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Build a Stronger Firm Through Risk Management

05.04.14  |  By William T. McCaffery

This article appeared in the May 4, 2014 New York Law Journal Special Section on Law Firm Management.

Law firm managers have countless responsibilities to their firms. Among those responsibilities are firm finances, personnel matters, partnership issues, and business development, just to name a few. Another important aspect of any law firm manager's job is that of risk management: protecting the firm, as best as possible, from unnecessary exposure to liability. All too often, such liability can financially damage a firm, ruin a firm's reputation, and in the worst scenarios, destroy a firm altogether.

No law firm manager can fully insulate a firm from exposure to liability, but there are a number of basic steps that can be taken by every firm to minimize exposure to liability that could cause serious damage to a firm. A periodic review of certain fundamental areas of every firm's practice is essential in order for firms and their managers to minimize exposure and ensure best practices are being followed. Attention to basic elements of practice such as conflicts of interest, new matter intake, and client communications can help each firm manager build a stronger firm and protect the firm from liability.

Conflict Checks

According to a 2011 study by the American Bar Association's Standing Committee on Lawyer's Professional Liability, 4.28 percent of all legal malpractice cases arise from conflicts of interest. Such claims can often be avoided by a firm's employment of a routine conflict check system. In fact, the standard use of a conflict check system is mandated by New York's Rules of Professional Conduct.

RPC 1.10(e) requires that "a law firm … implement and maintain a system by which proposed engagements are checked against current and previous engagements." Not only do the Rules require that a conflict check system be maintained by each firm, the Rules state four specific instances when a conflict check must be performed: (1) when the firm agrees to represent a new client; (2) when the firm agrees to represent an existing client in a new matter; (3) when the firm hires or associates with another lawyer; and (4) when an additional party is named or appears in a pending matter.

Even firms that conduct a rigorous conflict check at the outset of each new representation can be lax in conducting a further conflict check later in the case if, for example, a new party is added to the case. Firm are also often remiss in ensuring there are no conflicts with lateral hires to the firm. It is important to remember that any new hire to the firm brings to the firm his/her own conflicts based upon prior representations, and that attorney's conflicts become the firm's conflicts.

Any firm's conflict check system is as good as the information in the system and as good as those conducting the check. As a result, it is imperative to have a standardized conflict check procedure for the firm that requires the input of certain basic information and well trained staff members and attorneys who are well versed in the firm's conflict check system.

If a conflict is identified, it does not necessarily mean that the firm cannot represent the potential client. While not all conflicts are waivable, in many circumstances a conflict waiver can be obtained from the potentially conflicted clients, which can make the firm's representation permissible. Such waivers should be in writing and should specifically identify the parties involved, the nature of the conflict, and state the client's consent to the representation despite the potential conflict.

New Matter Screening

All firms want new matters and new clients, but it is just as important to a law practice to reject the wrong cases as it is to accept the right ones. Accordingly, there are several questions that must be asked before any new case or new client is accepted by a firm.

Does the firm have the resources to handle the new case?

If the case will be too costly in terms of expense or even time or firm resources, the firm may be better served to reject the case. A case that is too big for a firm to handle can often result in the case not receiving the attention it requires or result in other cases in the office being neglected due to the demands of the bigger case. File neglect of this kind can often lead to a firm's exposure to liability.

Does the firm have experience in the area of law of the potential new matter? 

According to the ABA study, 13.6 percent of all legal malpractice claims arise from an attorney's failure to know the law. Firms often accept cases outside their areas of concentration to generate more fees or even to assist an existing client, but a firm that accepts a case outside its area of practice does so at its own peril. Rather than earning an extra fee or helping a client, "dabbling" in other practice areas often results in otherwise unnecessary errors that result in claims against the firm.

What are the client's expectations? 

It is the attorney's responsibility to educate the client on realistic expectations, but if despite the attorney's best efforts the client maintains unrealistic expectations for his/her case, then it is often best to reject that potential client's case. A client with unrealistic expectations cannot be satisfied and dissatisfied clients lead to claims and grievances against attorneys.

What is the client's motivation?

A client motivated by emotions such as anger, revenge, or even a noble cause like justice also cannot be satisfied. Our system of justice does not provide for remedies that can satisfy a client with these motivations. In the case of litigation, a client is generally limited to a monetary recovery. Where a monetary recovery is insufficient to satisfy the client, then no matter the result achieved for the client, he/she will not be satisfied and an unsatisfied client leads to claims against the firm.

Can the client afford the firm? 

A client who has a problem with the stated fee structure from the outset of the representation will usually result in a problem client throughout the course of the representation. Conflicts over legal bills can often result in conflict between clients and their attorneys and such conflict leads to claims against the law firm. Such conflict can be avoided when it is recognized as potential issue at the outset of the representation.

Is the case too small for the firm? 

It can be easy to recognize if a case is too big for a firm, but the question of whether a case is too small for a firm is often overlooked. Small cases are often accepted with the hope that they will lead to better cases from that client later, but too often a small case is neglected for the bigger cases that will generate the bigger fees. However, regardless of the size of the case or the fee it will generate, an attorney owes the same duty to the client on the small case as he/she does to the client on the bigger case. As a result, it is often the small case that never should have been accepted by the firm from the outset that later results in the claim against the firm.

Engagement Letters

A confused client and the failure to document a file can result in claims against firms that are difficult to defend. Many problems can be avoided with the proper use of engagement letters. An engagement letter should at a minimum detail the scope of the representation, who is being represented, the anticipated costs associated with the representation, and the length of time the matter is expected to take through resolution. If there are certain matters that are specifically excluded from the representation, it is also important to denote those matters in the engagement letter as well. Providing the client with a detailed writing of the scope of the representation and providing the client with reasonable expectations from the outset of the representation can avoid problems and confusion later.

Not only is it important to make proper and routine use of engagement letters, but it is equally important to make use of non-engagement and disengagement letters. If the firm elects to decline a representation, a non-engagement letter should be sent to confirm that the firm will not be providing representing in the matter. The letter should also state that the would-be client is free to consult with other attorneys if he/she would like to pursue potential representation for the matter. Unless a non-engagement letter is sent to the potential client specifically stating that the firm has not accepted the potential client's case, the firm risks the chance that the would-be client will later claim that he/she understood that the firm had accepted the case and believed that the firm was representing him/her in the matter.

Similarly, at the conclusion of a representation, whether that conclusion be at the natural resolution of the representation or if the representation is terminated while the matter is still ongoing, a disengagement letter should be sent to the client. The disengagement letter clearly documents the termination of the representation. This prevents any ambiguity as to when the firm ceased its representation of the client and generally will start the time running on the statute of limitations for any claim to be filed against the firm.


Legal bills consistently cause conflict between attorneys and their clients. The best way to avoid conflict over billing is to provide routine bills to the client and by keeping the client informed of the status of his/her legal matter. As noted above, avoiding billing conflicts starts with an engagement letter that clearly explains to the client the fees that will be charged and the anticipated cost of the entire representation. This provides the client with reasonable expectations from the outset of the representation. This should be followed with routine communication to the client, keeping the client advised of the status of the matter. As a result, when bills are sent, the client understands for what he/she is paying and why. Bills should also be sent on a frequent basis, preferably monthly, to avoid unnecessarily large bills. Unexpectedly large bills often lead to conflict between the attorney and client.

The best practice is generally to take a retainer fee from the client and then have the client replenish the retainer as costs and fees are deducted from it. Retainers ensure payment, help firms avoid chasing clients for fees, and often prevent fee claims against clients. It is imperative to take all necessary steps to avoid fee claims against clients, as fee claims almost invariably lead to legal malpractice counterclaims by clients against their former attorneys.
Client Communications

According to the ABA's 2011 study, 14.6 percent of all legal malpractice claims arise from issues of "client relations." Often, such claims can be avoided through regular and informative client communication. Claims against a firm can arise simply because a client is uninformed or confused or feels excluded from the decision-making process. The simple solution to this problem is regular, informative communication with the client. Such communication is even mandated by the Disciplinary Rules (DR 1.4). It is important that communications with the client also be documented in writing to avoid any miscommunication or misunderstanding between the parties.

It is particularly important to include the client in the decision making process for substantive decisions. If an attorney makes an erroneous decision over the course of the representation, he/she may be protected from liability for use of his/her professional judgment, but the attorney may not be protected if the informed consent of the client was not obtained before the decision was made. As such, it is imperative to obtain the client's informed consent for all substantive decisions. Once the client's informed consent has been obtained, the decision should be documented in writing to the client and should specifically detail the issue that was discussed, its impact on the matter, alternative choices available, the decision that was made, and that the client consented to the ultimate decision.

Insurance Coverage

As discussed above, there are a number of practices and precautions that firms can employ in an effort to minimize potential liability. However, regardless of any firm's best efforts, it is impossible to fully insulate a firm from liability. It is for this reason that every firm must pay particular attention to its policy of professional liability insurance. As a general rule, a firm's policy limits should be enough to cover the largest cases in the office. For example, if a personal injury firm is handling five million-dollar Labor Law cases, its insurance policy should be sufficient to cover those cases in the event of a claim arising from one of those cases. Each professional liability insurance policy also has a deductible. As the deductible increases, the insurance premium will decrease. While it can be tempting to accept a high deductible in order to minimize annual premiums, a deductible should not be too high such that it will be a financial strain on the firm should a claim be made against the firm which requires the deductible to be paid. It is important for a firm to review policy provisions with its insurance carrier or broker to ensure that it is carrying all appropriate coverage for its needs.

Law firm managers cannot prevent every possible claim against their firms, but by implementing certain basic practices, many common claims can be avoided. Where claims arise, however, it is comforting to know that the firm is protected by a solid policy of professional liability insurance.

William T. McCaffery is a partner at L'Abbate, Balkan, Colavita & Contini where he practices legal malpractice defense.

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