Conflict of Interest
The former wife of a financial services executive sued a major law firm and two of its attorneys for failing to disclose their conflicts of interest. The firm, while representing her during her divorce action, concurrently represented her husband’s employer in a $400 million deal, a business relationship she claims led to a conflict of interest and mishandling of her divorce. She is seeking $8.3 million in compensatory damages and $25 million in punitive damages.
Even without a specific time limitation, a lawyer’s delay in dealing with a client’s matter could cause a loss. When the wife’s mother abruptly passed away, leaving a lot of debt but also a house that was rented out, the couple engaged an attorney in a solo practice to negotiate and complete the sale of the property to the tenant, who had expressed an interest in buying it. The attorney’s attention was quickly drawn to other, more lucrative business and the property sale got pushed to the back burner. Eventually, the tenant left the house without buying it and owing several months’ rent. The couple, unable to keep up mortgage payments, sold the house for considerably less than its value and sued their
attorney. They also registered a complaint with the state bar association.
A lawyer, engaged by a reality television star and her husband to help them with a bankruptcy filing, was sued by the couple for legal malpractice and negligence after they lost their home and were sentenced
to jail for hiding assets from creditors, submitting phony loan applications and tax evasion. The couple’s $5 million lawsuit claims the attorney improperly handled the bankruptcy filing, prepared flawed amendments and failed to properly prepare them for an appearance before the federal bankruptcy trustee and creditors.
When the law firm brought a complex lawsuit against a business and failed to win, its client turned around and sued it for malicious prosecution. The former clients accused the firm of putting its own
interests in amassing fees ahead of those of its client, and failing to properly explain that the case was unlikely to be successful. While the law firm ultimately prevailed, its defense costs exceeded $1 million.
Questions to Ask
What areas of practice does the law firm offer?
Certain areas of legal practice may give rise to malpractice claims that are especially difficult and expensive to defend against. For example, a law firm that handles patent law might engage in complex and protracted litigation for its client to determine who actually designed a piece of software. If this firm loses the case, its own client may come after them with allegations as complicated to defend as the original case. Attorneys who practice in excessively complicated areas like intellectual property litigation or handle oil and gas rights where so much money is riding on their performance will have larger claims and thus a greater need for higher limits. Real Estate and personal injury law usually have the highest frequency of malpractice actions. The insurance application should clearly show the percentage of each area of practice and any other types of activities the firm handles. And it should include relevant supplemental applications.
In the event of an expensive claim, how much of a hit can your law firm afford to absorb?
When the stakes are high, an agent needs to encourage the law-firm client to think about the losses it could comfortably absorb and help it determine the limits and deductible that are appropriate for its risk. Coverage for defense costs is particularly important for lawyers because they could face disciplinary procedures in addition to civil claims. Ideally, you’ll try to get defense coverage outside the limits and uncapped so it doesn’t erode the indemnity limits. Something as easy to do as typing the wrong name in an email that forwards confidential information to a third party could prove very expensive.
What kind of system do you use to track time-sensitive matters? To detect potential conflicts of interest?
The world works on deadlines and an attorney who fails to file papers on time, or misses a court or hearing date, risks getting adequate compensation for a client. Similarly, a law firm without an efficient way to screen for possible conflicts of interest among its clients could find itself in an untenable position. Clients using calendaring tools and conflict of interest software demonstrate good risk management controls that can work in their favor. If these tools are not currently being used, an agent can use that information to act as the client’s trusted adviser.
Do you currently have E&O coverage? Do you understand how a claims-made policy works?
Lawyers may be very comfortable with contracts, but that doesn’t negate the agent’s responsibility to explain that errors and omissions policies are written on a claims-made basis and how it differs from an occurrence policy. These clients need to maintain continuous E&O coverage to protect their futures from the results of their past work when it is challenged years after the work actually was performed. The agent will need to see the current policy dec page to properly extend the coverage back to the first date of continuous coverage.