Category: Lawyers Insurance

Emotional Distress in Malpractice Claims

Emotional distress is not uncommon in malpractice cases. Some jurisdictions have expressly permitted the recovery of such damages, while other jurisdictions don’t have any law addressing this potential healing area. A few states have addressed this issue in the past year, and the decisions are worth noting.

Last year, the Washington Supreme Court issued a decision that opened the door for potential damages in a legal malpractice action. In Schmidt v. Coogan, the malpractice claim was triggered by the alleged negligent representation in a personal injury suit that was filed after the statute of limitations. During the trial of the malpractice case, the plaintiff sought to amend her complaint to add damages for emotional distress. She alleged that her attorney harassed, intimidated, and belittled her when she raised the issue with the statute of limitations.

On appeal to the state Supreme Court, one of the issues addressed was whether emotional damages are recoverable in a legal malpractice case.   The Court held “that emotional distress damages are available for attorney negligence when distress is foreseeable due to the particularly egregious (or intentional) conduct of an attorney or the sensitive or personal nature of the representation.”   The Court noted that egregious conduct is not necessarily the only way to establish the right to recover damages for emotional distress, but is not “required” if the plaintiff can prove that the attorney’s conduct subjected him to significant emotional distress. In this particular instance, however, the plaintiff was unable to recover from emotional distress because the subject matter of the litigation was not particularly sensitive, she did not lose any freedoms, and her attorney’s actions were not egregious.

In contrast, two other courts recently held that distress damages in malpractice claims are not recoverable. In Rodriguez v. Nam Min Cho, the California Court of Appeals addressed the issue of what damages were recoverable in a default judgment. In its analysis, the Court relied on other state court opinions and noted that “a plaintiff generally could not recover emotional distress damages for legal malpractice.”  Similarly, in Desposito v. New Jersey, the U.S. District Court in New Jersey indicated that emotional distress damages are generally unavailable in a legal malpractice action. Quoting from prior state court decisions, the Court noted that “emotional distress damages should not be awarded in legal malpractice cases at least in the absence of egregious and extraordinary circumstances.”

Attorneys need to be mindful of the laws in their jurisdiction regarding the recovery of damages. While an attorney’s actions should never rise to the level of “egregious conduct,” knowing whether the law permits recovery for such damages and the type of conduct that would trigger such a claim is essential. Likewise, attorneys involved in a malpractice suit need to know the available defenses and when a claim for can be raised.

Engagement Letter Defense

An engagement letter is typically the first line of defense. It clarifies obligations, the scope of duties, the client’s identity, billing terms, and other vital clauses that are generally a must for most engagements. They may also include exculpatory language such as limitation of liability provisions, damages caps, or different contractual language, which may aid in defending a lawsuit. Yet, according to a recent decision, the clause was not enforceable because it was not explicit and clear.

In Warren Averett, LLC v. Landcastle Acquisition Corp., 349 Ga. App. 479 (2019), an accounting firm – “Accountant” – argued on appeal that the underlying court erred by finding unenforceable a contract provision that limited the number of recoverable damages. Accountant conducted year-end audits for its client, a law firm. When the law firm discovered that its managing partner had allegedly embezzled more than $15 million, it sued Accountant for breach of contract, professional negligence, and gross negligence.

The Accountant filed a motion for partial summary judgment contending that a provision within the parties’ contract limited any recoverable damages to the number of professional fees paid to the Accountant, which amounted to about $87,000. The clause within the parties’ engagement states:

Should you become dissatisfied with our services at any time, we ask that you promptly bring your dissatisfaction to our attention. If you remain dissatisfied, it is agreed that you will participate in non-binding mediation under the commercial mediation rules of the American Arbitration Association before you assert any claim. In any event, no claim shall be asserted which is more than the lesser of actual damages incurred or professional fees paid to us for the engagement.

In response, the plaintiff filed a cross-motion arguing that the clause was unenforceable as a matter of law because it was not sufficiently prominent to provide notice, and it was ambiguous and insufficiently explicit as to whether it applied to the claims for professional negligence and gross negligence. The court agreed and concluded that the clause was unenforceable due to its “lack of prominence among the surrounding terms, the ambiguous scope of the provision, and its invalidity as to the … claim for gross negligence.”

According to the court, the clause at issue was not prominent enough because:

• The clause was “the same font size as that used throughout the entirety of the [contracts].”
• The clause “is not capitalized, italicized, or set in bold type for emphasis.”
• The clause is “not set off in a separate section that specifically addressed liability or recoverable damages, with a bold, underlined, capitalized, or italicized specific heading, such as “Limitation on Liability” or “DAMAGES.”
• The clause is not “a prominent place within the contracts to emphasize the importance of the provision’s limitation on recoverable damages, such as being adjacent to another similarly significant provision or being next to the parties’ signature lines.”

Perhaps the silver lining in this decision that did not go the way of the professional is that it could provide us with a road map of how best to avoid a similar result in engagement letters moving forward.

Most Common Malpractice Claims for Attorneys

Understanding where and why malpractice claims happen can help you proactively take steps to reduce the likelihood that a claim will be made against you.

So, what is the most common of all the malpractice errors that lawyers can commit? You are correct if your answer is a failure to know or apply substantive law. No single error accounts for the majority of claims. However, as a general category, the substantive-related kind is your best bet for falling on the wrong side of the malpractice line.

The following guide includes the five most common malpractice claims attorneys face, along with preventative steps to avoid them within your firm.

An accurate picture of malpractice errors. Getting good across-the-profession data on legal malpractice errors in the United States is virtually impossible for two reasons: Multiple legal professional liability insurance carriers operate in all but one state, and many U.S. lawyers don’t have malpractice insurance.

Substantive errors. When grouped, substantive errors account for more than 46 percent of reported claims. The most obvious error in this category is a failure to know or adequately apply substantive law. Another rather obvious error is the failure to understand or ascertain a deadline. Claims further indicate that “dabblers,” or lawyers acting outside their usual practice area, are far more likely to fail to know or apply the law.

Administrative errors. Taken together, administrative errors—including tickler system errors, clerical and delegation errors, lost file or document errors, and procrastination—account for 28.5 percent of reported claims. A failure to file documents is the top administrative error in the studies (at 8.6 percent). A failure of the calendar is the fifth-most common error. A related but less standard error is the failure to react to a calendar system. Clerical and delegation errors include simple clerical errors, errors in mathematical calculations, and work delegated to an employee that is not checked. Delegating tasks to knowledgeable support staff is an essential part of the operation of every practice. However, the lawyer is ultimately responsible for the delegated work and has to take steps to ensure that delegated work is reviewed appropriately.

Intentional wrongs. Intentional wrongs constitute 12.3 percent of claims. Intentional wrongs include fraudulent acts by the lawyer, malicious prosecution or abuse of process, libel or slander, and violations of civil rights. As a category, these types of claims may be the most shocking.

Regardless of firm size, every firm must implement appropriate internal controls to ensure that funds in trust accounts are handled correctly and that all transactions involving client monies are adequately documented.

Client-relations errors.  Client-relations errors constitute 12.3 percent of claims. There are several types of these claims, which all tend to arise from lawyer-client communication problems.

The first type is failure to follow the client’s instructions. Often these claims arise because the client says one thing about what was said or done, or not said or done, and the lawyer says another. These claims tend to come down to credibility and can be challenging to defend if the lawyer has not documented the instructions in the file successfully.

The second type is failure to obtain the client’s consent or inform the client. These claims involve the lawyer’s allegedly doing work or taking steps on a matter without the client’s consent. Such claims also involve the lawyer’s failure to advise the client of all the implications of possible outcomes when decisions are made to follow a particular course of action.

The third type is poor communication with the client, which involves a failure to explain to the client information about administrative procedures, such as the timing of steps on the matter or fees and disbursements. This error also arises when there is confusion over whether the lawyer or client is responsible for taking a specific action during or after the matter—for example, sending a lease renewal notice to a landlord or renewing a registration or filing.

You can significantly reduce exposure to client-relations errors simply by controlling client expectations from the very start of the matter, actively communicating with the client at all stages of the matter, creating a paper trail that carefully documents instructions and advice, and confirming what work was done on a matter at each step along the way.

Conflicts of interest. There are two types of conflict malpractice claims. The first arises when conflicts occur between multiple current or past clients represented by the same lawyer or firm. The second type occurs when a lawyer has a personal interest in the matter. Because real estate and corporate commercial lawyers regularly act for multiple clients or entities, these lawyers experience more conflict claims than those in other areas of law. Litigators, however, seem better able to recognize conflicts and have a relatively lower rate of conflict claims.

To avoid conflicts of interest, ensure your firm has procedures for checking disputes at the earliest possible time. This should, ideally, involve an electronic system that includes not only client names but also individuals and entities related to the client, including corporations and affiliates, officers and directors, partners, trade names, and the like.

Another hot-button issue is a rise in conflicts relating to the lateral hirings of partners and associates. Unfortunately, such conflicts are often addressed very late in the process, when the transfer is all but done. At this late stage, all parties have a strong desire to complete the transfer, that potential conflicts are often ignored or overlooked.

Frivolous Lawsuit Leads to Serious Damages

Many attorneys will encounter a lawsuit they believe to be potentially frivolous at one point or another. These claims often lead to frustration for the defense attorney and Client, who may face two complex alternatives: (a) settle the case to avoid defense costs or (b) expend time and money in defending a meritless claim. A recent case out of Pennsylvania may give some hope to those forced to defend weak claims and might give pause to anyone considering such a suit in the future.

A jury in Philadelphia County recently awarded approximately $2.3 million in damages in a frivolous litigation matter. Plaintiff alleged that the defendant’s attorney and law firm commenced and pursued a frivolous claim designed to extort money. Defendant Attorney represented Client in a bitter amongst Client’s family over nearly $1 million in stocks. Client, through Defendant Attorney, alleged that Client’s aunt was mentally incompetent and that Client’s brother-in-law (“Plaintiff”) was unduly influencing the aunt to take advantage of the stock windfall. That suit was dismissed with prejudice in 2013.

Subsequently, the brother-in-law (an attorney) filed a claim against the defendant’s attorney, alleging that the undue influence suit was commenced to pressure the family into a financial settlement by threatening his reputation within the legal community. The jury agreed with Plaintiff’s allegations and awarded approximately $2.3 million in damages, roughly $1.9 million attributed to Defendant Firm.

Though the threat or implication of a potential lawsuit is a widespread and predictable settlement and negotiation tactic, following through with such a lawsuit where the claim itself is not solvent creates the instant potential for retribution by way of a counter-suit based upon frivolity or vexatious litigation. Instances such as this serve as yet another reminder that those in the legal profession need to take care and exercise only the best and most prudent judgment when accepting and pursuing cases on behalf of clients, lest the potential for recovery becomes a potential for loss.

Cyber Security Best Practices

Law firms are the same as any other company in countering cyber attacks and protecting their confidential and proprietary data. The only difference is that law firms have ethical rules that require confidentiality of attorney-client and work product data. That does not make them unique, however, because accounting firms, engineers, and medical providers also have privileged data.

Some essential activities must be undertaken to establish a security program, no matter which best practice a firm decides to follow. Technical staff will manage most of these activities, but firm partners and staff must provide critical input. Firm management must define security roles and responsibilities, develop top-level policies and exercise oversight. This means reviewing findings from necessary activities, receiving regular reports on intrusions, system usage, compliance with policies and procedures, and reviewing the security plans and budget.

• Set the “tone from the top” and issue high-level policies regarding the privacy and security of firm data. This includes encryption, remote access, mobile devices, thumb drives, laptops, Wi-Fi “hotspots,” clouds, Web email accounts, and social networking sites.
• Inventory the firm’s software systems and data, assigning ownership and risk categorizing. Client data may need to be organized; not all clients are equal. Extremely sensitive matters have the highest risk and could cause the most significant magnitude of harm if breached. Firms may want to keep this data on a separate server with stronger security protections and access controls.
• Conduct third-party vulnerability scans, penetration tests, and malware scans. Antivirus software is essential, but it detects only a small percentage of new malware. Specialized services that see sophisticated attacks may be required.
• Deploy needed security technologies for encryption, intrusion prevention, detection, monitoring, security event management, etc.
• Identify and document security controls.
• Develop security policies and procedures to support the security plan and technologies.
• Develop contractual security requirements for outsourcing vendors, cloud providers, or other entities that connect to the firm’s network, including notification in the event of a breach.
• Conduct regular reviews of the security program and update as necessary.

Like any other business, law firms are subject to breach notification laws, and many have pre-breach security program requirements. A firm will be in a far superior position with its clients, its state bar, and any regulators that may become involved if it can show that (1) its security program is aligned with best practices, (2) its management is engaged, (3) it is complying with its policies and procedures, and (4) tools are deployed to detect malware and criminal behavior.

RESPONDING TO AN INCIDENT

Having a well-rehearsed incident response plan is critical. It must specify who will be notified, within what time frame, what documentation must be kept, who is designated to speak about the incident, and who has the authority to make certain decisions about the investigation. Serious incidents require specialized assistance from cyber forensic experts and careful documentation to preserve evidence. Even if the event did not trigger a breach of law, a law firm’s decision to cover up an incident could be a dangerous strategy.

ETHICAL CONSIDERATIONS

New commentary to Rule 1.1 of the Model Rules of Professional Conduct requires attorneys to “keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology.” Model Rule 1.6(c), on the confidentiality of client communications, acknowledges that disclosures can happen by providing: (c) A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.

Commentary on the Rule notes that [18] Paragraph (c) requires a lawyer to act competently to safeguard information relating to the representation of a client against unauthorized access by third parties and inadvertent or unauthorized disclosure.

Thus, Rules 1.1 and 1.6 may allow a law firm to avoid an ethics violation stemming from a breach if it has acted competently (e.g., having a strong security program) to protect its client data from disclosure.

Accordingly, a strong security program may help shield a firm from an ethics violation caused by not appropriately protecting client data, and it may help them beat a negligence charge. Still, it does not impact the Rule’s requirement to inform clients of security incidents. A good security program does, however, reduce the likelihood that such a painful conversation will have to take place. Altogether, it is clear that an up-to-date security program is the best defense that a law firm can have. Whether large or small, taking measures to establish a strong security posture is not only the right thing to do, it’s the ethical thing to do. It may help save the firm cases, clients, and reputation.