Exposure and Costs

Managing Malpractice Risk

Exposure and Costs

Legal malpractice costs the injured person and the lawyer alike, and that double cost is the reason lawyers should spend time and money on prevention before anything goes wrong.¹ Prevention starts with understanding the bases of liability, and the rest of this chapter builds on that.²

Consider the injured person first. Many people harmed by a lawyer never bring a claim, because the damages may be too small to support a plaintiff's lawyer working on contingency.³ The person who does sue and win may still not end up where he or she started, because in most legal malpractice cases the plaintiff cannot recover attorneys' fees.⁴

The sued lawyer pays in other ways. Malpractice insurance may not cover the type or amount of the claim, and even a covered claim leaves the lawyer responsible for the deductible or retention. A claim can also raise future premiums and may affect whether the lawyer can be insured at all.⁵ Beyond those dollar costs, a malpractice claim can take a personal and financial toll on the lawyer.⁶ Insurance therefore answers only part of the problem.

Exposure does not stop with clients. Two large settlements show how much nonclient claims can cost. A New York law firm that had represented the Stanford Financial Group paid $35 million to settle claims by investors in an allegedly fraudulent $7 billion scheme tied to a Caribbean bank.⁷ In another matter, a California jury returned a $34.5 million compensatory verdict but deadlocked on punitive damages, and an internationally known firm then settled with three nonclient investors who allegedly had been misled about failed real estate investments.⁸

Nonclients still have a harder time than clients holding lawyers accountable, and the reason is legal duty.⁹ Courts often discuss duty in terms of privity. In legal malpractice law, privity means an attorney-client relationship between the defendant lawyer and the plaintiff (or the plaintiff's predecessor-in-interest), and it is that relationship that gives the lawyer a broad array of legally enforceable obligations to the plaintiff.¹⁰

The cases show how the barrier works. In Shoemaker v. Gindlesberger, the Ohio Supreme Court rejected a nonclient's malpractice claim under a strict privity rule.¹¹ In Flaherty-Wiebel v. Morris, Downing & Sherred, the Third Circuit rejected a claim based on the defendants' drafting of a pre-nuptial agreement, noting that Flaherty "was represented by her own counsel during the negotiation" of that agreement and so could not sustain a malpractice claim against the drafting lawyers.¹² Receiving a lawyer's work product does not cure the problem. The Restatement requires a request for representation before an attorney-client relationship can arise, whether by agreement or by mistake.¹³