Several issues can trip up even the most well-meaning lawyer and cause either a malpractice claim or an Office of Lawyer Regulation (OLR) grievance. These areas have produced some claims for Wisconsin Lawyers Mutual Insurance Co. (WILMIC) and its insured lawyers in the past few years.
The three areas discussed in this article are 1) claim settlement considerations, 2) helping clients with business deals, and 3) statute of limitation issues.
Claim Settlement Considerations
Inadvertently engaging in a “prohibited transaction” with a former client after discovering you have made a mistake may lead to a malpractice claim or a grievance filing. Here is an example to bring this into focus.
An attorney returns from vacation and discovers he did not timely file a notice of appeal. The deadline to file the appeal has passed, resulting in the waiver of the client’s right to appeal. After reporting the potential legal malpractice claim to his professional liability carrier, the attorney contacts the client directly to discuss the error. The client expresses dissatisfaction with the way his case was handled but then indicates he would like to put the matter behind him. The client states he is willing to let bygones be bygones in return for $5,000.
1) Can the lawyer resolve this legal malpractice claim directly with the former client?
Yes, pursuant to SCR 20:1.8(h)(2). A lawyer is allowed to settle a claim or potential claim with a now unrepresented former client, so long as that person is advised in writing to seek the advice of independent legal counsel regarding the underlying representation and is given a reasonable time to do so. Brian Anderson, WILMIC claims counsel, cautions, “It is important that the lawyer consider the inherent danger of appearing to take unfair advantage of an unrepresented former client after a mistake has been made. This is especially the case when the lawyer may be the only attorney the client has ever worked with and the client has always relied on that lawyer for advice and guidance.”
2) Can the lawyer condition a legal malpractice settlement agreement on the client agreeing not to report the lawyer’s conduct to disciplinary authorities?
No. Pursuant to SCR 20:1.8(h)(3), a lawyer cannot enter into a settlement agreement with a client or former client that limits that individual’s ability to report the lawyer’s conduct to disciplinary authorities. It might be frustrating to the lawyer; however, the client has the right to file an OLR grievance even after the former client has been paid a settlement releasing the client’s legal malpractice claim. The ethics complaint cannot be conditioned on any settlement terms between the parties.
3) Should the lawyer notify his professional liability carrier before settling the claim directly with the former client?
Yes, if he wants to protect his coverage. As a condition of coverage under a lawyer’s professional liability policy, the lawyer must report all claims and potential claims to the insurance carrier. A lawyer may decide not to use the policy to resolve a legal malpractice claim; however, to protect coverage, a lawyer must report all claim matters during the policy period in which the claim is first made or the potential claim first exists.
Anderson says, “Sometimes, what looks like a fairly straightforward issue turns out to be far more complicated than expected. Or, it is possible that the lawyer missed a change in the law that dramatically increased the claim risk. In these instances and in matters where the former client later changes his or her mind regarding the settlement agreement, the lawyer may need to involve the malpractice insurance carrier. To ensure coverage, the lawyer must notify the carrier of the claim at the outset, before reaching any settlement. This is the essence of a ‘claims-made and reported’ policy.”
This claim scenario highlights the precarious position occupied by a lawyer who is in potential conflict with a former client after a mistake has been made that affects that former client’s legal rights. Anderson says it is important for a lawyer in this situation to not complicate a legal malpractice error by inadvertently entering into a prohibited transaction with a former and now unrepresented client while trying to rectify a mistake.
“And remember, unlike an occurrence insurance policy, your professional liability policy is a claims-made policy, which means you must report all claim matters to your professional liability carrier in writing during the policy period in which you first become aware of the matter.”
Helping Clients With Business Deals
Any business lawyer who works with clients on business deals can be at risk if a deal goes bad. When your client’s deal goes bad, are you at fault? Lawyers would almost universally answer that question in the negative: It is not the lawyer’s responsibility to guarantee the success of the client’s undertaking. But as Anderson has seen, “Lawyers should be aware that clients sometimes do blame their lawyers when a deal fails.”
In a tough economy, it is not uncommon for a client to decide to take a large risk, hoping for a potentially lucrative return. The client may have decided to move forward with a transaction long before retaining a lawyer, and there may be nothing the lawyer can do or say to talk the client out of moving forward or “rolling the dice.”
Common Causes of Statute of Limitation Errors
Bringing suit in a jurisdiction outside Wisconsin with whose laws the lawyer is unfamiliar
Failing to provide proper notice or to timely file claims against municipalities, the state, the federal government, or individuals acting in the course and scope of their employment for a governmental unit or agency. This is especially important because these types of actions might not be governed by the typical three-year statute of limitation in Wisconsin
Engaging in careless intake, resulting in incorrectly entering on the lawyer’s tickler system the date, month, or year that the accident occurred
Failing to understand that an attorney-client relationship was formed or to timely terminate the attorney-client relationship in writing, once the lawyer has determined that he or she is unwilling or unable to prosecute the client’s injury claim
Maintaining a fee interest in a case that has been referred to another attorney who ends up making mistakes in the case (see SCR 20:1.5(e))
Making errors in cases involving minors or individuals with disabilities
Failing to timely locate or identify all potential insurance policies and comply with the notice terms and conditions necessary to make a claim under the policy
Anderson says, “Your client may be resistant to allowing you to change terms or conditions that you advise are unfavorable. The client may fear that the recommended changes could ruin the deal. But if the deal goes bad, the lawyer is often the person targeted for blame.”
Unfortunately, Anderson says, claims have been reported to WILMIC in which the client ultimately decided to blame the lawyer after a risky third-party contract or long-shot business venture went awry. The most frequently encountered problem areas are seller-financed transactions, often involving land contract sales; the sale or purchase of a business, with the seller taking a lien on the assets or the buyer relying on a financial statement provided by the seller that turns out to be inaccurate; the client entering into a partnership agreement that does not pan out; or the client deciding to go into business with a friend, neighbor, or colleague.
Anderson adds, “The common theme behind these claims is that the other party to the transaction fails to hold up their end of the agreement and turns out to be uncollectible when a breach-of-contract claim is pursued. Sometimes the asset is returned, but it has been dissipated, and no longer has any collateral value. Or the third party’s first mortgage makes worthless the second mortgage that was to provide security for a personal guaranty.”
In these circumstances, the client might see the lawyer as the only potential source of recovery after the loss and then claim that the attorney failed to “appropriately” warn him or her of the problems with the transaction. Anderson says, “To protect yourself, it is very important that you communicate clearly with the client about the potential risks that are being assumed, both in discussion and in writing, prior to any contract being signed or any agreement being entered into. This is especially important when the client decides to enter into a business deal or contract that is against your recommendation.”
Anderson adds that it is important to remember that lawyers are retained to provide advice, not to make business decisions that properly belong to clients. “So long as you advise the client of the pros and cons of entering into the transaction, in writing, you have some protection if a deal falls apart and the client later tries to blame you. Documentation is very important. The more formal the writing, the better the protection. Too often, the lawyer explains later that the issues were thoroughly discussed, and the client went ahead in spite of the lawyer’s cautions, but the lawyer did not go the extra step of confirming that discussion in writing, leaving the door open for a ‘lawyer guaranty’ claim.”
The level of communication can differ depending on the sophistication of the client; however, under all circumstances, written communication between the attorney and the client is the best way to help a client understand the risks assumed in the transaction and, if necessary, to defend a case when the underlying issue is really seller’s or buyer’s remorse, not legal malpractice.
Statute of Limitation Issues
Plaintiffs’ personal injury practice continues to be the highest risk area for legal malpractice claims, in terms of both frequency and severity. Statistics compiled by the National Malpractice Data Center indicate that more than 25 percent of all claims made against lawyers arise out of personal injury practice. Missing deadlines, specifically failure to file a personal injury claim within the applicable statute of limitation, is the most common type of mistake reported.
Why is a missed statute of limitation so frequently the source for these types of claims? According to Anderson, “Lawyers sometimes fall into the trap of assuming that they know the statute date and never realize that the particular accident claim that they are dealing with has a unique feature that has changed the anticipated deadline for filing.” Some of the most common causes of statute of limitation errors that have been a source of claims at WILMIC include:
Bringing suit in a jurisdiction outside Wisconsin with whose laws the lawyer is unfamiliar;
Failing to provide proper notice or to timely file claims against municipalities, the state, the federal government, or individuals acting in the course and scope of their employment for a governmental unit or agency. This is especially important because these types of actions might not be governed by the typical three-year statute of limitation in Wisconsin;
Engaging in careless intake, resulting in incorrectly entering on the lawyer’s tickler system the date, month, or year that the accident occurred;
Failing to understand that an attorney-client relationship was formed or to timely terminate the attorney-client relationship in writing, once the lawyer has determined that he or she is unwilling or unable to prosecute the client’s injury claim;
Maintaining a fee interest in a case that has been referred to another attorney who ends up making mistakes in the case (see SCR 20:1.5(e));
Making errors in cases involving minors or individuals with disabilities; and
Failing to timely locate or identify all potential insurance policies and comply with the notice terms and conditions necessary to make a claim under the policy.
Once a statute of limitation is missed in the area of personal injury claims, the error is almost always fatal to the case, with no ability for the attorney to correct the mistake. As a result, Anderson notes, “Thirty-three percent of the defense and indemnity dollars WILMIC has spent since 1990 have resulted from personal injury representation. Careful intake and review of the deadlines concerning all of the personal injury claims in your office is crucial.”
With the new year still young, there is time for you to consider your practice and develop risk-management strategies to help you avoid claims. Here’s to a successful 2014 and a happy and claims-free year!