employees, trim expenses,” says Kelley Heide Martin, senior claims specialist in the technical resource center of Scottsdale Insurance Co.

From an errors and omissions perspective this spells trouble for some law firms because such cost cutting measures can result in more malpractice claims.

Michele Wade, executive vice president of Lockton Cos., says downsizing the number of attorneys and staff often leads to clients falling through the cracks. “It leads to possibly having the same number of clients and a lot less number of people to help them,” she says. “It also leads to a lot of law firms hiring independent contractors rather than full time lawyers That often can lead to problems for law firms.”

Another cause for concern when it comes to E&O claims stems from what Wade and Martin refer to as “door law,” a circumstance where law firms might choose to represent any client that walks in the door, even when the case involves unfamiliar territory. The competition for new business is leading many firms to go after clients not typically within their legal specialty, Wade and Martin say.

Some of Wade’s law firm clients are moving out of their area of expertise to take a case they wouldn’t take in good economic times, she says. “That leads to mistakes and it often also can lead to putting that client on the back burner when a real case that is in their expertise comes along.”

The bad economy has led to inexperienced attorneys handling areas of law that they may not know well, Martin adds. “That leads to additional errors and admissions claims.”

Collecting Fees and E&O Risk

Another basis for rising E&O claims that has developed as a result of the bad economy are lawsuits against firms arising out of unpaid client fees.

Wade says many E&O claims today are related to fees. “In this economy law firms are not getting paid. Their collections are way down and they tend to want to sue their clients for fees more aggressively than in a good economy,” Wade says.

When clients get sued for unpaid legal fees, a countersuit tends to follow.

“Suits for fees draw counterclaims and that brings professional liability claims,” Wade says. “Often my clients seem to be getting sued just out of their clients wanting to head them off at the pass … It’s a vicious cycle.”

Trying to collect client fees in today’s economy is a huge problem, according to Martin.

“A lot of times if a firm had let their accounts receivable go past 90 days, 120 days, or a year We’re not talking about maybe a $5,000 or $10,000 bill. We’re talking about hundreds of thousands of dollars. There comes a point when the firm has to collect that money. They’ll look at suing, either filing a suit or perhaps counterclaiming for their fees,” Martin says.

While law firms must collect on past client fees, from a claims standpoint Martin believes filing a fee lawsuit again a client is never a good idea. “We see that from an insurance company perspective as just one of the worse things you can do because you are inviting the legal malpractice claim.” Martin says suing clients for fees doesn’t typically have a good outcome but instead invites a costly E&O claim for the firm.

Emerging Risks

Another potential E&O concern for law firms today involves the use of social media and how its use might invite exposures.

Wade believes the use of social media such as Facebook, LinkedIn and Twitter could potentially be a huge exposure, one many law firms have not been adequately addressing.

“I think that Facebook and Twitter and those types of media are not regulated by a law firm like a Web site would be,” Wade says. “Social media, you can say anything you want I believe that plaintiff attorneys will be using that against law firms who may be discussing cases, a big win, whatever it is, on their Facebook.”

While insurers are not addressing social media use now, Wade sees that attitude changing. “I believe that eventually and probably sooner rather than later, the insurance companies will be putting questions in their applications, possibly exclusions, for Facebook or Twitter type of communication,” Wade predicts.

Martin agrees that the danger of social media use lies in its lack of oversight. “There is no oversight,” she says.

Martin advises lawyers to forego posting anything related to their profession on social media venues. “It’s just not a good idea. It’s definitely an ethical violation. There needs to be some type of oversight by the firm or the attorney themselves. Talk about what you do in your own time. Talk about what your kids do or your latest vacation.”

But Martin says attorneys need to leave business out of social media.

“If you’re in mediation, and you say, ‘hey, they offered me X amount of money. I’m not going to take it because I’m going to get five times that,’ you’ve just blown through about five different ethical rules. That’s going to lead you to a malpractice claim.”

Wade and Martin were speakers on the “The First Thing We Do – Sue All Lawyers: Emerging Themes in Legal Malpractice” panel at the 2010 PLUS International Conference in San Antonio, Texas.