By Teresa Niederwmmer
“This too shall pass” is a common phrase we hear during times like these. As attorneys, we are trained to evaluate the current state of things and prepare for what may come next. Many law firms are bracing for a possible recession sparked by fallout from the coronavirus. Some attorneys view the current state of the world in a positive light, as they are confident there will be plenty of work in the coming months. This work will include assisting clients seeking to address supply chain disruptions, or providing guidance on debt restructuring or legal advice related to cancellation and postponement of major conferences, trade shows and other large events.
The litigation finance industry is also gearing up for a steady stream of coronavirus-related activity. Some believe insurance-related disputes are likely to spike in the near term. Others anticipate increased activity in the bankruptcy/insolvency arena driven by a declining economy. Still others believe a downturn in the economy will lead to an uptick in disputes, both in litigation and in arbitration.
If history offers any indication, attorneys should also expect an increase in both the number and severity of professional liability claims if an economic crisis results from the current pandemic. During the late 1980s and early 1990s attorneys found themselves the object of lawsuits relating to failed savings and loans or other financial institutions. Attorneys who were targeted often had a very close working relationship with the owners and founders of those financial institutions. They were involved in setting up the financial institutions and even served as go-betweens for the financial institutions when dealing with federal regulators. The economic downturn between 2000 and 2002 related to the collapse of the dot-com bubble and the events of Sept. 11, 2001 were major drivers of economic problems during that period.
These events, combined with a weak real estate market, caused, in part, the collapse of some questionable corporations and deals that were propped up by what had been a strong economy. As a result, lawyers’ professional liability claims arose from the efforts of attorneys to create what would later be deemed illegal tax shelters. These tax shelter losses were limited to a number of firms which had a significant tax shelter practice. The same was true of the economic crisis beginning in 2008. Real estate values plummeted and lawyers’ professional liability claims against those involved in real estate transactions followed.
When the economy worsens, attorney may face increased risk for three primary reasons. First, attorneys can find themselves entangled in litigation stemming from representation of key players who are either the victims of or perceived as causing the economic downturn. Second, those who lose money in a downturn are motivated to recover their losses and many times look at their attorneys as deep pockets. Third, attorneys may feel pressure to find ways to reduce their own costs and increase income, which can lead to taking on representations they would have avoided in a more stable climate. Understanding the potential causes of increased risk can help attorneys prepare for what may come next.
Representing key players
In the wake of the current pandemic, key players will likely take many forms. They may range from health care providers and essential businesses to financial institutions or governmental bodies. These entities are looking to their attorneys for guidance for managing both customer and supplier relationships, as well as internal responses to employee concerns and safety. If you count these entities among your clients, it is important to ensure your representation is within your area of expertise, well-reasoned, timely and grounded in the law. Additionally, ensuring you are properly insured for the type of work you do is key. A good place to start is by looking at the value of the files in your office. If advice given to a client forms the basis of a claim, would your current professional liability limits be enough to defend and resolve the claim? Oftentimes, claims related to key players have far-reaching effects and involve many parties. Such claims tend to be expensive to defend and even more expensive to resolve.
Financial pressures may cause clients to point to the attorney as the source of their problems. Many times attorneys find themselves on the defensive following an economic downturn simply because clients have lost money and are seeking ways to recover their losses. A common scenario involves allegations of client fraud stemming from client activities that may or may not be grounded in attorney advice. The client’s actions can taint the attorney, who may be perceived as providing negligent or even unethical advice, or failing to advise against certain actions. If the client becomes insolvent, these claims will come from the bankruptcy trustee or a receiver. Ensuring the scope of the representation is clearly defined, and documenting the nature of the advice given to clients can go a long way if a client seeks to place blame at the feet of its attorney.
Other fraud-based claims come in the form of investor lawsuits. Although investors often do not have a direct client relationship with the attorney, they often will pursue claims against the wrongdoer’s outside lawyers in the form of an “aider and abettor” action against the attorney. The cost of defending a major fraud claim can be daunting, and it can significantly erode an attorney’s insurance coverage. The stakes often are so high in these claims that there is enormous pressure on attorneys and their insurers to reach large settlements.
Another area of concern relates to trust work. If real estate markets or the stock market tank, the value of many trusts decline as well. When trust assets shrink, family squabbles can draw in the attorney. This is particularly problematic when the attorney has done work for the trustee or serves as a trustee. The decline in the trust’s value may be blamed, in part, on the attorney. Clear documentation by the attorney throughout the representation can often aid in the defense of such claims.
Increase revenue, decrease expenditures
Like their clients, attorneys may also be in search of capital during challenging economic times. In response to decreasing revenue, attorneys may be tempted to resort to extraordinary measures to reduce costs and increase billing. Some of these moves may put firms at risk of malpractice suits.
Staff reductions, for example, can lead to problems. Attorneys run the risk of becoming overstretched, which can result in costly errors in judgment and, possibly, malpractice suits. Attorneys may also consider taking clients that they might not have taken during more prosperous times, and they may delve into areas of practice which traditionally are out of their area of expertise. Economic constraints may also cause a law firm to focus on litigation clients to make up for lost business in other areas of practice. When this happens, attorneys may be tempted to prolong litigation—which may not be in the client’s best interest—to generate more billable hours. This, in turn, can lead to fee disputes with litigation clients.
Fee disputes between attorneys and clients also are more evident during harsh economic periods. While this may be inevitable if clients are in poor financial condition themselves, it may also be the result of attorneys being more likely to pursue fee claims. Be aware that fee claims almost certainly will increase the frequency of counterclaims for malpractice.
Should the current pandemic evolve into a global economic crisis, we will surely see some increase in the frequency and severity of professional malpractice suits. It is hard to say which areas of the law will be impacted, or to what degree. It is certain, however, that attorneys will be involved in some capacity as the world continues to evolve in response to changing times.
Teresa Niederwimmer is vice president of claims for The Bar Plan, which provides solo and small firms with lawyers’ professional liability insurance and other lawyer-related insurance products and services.