Much like gas prices, rumblings of a possible recession are increasing. Despite analysts having conflicting views of what lies ahead, the effects of a recession on law firms are certain. A recession has a large impact on both the frequency and severity of legal malpractice claims.
Historically, economic downturns have resulted in legal malpractice insurers experiencing a spike in paid claims.
For example, following the 2008 recession, the number of claims filed against attorneys peaked with five practice areas — personal injury, real estate, family, bankruptcy, and estate law — being hit the hardest. Malpractice claims nearly doubled from 2005 to 2009, hitting 9,509 claims in 2009.
According to the American Bar Association’s “Profile of Legal Malpractice Claims”, the number of legal malpractice claims increased in the years following the stock market lows in both 2008 and 2011.
In difficult economic times, we are all pinching our pennies a bit tighter and are hyper-aware of how we are spending our money. We may spend more time reflecting on our purchases and whether or not we received the full value. This coupled with the added stress of a recession can make clients more likely to pursue a claim against an attorney if they don't get the result they expected.
Managing Legal Malpractice Risk in a Recession
While it is uncertain if we will see a recession in 2022, it's best to be prepared. There are several steps you can take now to reduce your risk of experiencing a legal malpractice claim.
Only Take the Right Clients and Cases
Now more than ever it is important to make good decisions about which clients to take on and which clients to pass up. While it's great to be getting new business in the door, not all business is good business.
Ask yourself: Is the client a good match for my skill set? Does their case have merit? Do I have time for the case? Are there any warning signs about the client themselves such as unrealistic expectations, displaying questionable business practices, or alleged malpractice claims against its prior counsel?
Have conversations with potential clients about their goals 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.
Setting realistic goals is the key to avoiding client disappointment.
From the start of your relationship, discuss your client's expectations and walk them through your process. This includes discussing everything from how realistic the deal deadlines are, to billing procedures, to clarifying the deal points. This should be done verbally as well as in the form of an engagement letter. A well-written, detailed, engagement letter is the best way to minimize or avoid a potential claim.
To keep your client realistic, be honest about all possible outcomes, including the worst-case scenarios.
There is no such thing as too much documentation. Anything you don't write down can be used against you.
In the previous section, we discussed how engagement letters minimize the risk of a claim. But, the documentation doesn’t stop at engagement letters, rather, they are the first step in properly documenting your engagements with clients.
In addition to engagement letters, you should always have a paper trail detailing advice given, interactions with clients, and time records. Unfortunately, if a client feels they are having a bad experience, they may remember your interactions differently than they may have occurred. Proper documentation can resolve potential disputes quickly and hopefully without a claim.
Avoid Conflicts of Interest
In the Lawyers Professional Liability Insurance 2022 Claims Survey by Ames and Gogh, conflicts of interest were cited as one of the most common legal malpractice errors.
With every new client, a lawyer must check to make certain that their representation of this client will not have a negative impact on the interests of another client, past or present. A lawyer may not put one client’s interests above those of another client, nor may they put their own interests above those of a client.
As the number of claims goes up during a recession, so does the number of conflict of interest claims. There are many strategies to avoid conflicts of interest such as keeping records of current and past clients or investing in conflict-checking software.
Review Insurance Coverage
During a recession, business owners such as yourself will be looking at their budgets a bit more carefully and trying to find ways to cut costs. Legal malpractice insurance is not one of the places you want to cut costs.
As seen with the 2008 recession, some practice areas are more prone to malpractice claims than others. But, with the right coverage, you can have the peace of mind that a claim will not result in financial ruin for your business.
This is the time to review your current coverage and determine if it is sufficient for the needs of your practice areas and law firm as a whole.