Risk Update

Economic Risk — CNA on Key Law Firm Risks and Response Strategies in a Challenging Economic Environment

Posted Dan Bressler

CNA reminds us: “A Bad Economy Increases Risks for Lawyers” —

  • “Experts may disagree as to whether we are in a recession, but there is no question that our economy has been in a weakened state for a lengthy time period, which may impact professional liability claims for lawyers. For example, virtually all areas of practice for lawyers showed an increase in claims as a result of the 2008-09 recession. As a result, lawyers should be keenly aware of liability exposure as professional liability claims tend to increase during bad economies.”
  • “Avoid the Risky Client. Financial pressures may force some law firms to consider potential clients that they would probably decline in better economic times. Such law firms need to balance the need for increased revenue against the liability risks of accepting a marginal client. Client intake represents a critical component in endeavoring to avoid legal malpractice claims.”
  • “Decline to Dabble. During tough economic times, some lawyers may be tempted to dabble in practice areas in which they have no experience in order to earn more law firm revenues. However, the risks may outweigh the rewards for lawyers who deviate from their traditional areas of practice.”
  • “Think Twice Before Suing a Client for Fees. Another tactic firms often employ to boost their accounts receivable is to bring collection actions against clients who have not paid their invoices for legal fees and expenses. Notably, such collection lawsuits often result in counterclaims for legal malpractice.”
  • “Guard Against Conflicts of Interest. Financial concerns may lead law firms to slash expenses related to their risk control protocols, such as the personnel and resources devoted to conflict of interest checking systems… But saving a little money upfront in exchange for a weaker conflict of interest system and later expending money, time, and resources due to a professional liability claim arising from a missed conflict of interest issue becomes penny wise and pound foolish.”
  • “Communicate Regularly with Clients and Discuss the Impact of a Bad Economy on Their Matters. Documenting your client file strengthens client communications and may protect lawyers against professional liability claims. A well drafted engagement letter with a narrowly tailored “Scope of Representation” provision will help set expectations at the outset of the attorney-client relationship. Throughout the course of the representation, lawyers should have a paper (or electronic) trail of correspondence with the client referencing any legal advice provided, summaries of discussions on the benefits and risks of a particular litigation or transaction strategy, and client decisions regarding settlement negotiations, among other issues. Memorializ- ing these interactions is critical in the event that the client decides to act contrary to your advice, sets time or financial constraints upon your representation, or tells you not to pursue certain causes of actions, defenses, or other important issues.”
  • “Address Errors Promptly. Lawyers may commit errors at any point in their careers, but as noted earlier, claims typically rise in a bad economy and financial pressures may increase the likelihood of an error that leads to a professional liability claim. Errors can run the gamut from minor and correctible to substantial and damaging.”