In Practice

Legal Malpractice Claims are Costing Firms Big Bucks

, Daily Report

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J. Randolph Evans is a partner in McKenna Long & Aldridge's Atlanta office, where he is the chairman of the financial institutions practice.

Recent headlines from around the country reveal multimillion-dollar legal malpractice payouts, with firms facing big exposures arising out of predictable and avoidable problems.

These stories are not surprising for regular readers of this column. As reported in many past articles, in a suffering economy, clients and former clients often look to attorneys—who are perceived as having deep pockets—to compensate them for failed businesses, lost homes or risky investments. This year, the number of large verdicts against attorneys confirms the risks of failing to follow effective risk management procedures for avoiding legal malpractice claims.

Notably, these multimillion-dollar payouts reflect trends and risks that can serve as useful tools in designing, implementing and following effective risk management procedures for attorneys. Here are examples with some recommendations for reducing the risk of a runaway jury or an unexpected multimillion-dollar settlement in connection with an avoidable legal malpractice claim.

Reputations mean little to juries

Although smaller firms certainly face the highest frequency of claims, larger law firms continue to face the highest severity of claims. Big firms face big risks. Unfortunately, neither the size of the firm nor the reputation of the attorney provides much insulation from legal malpractice exposure. Some of the bigger verdicts this year were against attorneys with excellent reputations who were part of well-regarded law firms.

For example, a jury in the Washington, D.C., area awarded a $4 million legal malpractice verdict against an attorney repeatedly recognized as one of the best trial attorneys in the Washington metro area. The attorney was a former president of the Association of Trial Lawyers of America and named an attorney of the year by the D.C. Trial Lawyers Association. In spite of his excellent reputation and continued success, he still found himself on the losing end of a malpractice claim.

In another high-profile case, K&L Gates was unsuccessful in its attempt to have a court dismiss a $500 million lawsuit against the firm. Notably, K&L Gates disputes the very creation of an attorney-client relationship giving rise to the litigation.

Oddly, notwithstanding these risks, it is often the most experienced attorneys with the best reputations that skirt firm protocols and ignore risk management procedures. Yet, according to the data, the attorneys who need to strictly adhere to risk management practices and procedures are experienced attorneys with significant clients and significant exposures. Big reputations backed by big firms do little to persuade a jury to find in an attorney's favor when the rules have not been followed or a mistake has been made.

Conflicts of interest continue

to drive up exposures

Juries do not like conflicts of interest, regardless of how they happen. In fact, even the appearance of a conflict of interest can, and often does, result in some of the largest legal malpractice verdicts.

For example, in October 2013, the Eleventh Circuit upheld a $10 million claim against an attorney who failed to treat escrow funds properly and did not disclose the movement of funds to its insurance company. There were no allegations of fraud or embezzlement—just that the attorney did not follow the proper protocol for managing conflicts.

In addition, a jury awarded $1.2 million against a prominent Florida firm on a claim asserted by the FDIC, where the law firm represented multiple parties in a single loan transaction, resulting in a conflict of interest. Although the firm sought a conflict waiver, it did not properly obtain it.

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