When your office door opens or your phone rings, there’s potential for a new client, new work and additional revenue for your law firm. While a new client is overwhelmingly a positive thing for your business, it also provides risks.
Like any professional service offered, especially for a fee, there are risks and potential liabilities to take into account for you and your law firm. While managing your business and law practice, it’s important that with every client and service offered, you’re taking the appropriate steps to mitigate risk as much as possible.
At Protexure, we are asked all the time, “What can be done to mitigate risk?” Risk is not all bad, you can't have reward without a little risk. But, reducing the chance of negative consequences is on any business owner's mind.
One of our biggest recommendations to reduce the risk of a legal malpractice claim is to use engagement letters.
As the Assistant Vice President of Underwriting at Protexure Insurance Agency, I have seen many claims arise because attorneys elect not to use engagement letters. Engagement letters are so crucial to the protection of law firms that insurance carriers will often give law firms a discount on their insurance for using them.
But, before you can implement engagement letters, you must fully understand what they are, how they are used and why they are important. By the end of this article you should have a solid introduction to engagement letters.
What Is an Engagement Letter?
In short, an engagement letter defines the legal relationship between a law firm and a client. An engagement letter states the terms, conditions and scope of the attorney/client relationship and the terms of compensation for the firm.
After the first few initial phases of meeting a new client, you’ll begin to understand the legal service(s) the client is requesting and needs. As the attorney, if you decide to offer representation, the next step should be to draft an engagement letter. An engagement letter is in many ways, the first step in formally representing a client.
The terms of an engagement letter should be in writing, not just because many states require it but it’s a critical component of best management practices.
Your engagement letter will show proof of representation between you (the attorney) and your client. It should clearly define the scope and nature of legal services to be provided by the attorney on behalf and to the client. The importance of an engagement letter is it should provide zero confusion to the client about what legal services will and will not be provided to them by their attorney.
Understanding the Engagement Letter
Like any contract, the language used in an engagement letter is extremely important. As the attorney, specifically defining the legal services you will provide can be the difference between being liable for a claim or not. The more detailed and specific you can make your engagement letter, the better.
To your benefit, you’ll want to define the scope of your representation as narrowly as possible. The more you do this, the better chance there is for the client to not be confused on what their attorneys representation will include.
In addition to defining the nature and scope of legal services, it’s important to explain that the attorney and law firm will not be obligated to offer legal services outside of the scope which is defined in the engagement letter.
Other details which should be in your engagement letter are: your fees and fee structure, potential consequences or limitations that might arise within the scope of your representation, a reasonable time frame the representation may take along with any possible setbacks that could occur, and defining who the client is.
Defining who the law firm's client is should not be overlooked. Whether your client is one person or a multiple party, defining who your client(s) is sets forth a clear understanding of who the law firm is representing. Without defining who the client(s) are, you leave yourself and the law firm up for unwanted liability.
For example, if you are handling the estate for a client’s deceased family member but do not clearly define who the law firm's client is, you could be susceptible to claims from people who were not represented by your law firm but were associated with the estate.
Similarly, if you are handling a divorce matter and only representing one of the spouses, but that’s not clearly defined in the engagement letter, you again leave yourself and the law firm open for a claim. In most areas of practice, there are scenarios where not clearly defining the client could be very costly for you and the law firm.
Help Creating Engagement Letters
If your law firm doesn’t currently have or use engagement letters, what should you do? Or, if you currently use engagement letters but they need improvements, where should you turn?
You’re in luck as almost all legal malpractice insurance carriers provide a risk management hotline. Most hotlines have many useful functions for insureds. Risk management hotlines are a good source for information about engagement letters and other risk management protocols. The hotline can provide basic outlines and best language for an engagement letter and even potentially contour it to the specific area of practice. You may also be able to get the latest trends as well the best format and language for engagement letters.
With a better understanding of how to draft and use an engagement letter, you are not only following best practices for your law firm but potentially helping keep your annual insurance premium low.
How Engagement Letters Save You Money
When applying for a legal malpractice insurance quote for your law firm, whether from your current carrier and or new carrier(s), you are subject to certain underwriting characteristics that can affect your premium.
Typically, a carrier is going to already have certain defined rates based on the location of your practice, your firm's areas of practice, number of attorneys, policy limits and your firm's retro date. Once those are rated, one of the biggest characteristics of a firm reviewed by underwriting is what management protocols are in place.
The engagement letter usage is a critical part of that. If the underwriter is confident that your law firm uses engagement letters for every client, that goes a long way in judging the risk associated with the firm. The better your firm management looks to the underwriter, the more likely it is that the underwriter will want to keep your premium lower. Ultimately, engagement letters will help your law firm save money on legal malpractice insurance.
Oftentimes, the law firm explains that an engagement letter is not used for every client but, it is for most. Although using an engagement for most clients is better than never, it’s not ideal for keeping risk lower.
For example, sometimes attorneys will not use engagement letters because they work in a small town where they know everyone and representation is based on a “handshake agreement.”
Another example is when a former client engages the attorney in a new matter and the attorney doesn’t feel the need to execute an engagement letter again.
As understanding as underwriting will try to be to the circumstance, the fact still remains that not using engagement letters increases the law firm and the insurance carrier’s risk. In order to save on insurance, engagement letters need to be used on a consistent basis.
Viewing Your Engagement Letter as Risk Management
There is a lot that goes into operating a successful law firm. What goes unnoticed most often is the law firm’s management protocols.
There are many reasons that go into that, but it should never be overlooked. It’s not only a potential money saver on your annual legal malpractice insurance premium, it’s one of the best ways to avoid a claim. Your engagement letter is step one in that process.
As the attorney, it’s imperative you define, as specifically as possible, the nature and scope of legal services you will provide the client(s). Define who the law firm's client is, explain your fees and explain any possible delays or obstacles that could arise based on the scope of your legal services.
Once the client agrees to terms, the engagement letter must be signed and dated by the law firm and all clients. If there is not a signature and date by all involved, then it did not happen. I urge you to make engagement letter usage a requirement for all law firm clients and seek additional resources for guidance, such as your carrier’s hotline.
