The American Bar Association’s Standing Committee on Lawyers’ Professional Liability recently issued its eighth Profile of Legal Malpractice Claims which examines data collected from participating lawyer malpractice insurers covering the years 2016-2019. While these surveys do not claim to be statistically significant, they do offer insight into malpractice claim trends and suggest many connections between various practice activities and risk for lawyers. And, with each additional survey and report, the information provided from examining trends from report to report becomes more interesting and helpful when considering risk and risk management ideas.
One of the most interesting observations is the interaction between claims activity and the state of the economy. In particular, the apparent connection between business transaction claims activity and the economic cycle.
Claims Rise as The Economy Booms
The current survey notes that the number of business transactions claims apparently rises when the economy is booming. At one level, this can seem like a straightforward rational result: when the economy is better there is more business activity going on; with more business deals happening, lawyers’ transactions business increases; and when you have more matters, your risk that you ultimately have a matter that becomes a claim increases.
Why? First, simple math. For instance, if, hypothetically, statistics show that 1 out of every 10 matters generates a claim, then a lawyer will likely face two claims if they handle 20 matters in a year, and three if they handle 30 in a year.
But busier times increase risk substantively as well. More matters equal more “opportunities” to make a mistake. If your attention is divided among more matters, it is easier to overlook details or to confuse one matter with another. We’ve all encountered those situations when handling similar matters for the same—or different—clients we get confused for a moment about which matter is which. And then that moment leads to concerns about whether or not you really did make changes to the shareholder agreement last week or you just think you did, but maybe you are actually remembering a different shareholder agreement for a different deal…
Another possible factor at work in this arena is that, when the economy is booming, it may be the case that less-experienced people jump into the business arena, resulting in lawyers dealing with those less-experienced clients—who may not have as clear an understanding of what to reasonably expect from their relationship with the lawyers participating in a deal. This inexperience and skewed view may then lead them to blame the lawyer if the deal goes south.
Claims Rise When The Economy is Down
When the economy is down, the data seem to show a smaller number of business transaction claims in comparison to the total number of claims overall, but the risk that a business transaction representation will ripen into a claim seems to increase a bit. There is a clear logic behind this too.
When the economy is more volatile, business transactions themselves are more volatile. Also, when the economy is worse, every lost dollar is more valuable—every loss in a transaction stings more. Thus, when clients weigh the cost of the business loss against the cost of pursuing a claim against their lawyer, they might conclude that a malpractice claim might be worth it when in better economic times they might be willing to write off the loss rather than bothering to bring a claim against the lawyer.
Managing Risk in Any Economy
So, what’s a lawyer to do to manage these risks?
One of the biggest things you can do is to simply take these risks seriously and use that to motivate you to be very conscientious in every matter. Use all the tools you have available to make sure you meet deadlines, fulfill obligations, catch typos, dot all the i’s, and cross all the t’s. Make good use of your docketing systems. Follow every step of every checklist every time. And then document those steps clearly in every file, noting that doing so isn’t just a CYA measure: when you actually physically check off a step on a checklist, you can easily resolve that “did I make the shareholder agreement changes or didn’t I” question with one quick glance.
- Communicate clearly with your clients about expectations. This includes discussing everything from how realistic the deal deadlines are, to billing procedures, to clarifying the deal points. And don’t skip the engagement letter, even for new matters for existing clients. At a minimum, send to that existing client a clarifying email laying out your understanding of the representation for each new matter, with details like important deadlines, who the parties are, who the decision-makers are on your client’s end, what your payment structure will be, and other pertinent information.
- Make good decisions about which matters to take on and which to pass up. Have conversations with potential clients about their goals in the transaction and try to gain an understanding of their financial position relative to the deal, so that you have a feel for how much each dollar matters to them. If the risk is too high for the client, the risk will be very high for you, too.
- Avoid conflicts, real or perceived. It may be best to decline to be the only lawyer in the deal room, especially when the economy is in a downturn. If every party is represented separately you take on only the risk of your particular client. If that isn’t possible or desirable, then be sure to document very clearly and accurately where your loyalties lie and work hard to make sure all parties understand your role and whose interests you will be promoting. And then, be careful to stick within those parameters. Likewise, reconsider “scrivener” representations. The risk associated with these undertakings are cousins to those where you agree to represent all the parties in a matter: it is all okay until it isn’t. If you make a mistake as a scrivener, all the parties have an interest in seeking indemnity from you. And mistakes are potentially more likely when you yourself have an apparently smaller stake in the game. If “all” you are doing is documenting what the parties have done, it is arguably that much more difficult to be appropriately motivated to take the care you need to take—and it is that much more difficult to find clarity when confusion arises.
Ultimately, the lesson to be gleaned from the business transactions data in the ABA’s most recent malpractice claims survey is that the practice presents a variety of risks that seem to trend in relation to the economic cycle. And it behooves every business transactions lawyer to be alert to and conscientious about those risks.