By: William C. Saturley and John C. Kissinger, Jr.

We recently discussed the steps to take if you make an error in a client’s matter.  In this column, we focus on whether you should notify your professional liability insurer.

The duty to provide notice of claim is found in your insurance contract.  Liability polices cover acts, errors, or omissions arising from the rendition of legal services.  Coverage is generally offered on a “claims-made” basis, meaning the insurer’s obligations to defend and indemnify only arise when a claim is made and reported within the policy period.  Failure to report a claim jeopardizes that coverage.         

When does an error amount to a claim?  Policies typically require the insured to give notice of any claim that the insured asserts is covered.  When do “claims” arise, so that notice is triggered?

At its most basic, a claim refers to a demand for damages received by the insured.  It can be any formal demand for money, in oral or written form, that the carrier could defend, settle, and pay.  Service of a complaint, of course, triggers the notice provision. 

What if the potential error or omission has yet to result in a demand, however?  Not every aggressive advocacy position taken by your adversary (a/k/a trash talking) amounts to a reasoned expectation that your client will eventually claim you screwed up.  If you feel you may have fallen below your own standards in representing a client, however, and that the client may have suffered by it, you may have reason to expect a claim.  If so, your future coverage may depend on timely reporting to your carrier.

 How soon must I provide notice of claim?  Typical policies require the insured to give notice “as soon as practicable” after becoming aware of any act, error, or omission that a lawyer could reasonably expect to be the basis of a claim.  “As soon as practicable” is code for “immediately”.  As we’ve said before, “Act, not in haste, but without delay.”  In many instances, insurers will claim (often legitimately) that a delay in the notice to them has prejudiced their ability to defend or settle the claim, thereby forfeiting coverage.

What about bogus claims?  Should someone assert a baseless claim against you, you should still notify your insurer.  Despite the lack of merit, you risk bearing your own defense costs for failure to comply with the notice provision.  The obligation to notify your insurer turns on the timing of the claim, not its merits.   

What if one offending lawyer in a firm hides the claim from others?  The notice obligation may be imputed to the entire firm under many states’ laws, applying agency principles, even when only one lawyer is aware of the error that could be the basis of a claim.  An agent’s knowledge of his own unauthorized acts is typically not imputed to the principal, however, when the agent has acted fraudulently toward the principal.  

What about acts that precede the policy?  Most policies exclude prior acts the lawyer “knew or could reasonably have foreseen” would result in a claim.  Your application and its contents are the keys to what may be covered, and what excluded.  Work with your broker:  disclosure and negotiation are the keys to determining what the carrier accepts.  Not every error or omission will be left uncovered:  the carrier looks to underwrite what it knows of, and is in the business of selling you a policy.  It’s the risks of which you are aware, but of which you keep the carrier ignorant, that will jeopardize your future coverage.  Like Watergate or Scooter Libby, the cover-up frequently results in worse consequences than the underlying wrong.   

When in doubt, ask.  Because so much rides on your response to a triggering event, don’t hesitate to call on your broker for guidance.  He or she can help you chart your way through the policy terms, and the analysis of whether an event triggers the necessity to provide notice of claim. 

A Familiar Situation

A lawyer from a different state asks you to serve as local counsel in a transaction or litigated matter. He just wants you to file recording instruments or pleadings with the court.  He wants to structure the transaction or run the litigation, negotiate the terms or conduct the discovery, and, above all, maintain all the client contact. 

            That scenario seems to benefit everyone involved.  But what happens if a deadline is blown? You may think lead counsel is solely responsible if something goes wrong; after all, he was primarily in charge.  A client who is unaware of the division of labor between attorneys, however, may think otherwise.  Courts, too, increasingly see the lawyer’s role as all-inclusive

            How much responsibility do you bear?

            The American Bar Association Rules of Professional Conduct suggest you shoulder broader responsibilities when you take on a local counsel role than you may have imagined.

            For example, in many states, Rule 1.1 requires the lawyer to identify areas beyond his competence and to bring those areas to the client’s attention.  Rule 1.4 requires the lawyer to keep the client reasonably informed about its matter.

To avoid local counsel malpractice, discuss the scope of your representation – and your specific responsibilities – before you undertake the case.

            Have a detailed discussion with lead counsel regarding the scope of your representation.  Specifically cover the tasks involved in the case and who will assume responsibility for those tasks.  Define the means and frequency of communication with the client. 

            Define in writing the scope of your involvement.

            The decisions and agreements reached should be put into writing.  Ideally, the client signs a letter acknowledging the precise scope of your responsibilities during the case.  Some versions of the Rules of Professional Conduct, Rule 1.2(c), contemplate such arrangements, which allow a lawyer to “limit the scope of the representation if the limitation is reasonable and the client gives informed consent.”  Without such a letter, consider executing a memorandum of understanding with lead counsel, to delineate the exact scope of your representation and your responsibilities during the case.  Send it to the client.  Amend the letter or memo as the tasks develop.

            Make sure that you understand the documents you sign and file.

            Even with such an arrangement, the court – and likely the client- will hold you responsible for the contents of pleadings you sign.  Under Rule 11 of the Federal Rules of Civil Procedure, and many state analogs, your signature certifies your belief, after a reasonable inquiry, that the pleading is presented no improper purpose, that the contentions are warranted by existing law or by a non-frivolous argument, and that there is or likely will be evidentiary support for the contentions.

            Stay involved and informed.

            Do your best to establish a direct line of communication with the client.  If this is not possible, make sure the client and lead counsel are at least copying you on correspondence and pleadings.  If lead counsel’s actions or inactions pose a risk to the client’s interests, and lead counsel fails to adequately respond to your concerns, you may have to consider direct communication with the client.

            Involve your broker and malpractice carrier’s risk management team.

            Whatever the percentage of your time spent as local counsel, you will be better off with engagement letters and specific delineations of your authority, especially if they include direct client consent.  Your broker or malpractice insurer should be able to provide you with sample forms and guidance in maneuvering through these politically sensitive waters.

            Conclusion.

            By following the preceding steps, you can better communicate with the client and your fellow counsel, enhance the quality of the representation, and minimize your risks because malpractice litigation increasingly is targeting local counsel malpractice.

Attorney Edward Mahlowitz represented the wife of David Rabinowitz in an acrimonious divorce. At one point Mahlowitz obtained an attachment on the wife’s behalf against Rabinowitz’s interest in property owned by an LLC controlled by Rabinowitz. The attachment was obtained after the wife discovered that Rabinowitz was concealing from her the imminent sale of the property. Eighteen months after the attachment had issued, and approximately one year after the attachment was dissolved, but while the divorce was still ongoing, Rabinowitz, a partner, and an LLC controlled by Rabinovitz, sued Mahlowitz for abuse of process, malicious prosecution, and interference with contractual rights, for obtaining the attachment. Mahlowitz counterclaimed for abuse of process and malicious prosecution.

After an 8-day, jury-waived trial in the Massachusetts Superior Court, the judge ruled in Mahlowitz’s favor, and awarded damages to Mahlowitz for his counterclaims. Mahlowitz also had sought sanctions against Rabinowitz’s attorneys; the judge denied that motion.

The Massachusetts Supreme Judicial Court concluded that the record contained sufficient evidence supporting the trial judge’s conclusion that the only motivation that Rabinowitz had in bringing his lawsuit against Mahlowitz was to cause the removal of Mahlowitz as his wife’s counsel in the divorce action.

The case contains a number of interesting highlights. Regarding evidence of fraud, for example, when the co-defendant failed to take the stand, even after the judge suggested she could find the defendants were in “cahoots” as to the lawsuit, the Court reached back to 1922 for the following cogent comment: “In the face of such accusations [of fraud], men commonly do not remain mute but voice their denial with earnestness, if they can do so with honesty. Culpability alone seals their lips.”

In awarding Mahlowitz his costs for defending against the improper action, the judge gave him credit for his own time, including 300 hours at $300 per hour.

Regarding Mahlowitz’s claim of emotional distress, the court distinguished between the claim for abuse of process and one for intentional or negligent infliction of emotional distress. In the latter, physical manifestation of emotional distress is generally required as an element of the tort. With abuse of process, no such evidence was required. The Court did, however, remand the action for the judge to explain her award of $150,000 in damages ($250 per day for 600 days), not because it seemed unsound, but only because it was unexplained.

The SJC also affirmed an award of $250,000 for loss of reputation, despite lack of evidence of any “real business loss” or other pecuniary harm, as complained of by the appellants. The Court found no need for evidence of such intangible harm.

Mahlowitz also sought sanctions against the defendants’ attorneys. The trial judge denied these, and the SJC affirmed that result, pointing out that a court “is expected to avoid using the wisdom of hindsight and should test the signor’s conduct [under Rule 11(a)] by inquiring what was reasonable to believe at the time the pleading, motion, or other paper was submitted. The court also noted that, “unless there is evidence to the contrary, a client’s improper motivation should not be imputed to his attorney.”

Available sanctions include damages which, in a class action, could be the lesser of $500,000 or 1 per cent of the net worth of the debt collector, as well as legal costs and actual damages. §1692(a)(2).

The statute also provides that no liability will attach for “any act done or omitted in good faith in conformity with any advisory opinion of the Federal Trade Commission.” Both the majority and the dissent agreed that requests for FTC opinions have been rare, and that waiting for such an opinion, even if the FTC would be able or willing to answer the flood of inquiries that could theoretically ensue, is impractical.

The lesson? Lawyers and their clients should re-review each stage of the debt collection process for legal compliance. In this case, the error was a lawyer’s advising a debtor that she had to dispute a mortgage debt in writing, when no requirement for a “writing” was contained in the FDCPA. To read the Supreme Court’s entire decision, click here. [Jerman v. Carlisle, Docket No. 08-1200 (April 21, 2010).]

To read the Memorandum of Decision and Order on Plaintiff’s Motion for Protective Order, click here.

A number of conclusions by the judge are instructive for future work on ESI.

1. There was a significant failure of communication between the lawyers and the client. The engineers at Qualcomm failed to understand that the opponent was entitled to the documents that undermined Qualcomm’s arguments. This resulted from a lack of direct meetings between the attorneys and the engineers who were to be witnesses, to discuss the issues and to discuss appropriate document collection. Outside counsel failed to obtain sufficient information to understand how Qualcomm’s computer system worked. No attorney took supervisory responsibility for verifying that the necessary discovery took place.
2. There was a lack of agreement amongst the participants regarding responsibility for document collection and production. Outside counsel was working with in-house paralegals. Lots of assumptions were made; lots of bad decisions and consequences resulted from those incorrect assumptions.
3. There was a significant lack of candor on the part of principal Qualcomm employees. For whatever reason, principal witnesses denied having participated in key meetings, and denied knowledge of key events or arguments, which led the attorneys to make certain conclusions and arguments they otherwise would have been unable to do.
4. There was inadequate follow up when confronted by contradictory evidence. The attorneys were overly cautious when evidence appeared that undercut the responses and assurances they had given to prior discovery, particularly where it undercut significant arguments on their client’s behalf.

Questions going forward:

1. How deep into the client’s engineering and IT systems must outside counsel go?
2. How much due diligence will the standard of care require, when a client makes direct answers to direct questions about discovery? Must we mistrust our clients?
3. Where will clients draw the line when lawyers say they must meet with specific individuals to discuss issues and obligations, when the client says, “it’s been taken care of?”
4. Can outside counsel rely on in-house counsel, if a task-sharing arrangement between them assigns a gathering of evidence to the in-house party?

The amount of exposure faced by attorneys when confronted by ESI violations grows every day. Though these particular attorneys were able to undo the sanctions order against them, the Magistrate’s order foreshadows levels of responsibility that intrude deeply into the attorney/client relationship.

A law firm is contacted by a potential client from overseas, seeking local counsel for a transactional or debt collection matter.  After the firm is retained, the purported client will notify the firm that some of the debt is undisputed, and that the debtor will repay the debt directly to the law firm by check – oftentimes a cashiers’ check.  The check is counterfeit, but a good one.  The firm is then instructed by the “client” to wire the funds to the client, less the usual fee for the attorney’s time and trouble.  By the time the check is actually identified as counterfeit, usually by the issuing bank, the law firm has already wired the funds to the putative client and those sums are unrecoverable.

What makes these fraudsters so tricky to detect (or so easy to fall for)?

They imitate real businesses, banks, and people, so law firms are more inclined to fall for the scam.  They think they’re working with a legitimate, familiar entity.

These artfully crafted counterfeit checks often pass the initial stage of check clearing and aren’t detected as “counterfeit” by financial institutions until it’s too late.

Many times these checks include a verification phone number that actually leads back to the fraudsters.

What can law firms do to ensure they won’t be tricked into these sophisticated scams?

Be careful when any potential client requests your services using the internet.  Do your homework on potential clients and avoid relying on email communication alone.

When playing middleman in a financial transaction, make sure the check from the debtor clears both the bank into which you are depositing the money, but also the institution on which it is drawn.

The Court also announced a new (prospective) rule for matters involving client cash.  In future cases, if bar counsel shows that client cash was received, and the lawyer failed to deposit it in a bank account or otherwise account for it, rebuttable presumptions arise that the unaccounted-for cash was commingled in violation of Mass. R. Civ. P. 1.15, and that the client was permanently deprived of the money. If the attorney fails to rebut the presumption that funds are missing due to intentional conduct, as opposed to negligence, he will be subject to disbarment or indefinite suspension.