Wisconsin Lawyer
Vol. 81, No. 12, December 2008

Managing Risk

Effect of Economy on Malpractice Claims

by Thomas J. Watson

It’s not just investment bankers and realtors who have been hit hard by the staggering economy. As the recent presidential election showed, the economy is the number one issue for most people, including elected officials. Americans from all walks of life are keeping a close eye on their retirement accounts, mortgages, credit card balances, and spending habits and even their jobs.

For solo practitioners and small-firm lawyers, the bottom line has taken on a renewed importance. How the economy affects their business depends on the areas of law in which they work. Clients may be less likely to seek their legal services, for example by choosing to close on a home, enter into a business transaction, or get through a divorce without a lawyer. On the other hand, bankruptcy and collection work appear to be on the rise – as does the number of clients who expect lawyers to fix their problems.

When business picks up in some areas of practice for certain law firms, and other firms operate with smaller staffs due to economic constraints, there also can be increased potential for a mistake, or worse, a malpractice claim.

With no end in sight to the current financial crisis, lawyers in firms big and small must reevaluate the way they do business, not only financially but in the way they handle cases as well. The economy affects malpractice claims, according to the just-released American Bar Association study of legal malpractice claims. The study, the fifth of its kind conducted by the ABA, was unveiled at a recent ABA conference in San Francisco, and updates the ABA’s study conducted four years ago. Eighteen U.S. insurers, including Wisconsin Lawyers Mutual Insurance Co. (WILMIC) in Madison, and six Canadian insurance companies participated in the study.

Areas of Practice

The study’s finding that legal malpractice claims related to real estate have increased nationally by approximately 4 percent should come as no surprise to anyone. Many national legal experts indicate that as real estate values have fallen across the country, more individuals and businesses are suing their lawyers because the results of the transactions are not what the clients expected.

The good news for Wisconsin is that declining real estate prices nationally have not hit the Badger state nearly as hard. Sally Anderson, vice president of claims for WILMIC, says, “So far, we have not seen a rise in real estate-related claims here.”

However, Anderson says she is starting to see more claims in the areas of business and corporate work. “The increase has been for lawyers who do transactional work – work often done by real estate lawyers. So while Wisconsin lawyers have been squeezed out of many real estate transactions by brokers, mortgage brokers, and lenders, the difference does show in the business transactions area of practice.”

Thomas J. Watson, Marquette 2002, is senior vice president and director of communications at Wisconsin Lawyers Mutual Insurance Co., Madison.

Overall, the number of claims in 2008 is running slightly ahead of 2007 for WILMIC. Katja Kunzke, WILMIC president and CEO, says, “Historically, the frequency of claims goes up as the economy goes down.”

The increase in claims in estate planning, trust, and probate bears that out. Anderson says part of the reason is an aging baby boomer population. “People are often very contentious when it comes to ‘free money’ and especially where there is some psychological baggage within a family. Because disenfranchised heirs can make these claims, the legal basis might be shaky to begin with, but the dollars involved are often worth an effort.” Anderson says there is also a slight increase in elder law claims, “especially in divestment situations that didn’t work as intended or explained,” she says.

The failing economy also may be having an impact in collections and bankruptcy. Anderson says there has been a slight rise in the number of claims related to the Fair Debt Collection Practices Act and the Wisconsin Consumer Act. She says many of these contain some sort of bankruptcy problem. “We expect to see greater increases in frequency in these areas of practice as the economic hard times set in and more people have difficulty paying their bills.”

When people look for relief through bankruptcy, Anderson says, legal work in that area will continue to be subject to great scrutiny. “In bankruptcy, the decision about what chapter provides the best protection could be second-guessed down the road.”

Client Expectations

According to panelists who gathered at the San Francisco conference to discuss the ABA study, one of the keys to avoiding malpractice claims is understanding and managing client expectations.

Kunzke, who led the panel discussion, says regardless of how the economy is doing, client expectations are always important. “Technology has made a big impact on how lawyers practice. Its speed has raised expectations – clients expect things to be done more quickly, but just as accurately. While technology has made life easier in many ways for lawyers, it can also be a double-edged sword.”

Knowing your clients, keeping them informed of case developments, responding to their inquiries in a timely manner, and providing them with sufficient information to allow them to participate in their representation in a meaningful way can help you and your client work well together – and also help prevent the client and the lawyer from developing incongruent expectations. That means writing the letter, making the phone call, and making sure the client understands. “It’s matching up client expectations with reality, and making sure those expectations line up with the lawyer’s expectations,” Anderson says.

“Letters of engagement that state your goals in the representation and include risks and costs also can make your life much easier down the road,” says Anderson. The value of on-going communication as a case unfolds cannot be overstated. “Letters documenting risk, costs, alternative approaches, and status reports can save you from a malpractice claim or OLR [Office of Lawyer Regulation] grievance.”

Interestingly, one area of practice that has not experienced an increase in claims at WILMIC during this economic downturn is the area that traditionally has led the way in most claims among all practice areas – plaintiff personal injury work. In fact, the number of claims in that area actually has declined slightly over the past few years. Anderson says that may be due to several factors. “Fewer of our insured lawyers report practicing in this area of law. Fewer, but more experienced, lawyers seem to be getting most of this work. Also, we know that the number of case filings of this type has decreased significantly over the past five years.”

Conclusion

Experts tell us the economy hasn’t faltered like this since 1981. And we haven’t seen Wall Street hemorrhage like this since the Great Depression. What does this mean for lawyers? It could mean a tighter budget for your law firm. But it also means clients may scrutinize your work more closely, especially in the areas of bankruptcy and collections, real estate, transactional work, business and corporate work, estate planning, and probate. Although you may not have to change the way you practice, it might be a good idea to review your procedures and make sure you are taking steps to avoid being second-guessed down the road. After all, as Kunzke says, “With less money to fight over, people sometimes fight a little harder.”  

Wisconsin Lawyer