Momma Said There Would Be Days Like This

Posted on December 9, 2013 05:15 by Steve Crislip

You know the legal rules and you follow them.  You use common sense and have good social skills with clients. You still get named in a legal malpractice action. It can and does happen to good lawyers.  The ABA recently put the average number of claims at three per career and at a risk of 4% to 17% of a claim in any year. ABA Profile of Legal Malpractice Claims: 2008-2011.

Like other professions, you cannot guarantee a result (and remember that half of each case loses as a rule) and sometimes an adverse result ends up as a claim despite no errors or issues – just a loss. I again encourage you to use all the methods available to you to control and reduce those possibilities. Bring your own stats down by all means available.

Various groups look at trailing years and report the highest risk area of practice.  It just makes you want to stay in bed some mornings.  The latest areas to stub toes are real estate (20%); personal injury (15%); family law (12%); estate, trust and probate (10%); and collection and bankruptcy (9%).  Oddly, solos have the highest percent of the claims and the percent’s drop sharply as the firm size goes up.  The level of experience fools you also because the new and the old are not the leaders of the pack in claims. Instead the biggest tranche of claims (35%) falls with those having 11 to 20 years of experience.

The number of claims and the severity (read cost) are on the rise. While loss prevention is not a positive cash flow in a firm, it certainly prevents already made and taxed income from going out the door. It is truly worth the time of a firm to devote resources to a solid loss prevention program.

Ames & Gough, a risk and insurance advisor to the law firms, does its own analysis and studies trends.  They polled seven of the leading professional liability insurers (80% of the market for Am Law 250 firms).  They confirm that the number of claims is increasing along with their frequency.  The bad news is that their study confirms the big claims and costs are growing, no doubt due to added complexity and the cost of defense of these claims.  Out of the seven carriers, six reported payouts on claims of more than $50 million.  That makes a law firm stop to look at their purchased limits, compared with the type of work they do.

The Butcher’s Bill lists new risks that never even existed in the past (attorney/client relationships from e-mails; inadvertent disclosures via e-mail; cyber risks and confidential information breaches).  Lateral hires are driving up the claims, but the old standby of conflict of interest still ranks as the first or second on all lists of the most frequent cause of malpractice claims – by a large margin.

I would like to offer end-of-the-year cheerful thoughts.  But the old Dragnet TV show detectives said:  “Just the facts, ma’am.”  It is what it is, so you better do all you can to keep down the claims against you.

This blog was originally posted on December 5 on the Lawyering for Lawyers blog. Click here to read the original entry. 

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As reported by InsideCounsel, the American Bar Association House of Delegates (“ABAHD”) recently approved an amended model rule stating that it is ethical for lawyers to disclose client information when trying to move from one firm to another.

Specifically, the rule states that it is ethical for an attorney in negotiations for a different job, as well as attorneys in merging firms, to disclose the identities of clients and the amount of business they generate because the information can help point out any conflicts of interest that might exist.  However, the model rule states that lawyers still should not reveal clients' financial information.

Although the model rule has been approved by the ABAHD, the rule is simply an advisory rule.  In addition, the rule provides little guidance for attorneys faced with the question of how much client information can be ethically revealed in states whose bar associations do not have rules covering this topic.  Thus, prior to revealing any information, lawyers should carefully consider and weigh this model rule against Model Rules of Professional Conduct 1.6 and 1.9.

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It is simply too easy for lawyers to quickly lose credibility within the bar and before the judiciary. It seems we've already lost this battle with much of the public, but within the profession I like to think we begin our careers with an undeserved presumption that most of us (at least those without the last name "Madoff") are straight shooters. This presumption should be nurtured and guarded for the gift it truly is.

A lawyer's individual reputation for honesty is as important, if not more important, than his or her intelligence or skill set.  Why? Most of us quickly learn that if we're out of our comfort zone skill-wise, we have choices.  We can involve another, more experienced practitioner.  Or we can double up on our research until we completely understand an issue or area.  Skills can be improved.  The same is not true for reputation.  Once our reputation for honesty is placed at risk, it is nearly impossible to fix.

The easiest way to lose credibility is almost too obvious to mention: to be untruthful, even about the most trivial detail. It's not necessary to falsify documents or manufacture evidence; a lawyer's reputation for honesty can be ruined simply by stretching the truth when "memorializing" a telephone conversation. We hang up, I read your letter, realize you've mischaracterized our discussion and from that point forward I don't trust a word you say. Worse, when my law partner mentions ten years from now that he's got a case against you, the first thought that comes to mind, which I surely share, is that you're not to be trusted. And just like that, you're no longer trusted.

Being untruthful with the court is even more dangerous.  Setting aside the risks of sanctions, contempt, complaints to the state bar, etc., judges have institutional memory which can follow you your entire career. Just as I'll tell my law partner that you can't be trusted, judges do talk, and have lunch together and, I am informed, discuss their cases and the lawyers appearing before them.  Let just one judge conclude that you are a lawyer capable of lying to the bench and that alone could devalue any statement you ever make in the same courthouse or even jurisdiction.

Many lawyers believe we only have our time and intelligence to sell on the open market.  I would add that neither time nor intelligence have any value at all without a reputation for honesty. Once we lose the trust of our colleagues and judges, everything about the practice of law becomes more difficult, especially winning cases and getting referrals.  Don't risk it.

as originally published at
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In addition to their work for their own clients in their own areas of expertise, some professionals also serve as expert witnesses in litigation.  They employ their knowledge and experience in their chosen field to analyze issues and render opinions for one or more parties to a lawsuit.  Like in any other aspect of their work, a professional serving as an expert can act negligently and make mistakes.  Sometimes these mistakes cause litigation problems for the party the professional has been retained to assist.  What happens when the professional is sued for his or her work as an expert?  What are the public policy implications of holding an expert witness liable for mistakes made in the litigation or conversely rendering the witness immune from suit?

A professional generally owes his or her client a duty of care to use the same amount of care, skill and proficiency commonly used by ordinarily skillful, careful and prudent professionals in the professional's community. See, e.g., Michaels v. CH2M Hill, Inc., 257 P.3d 532, 542 (Wash. 2011); Murphy v. A.A. Mathews, a Division of CRS Group Engineers, Inc., 841 S.W.2d 671, 674 (Mo. 1992).  Clearly, a professional retained to perform work as an expert witness in litigation owes his or her client a duty of care – a duty that can certainly be breached.

Some jurisdictions, however, have held that an expert witness's actions and testimony performed during the course of litigation are privileged.  In those jurisdictions, that privilege derives from the doctrine of witness immunity.

The Doctrine of Witness Immunity

As the Missouri Supreme Court has noted: "An immunity is a freedom from suit or liability.  The underlying premise of all immunities is that 'though the defendant might be a wrongdoer, social values of great importance require[d] that the defendant escape liability.'" Id. (quoting Prosser and Keeton on Torts 1032 (5th ed. 1984)).  The immunity for witnesses in judicial proceedings from liability for damages related to their testimony originated in English common law.See Briscoe v. LaHue, 460 U.S. 325, 332 (U.S. 1983)(citation omitted).  The basis for the immunity was the concern that, if subject to subsequent liability, a witness may self-censor his or her testimony – either by altering their testimony for fear or liability or failing to appear to testify at all. Id.  This is not to say courts have not considered the potential for harm resulting from false testimony.  Rather, courts have noted that the reliability of a witness's testimony "is ensured by his oath, the hazard of cross-examination and the threat of prosecution for perjury." Bruce v. Byrne-Stevens & Associates Engineers, Inc., 776 P.2d 666, 667 (Wash. 1989) (citing Briscoe, 460 U.S. at 332).

The immunity first arose in the context of defamation actions based on statements made by witnesses or other parties in the context of a court proceedings. Murphy, 841 S.W.2d at 675.  Different jurisdictions, however, extended the immunity in varying degrees based on the circumstances of the defamatory statement. Id. at 675-76.

Does the Doctrine Apply to Expert Witnesses?

The Seventh Circuit Court of Appeals has noted that witness immunity is particularly designed to protect and encourage disinterested lay witnesses. MacGregor v. Rutberg, 478 F.3d 790, 792 (7th Cir. 2007).   The court noted that because "they have no stake in the case and cannot be paid more than a nominal fee for testifying, [lay witnesses] would be highly reluctant to testify if the threat of a defamation suit hung over their heads." Id.  But what about an expert witness hired specifically to provide opinion testimony in a judicial proceeding?  Are they entitled to the same protection?

The Majority View Is No Immunity

The majority of courts to consider the issue in that context have held that so-called "friendly experts" are not entitled to blanket immunity for their work in preparing and communicating their opinions in litigation.  See, e.g., Marrogi v. Howard, 805 So. 2d 1118, 1128-29 (La. 2002).  InMarrogi, the Supreme Court of Louisiana analyzed whether the policy arguments used to justify the witness immunity doctrine apply in the context of a claim against an expert hired by the plaintiff in the underlying matter. It noted that the objective of encouraging forthright testimony in court "is not advanced by immunizing the incompetence of a party's retained expert witness simply because he or she provides expert services, including testimony, in relation to a judicial proceeding." Id. at 1131.

Some of the courts that have held that hired experts are not immune from suit by their client have based their reasoning on the distinction between the expert's testimony and the work leading up to that testimony.  In Pollock v. Panjabi, 781 A.2d 518 (Conn. Super. 2000), the court held that an expert witness was not entitled to such immunity, noting that the plaintiffs were not complaining about what the expert said; rather, the plaintiffs asserted that their hired expert failed to "perform work as agreed upon, according to scientific principles as to which there are no competing schools of thought." Id. at 525-26; see also Murphy, 841 S.W.2d at 680-81("These experts do not usually act solely as witnesses, but perform substantial pretrial work.").  The court held that there must be a nexus between the claimed immunity, the fact-finding function of the court and the interest in having the expert speak freely. Id. at 526.

California also recognizes the exception of friendly experts from the protection of witness immunity.  In Mattco Forge, Inc. v. Arthur Young & Co., 5 Cal. App. 4th 392 (1992), the court held in favor of the plaintiff company which had sued experts it hired to perform litigation support accounting work. The plaintiff's underlying suit was dismissed allegedly based on negligent work performed by the experts. Id. at 395-96.  In its opinion, the court raised the issue of access to the courts as a policy reason in favor of the exception. 403-04.  Citing the facts of the case before it, the court reasoned that if an expert's negligence caused dismissal of the client's suit before trial, granting immunity to that expert would not expand access to the courts. Id. at 404.

The Minority Viewpoint: Immunity For Friendly Experts

While the majority of jurisdictions to consider the issue have found that expert witnesses should not be immune from suit by their client for negligence, some courts have reasoned that the immunity should attach in such situations.  The most prevalently cited opinion on this side of the issue is Bruce v. Byrne-Stevens & Associates Engineers, Inc., 776 P.2d 666 (Wash. 1989).  In that case, the Supreme Court of Washington held in favor an engineer sued by a client for negligently rendering opinions on damages issues in prior litigation.  In addressing many of the same policy issues discussed in the cases listed above, the Bruce court found that immunity of experts would encourage them to be more careful in their work and result in more reliable testimony. Id. at 670.  It stated:

Civil liability is too blunt an instrument to achieve much of a gain in reliability in the arcane and complex calculations and judgments which expert witnesses are called upon to make.  The threat of liability seems more likely to result in experts offering opinions motivated by litigants' interests rather than professional standards and in driving all but

the full-time expert out of the courtroom.

Id.  The court also discussed the alleged distinction between the expert's testimony and the work leading up to the testimony. It held that to grant immunity solely to the expert's testimony but not to the basis for that testimony would undermine the policies underlying the immunity in the first place. Id. at 672; see also Panitz v. Behrend, 632 A.2d 562, 565 (Pa. Super Ct. 1993).

Some courts have held in favor of an expert witness who has failed to provide helpful testimony to his or her client at trial, though not based on the doctrine of witness immunity.See Griffith v. Harris, 116 N.W.2d 133, 135 (Wis. 1962)(noting that "a contract [between a party and a witness] creating an obligation not only to appear but also to testify in a certain manner on behalf of a party to a lawsuit, is against public policy");Shaffer v. Donegan, 585 N.E.2d 854, 860 (Ohio Ct. App. 1990)(same); Curtis v. Wolfe, 513 N.E.2d 1139, 1141-42 (Ill. App. 1987)(same).

What About Immunity From Disciplinary Actions?

Even in jurisdictions that afford professionals witness immunity, the risk of a disciplinary action – as opposed to civil liability – may still exist.  In Kentucky State Bd. of Licensure for Professional Engineers and Land Surveyors v. Curd, -- S.W.3d --, 2012 WL 512403 (Ky. App. Feb. 17, 2012), the Court addressed the argument made by an engineer who had appealed a suspension handed down by his state's licensure board for giving dishonest testimony as an expert witness in a quiet title action.  Id. at *9-*10.  The engineer argued that subjecting experts to disciplinary action based on their testimony would affect experts' opinion and have a consequent chilling effect on the administration of justice. Id. at *9.  The Court rejected this argument, distinguishing between an expert being sued civilly and one being subjected to professional discipline pursuant to a state statute in administrative proceeding. *10.


While the majority of jurisdictions who have considered the argument have found no immunity for friendly experts, there is a valid position – outlined in the Bruce opinion – that immunity should apply if this issue arises in a jurisdiction that has been silent on the issue.  Because many courts have never expressed an opinion on the matter, the arguments raised in Bruce should be available to many attorneys defending professionals in this context.

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Suppose your client, a lawyer, has been sued for malpractice. Could the alleged malpractice be a basis for discipline? Alternatively, is a disciplinary complaint likely to give rise to a malpractice suit? This article will attempt to shed some light on the distinction between attorney malpractice on one hand and professional misconduct on the other, as well as the types of conduct that may constitute both.

1. What is attorney malpractice?

Simply stated, attorney malpractice is a failure to exercise ordinary skill and knowledge, where that failure damages a client. “To state a cause of action to recover damages for legal malpractice, a plaintiff must allege: (1) that the attorney ‘failed to exercise the ordinarily reasonable skill and knowledge commonly possessed by a member of the legal profession’; and (2) that the attorney's breach of the duty proximately caused the plaintiff actual and ascertainable damages.” Schurz v. Bodian, 2012 WL 502680, *1 (N.Y. App. Div. 2012) (internal citations omitted). See also Legacy Healthcare, Inc. v. Barnes & Thornburg, 837 N.E.2d 619, 624 (Ind. Ct. App. 2006). (attorney malpractice claim involves “failure of the attorney to exercise ordinary skill and knowledge (the breach of the duty).”).

2. What is attorney misconduct?

By contrast, attorney misconduct is the failure to comply with the rules of conduct adopted by a court to which an attorney has been admitted to practice. Because all states except California have adopted some version of the American Bar Association’s Model Rules of Professional Conduct (the “Rules of Professional Conduct”), they will be the focus of this article. A failure to abide by the rules subjects the attorney to discipline by the highest court of that jurisdiction. “Failure to comply with an obligation or prohibition imposed by a Rule is a basis for invoking the disciplinary process.” Rules of Professional Conduct, Preamble, ¶ 19. See also Rule 9, American Bar Association’s Model Rules for Disciplinary Enforcement (“Enforcement Rules”) (“It shall be a ground for discipline for a lawyer to: (1) violate or attempt to violate the [State Rules of Professional Conduct], or any other rules of this jurisdiction regarding professional conduct of lawyers…”). The Enforcement Rules also provide for discipline for refusal to cooperate in the disciplinary process itself. See Enforcement Rule 9 (3), providing for discipline for disobeying a subpoena or order from a bar disciplinary authority.

Of course, the potential consequences of an attorney discipline case are very different from those of an attorney malpractice case. In the worst outcome of an attorney malpractice case, the attorney must pay monetary damages to the plaintiff. By contrast, attorney discipline actions place the attorney’s law license in jeopardy. An attorney who has been found to have violated the Rules of Professional Conduct faces a range of sanctions from a private reprimand up to disbarment, depending on the severity of the violation. See Enforcement Rule 10.

3. Does malpractice equal misconduct, or vice versa?

As noted above, attorney malpractice occurs where an attorney fails to exercise ordinary skill and care, and thereby causes damage to a client. Rule of Professional Conduct 1.1 provides "A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation."

Furthermore, Rule of Professional Conduct 1.3 provides "A lawyer shall act with reasonable diligence and promptness in representing a client."

Thus, it would seem that Rule 1.1 and Rule 1.3 may codify the requirement that an attorney exercise ordinary skill and care, and that failure to do so may constitute misconduct as well as malpractice. It is difficult to imagine a failure to exercise ordinary skill and care that is not also a failure to employ the “legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”

Some courts have indeed treated isolated mistakes as misconduct and punished it accordingly. For instance, in Board of Professional Responsibility, Wyoming State Bar v. Vreeland, 2012 WL 662236 (Wyo. 2012), an attorney represented a client in a criminal trial. Id. at *1. The jury returned a conviction on February 4, 2010. Wyoming Rule of Criminal Procedure 29(c) required that a motion for judgment of acquittal be made within 10 days of the jury’s verdict, and Rule 33(b) required a motion for new trial to be filed within 15 days of the verdict. However, Vreeland did not file the motions for judgment of acquittal and for a new trial until March 3, 2010; hence, the motions were untimely. Id. The Wyoming Supreme Court found that Vreeland violated Rules 1.1 and 1.3 of the Wyoming Rules of Professional Conduct (based on the Model Rules) and imposed a sanction of public censure. Id. at *2. See also Board of Professional Responsibility, Wyoming State Bar v. Dunn, 262 P.3d 1268 (Wyo. 2011) (attorney received public reprimand for failing to file timely governmental claims notice and complaint); In the Matter of Brown-Williams, 2012 WL 366587 (Ga. 2012) (attorney received public reprimand for missing statute of limitations in workers' compensation case).

By contrast, some courts have explicitly held that an isolated mistake is not a proper basis for discipline. For instance, in In the Matter of the Application for Disciplinary Action Against William E. McKechnie, 656 N.W.2d 661 (N.D. 2003), the Supreme Court of North Dakota addressed a mistake similar to the mistake made by Vreeland, but found that the mistake did not constitute misconduct. "In this case, McKechnie gave Follman incorrect legal advice about the statute of limitations and Follman's case was dismissed for failure to file within the limitations period. This evidence shows nothing more than an isolated instance of ordinary negligence, or error of judgment. We conclude there is no clear and convincing evidence that McKechnie violated N.D.R. Prof. Conduct 1.1." Id. at 669.

Even in jurisdictions whose highest courts have not specifically stated that isolated attorney mistakes should not give rise to discipline, attorneys are not typically sanctioned under Rule 1.1 or 1.3 for simple negligence. More commonly, it appears that attorneys are disciplined for violations of Rule 1.1 or 1.3 in addition to numerous other violations of the Rules of Professional Conduct that involve intentional misconduct, dishonesty, ongoing failure to communicate with clients, or chronic neglect of clients’ interests. For instance, in In Re Adinolfi, 934 N.Y.S.2d 94 (N.Y. App. Div. 2011), an attorney was sanctioned for violating New York Rule of Professional Conduct 1.3 where at least 26 of the attorney’s 103 cases before the Second Circuit Court of Appeals had been dismissed for failure to file a brief. 95.

Finally, the Preamble to the Rules themselves suggest that isolated mistakes should not subject a lawyer to discipline: “Moreover, the Rules presuppose that whether or not discipline should be imposed for a violation, and the severity of a sanction, depend on all the circumstances, such as the willfulness and seriousness of the violation, extenuating factors and whether there have been previous violations.” Rules of Professional Conduct, Preamble, ¶ 19. Thus, those courts that have either explicitly stated that an isolated mistake is not a basis for discipline, or at least typically decline to sanction lawyers for such mistakes, appear to employ an approach more in keeping with the spirit of the Rules.

What about the reverse question: can an act or omission that constitutes attorney misconduct give rise to a malpractice action? The Preamble to the Rules of Professional Conduct provides that violation of a Rule should not in itself give rise to a cause of action. “Violation of a Rule should not itself give rise to a cause of action against a lawyer nor should it create any presumption in such a case that a legal duty has been breached.” However, violation of a Rule can be evidence of the breach of the standard of ordinary care. The Preamble provides that though “[the Rules] are not designed to be a basis for civil liability,…[n]evertheless, since the Rules do establish standards of conduct by lawyers, a lawyer's violation of a Rule may be evidence of breach of the applicable standard of conduct.” Furthermore, some kinds of attorney misconduct have nothing to do with attorney malpractice. For instance, a felony conviction for operating a vehicle while intoxicated will certainly result in discipline, but would provide no basis for a malpractice claim.

Dina M. Cox is a partner with Lewis Wagner, LLP in Indianapolis, who focuses her practice on the defense of complex litigation, including legal malpractice, drug and medical device, product liability, consumer class actions, and insurance coverage and bad faith lawsuits.

Neal Bowling, attorney with Lewis Wagner, LLP, focuses his practice on complex business litigation as well as defense of lawyers in malpractice and disciplinary matters. He has extensive experience advising and representing clients in complex and challenging litigation including: securities matters; employment litigation involving breach of noncompete and wrongful termination claims; and representation of lawyers in malpractice actions and disciplinary investigations and proceedings. 

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As reported by Forbes, a U.S. District Court sanctioned a prominent U.S. law firmfor manufacturing a frivolous lawsuit.  The case is Lavesky et al. v. ITT Educational Services, Inc., filed under the False Claims Act (“FCA”).  The Lavesky court did not mince words in sanctioning plaintiff’s counsel: “From what the Court can gather, [plaintiff’s attorneys’] view is that virtually any ex-employee will do for purposes of manufacturing an FCA lawsuit.”  

Lavesky carries implications for all cases, not just those filed under the FCA--it provides a blueprint for the defendant victim of a manufactured lawsuit.  If discovery shows that the plaintiff was unaware of the facts upon which she based her lawsuit before an “enlightening conversation” with her attorney, the defendant should consider moving for sanctions pursuant to:(i) Federal Rule of Civil Procedure 11, and (ii) Model Rule of Professional Conduct 7.3, which prohibits lawyers from soliciting “professional employment from a prospective client when a significant motive for the lawyer’s doing so is the lawyer’s pecuniary gain.”  This recipe ended up costing the Lavesky’s counsel almost $400,000 in fees.

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Many people will not be shocked by the title of this post.  However, a new report issued by an advocacy group for the U.S. Chamber of Commerce was recently released that was entitled, “The Plaintiffs’ Bar Goes Digital, an Analysis of the Digital Marketing Efforts of Plaintiffs’ Attorneys and Litigation Firms.”  The report found that marketing efforts were being camouflaged as forums or support group sites.   The report estimated that law firms had spent more than $50,000,000 on Google advertising in 2011.  The overwhelming majority of that was spent by Plaintiff’s firms.  However, despite the fact that the amount of spending does not rank with large corporations, it is disproportionate for the size of the industry.  The report is critical of the Plaintiffs’ Bar because of a lack of transparency that many of their sites were actually marketing for law firms.  

As social networking, blogs, and other methods of disseminating information grow, they will become an increasingly prominent part of Plaintiff’s attorneys networking and marketing strategies.  To a lesser extent, we can expect the same on the defense side.  As we expand our internet marketing footprint, we need to be ever vigilant to ensure that our marketing is done truthfully and ethically.  Advertisement by legal professionals should be transparent and truthful.  Various bar associations will most likely weigh in on specific examples in the near future.  We should all make diligent efforts to make sure we are on the right side of whatever precedent is set.  

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Although unexpectedly large jury verdicts have prompted disputes between excess and primary insurers for years, the phenomenon of excess carriers suing defense counsel hired by the primary insurer relatively new.  The issue presented in such cases is whether, in the absence of a direct attorney/client relationship, the excess carrier has any right to sue counsel or, in the alternative, pursue a claim for equitable subrogation based upon counsel's client relationship with the insured.

For the most part, courts have declined to acknowledge a direct client relationship between the excess insurer and defense counsel.  As a result, some states have ruled that excess counsel has no right of action at all.  Indeed, in many states, courts have refused to acknowledge a client relationship between defense counsel and the primary insurer that hires counsel to defend its insured.  Whether a lawyer has an attorney-client relationship with an insurer that has hired it to represent a policyholder has been considered in several cases where insurers have sought to sue defense counsel for malpractice.  In several of these cases, courts have ruled that  the insurer is not a client of defense counsel. See First American Carriers v. Kroger Co., 787 S.W.2d 669, 671 (Ark. 1990)("when a liability insurer retains a lawyer to defend an insured, the insured is the lawyer's client");  Atlanta Int. Ins. Co. v. Bell, 475 N.W.2d 294, 297 (Mich. 1991)(declaring that "the relationship between the insurer and the retained defense counsel [is] less than a client-attorney relationship");  Continental Cas. v. Pullman, Comley, 929 F.2d 103, 108 (2d Cir. 1991)("[i]t is clear beyond cavil that in the insurance context the attorney owes his allegiance, not to the insurance company that retained him but to the insured defendant"); Point Pleasant Canoe Rental v. Tinicum Tp., 110 F.R.D. 166, 170 (E.D. Pa. 1986) ("[w]hen a liability insurer retains a lawyer to defend an insured, the insured is considered the lawyer's client") and In Re Petition of Youngblood, 895 S.W.2d 322, 328 (Tenn. 1995)(counsel's sole client is insured).

A few jurisdictions have also acknowledged that, even if the excess insurer is not a client, it is at least a third-party beneficiary of these legal services and thus entitled to bring suit.  Thus, in Paradigm Insurance Company v. The Langerman Law Offices, 24 P.2d 593 (Ariz.  2001), the Arizona Supreme Court found that although an insurer's retention of defense counsel does not necessarily give rise to an inherent conflict of interest in every case, neither does an insurer always enjoy "client" status. The Supreme Court agreed with defense counsel that "the potential for conflict between insurer and insured exists in every case; but we note the interests of insurer and insured frequently coincide."  Accordingly, the court found that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured "but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith."  In any event, even if the insurer is not the lawyer's client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications.  The court concluded that, "when an insurer assigns an attorney to represent an insured, the lawyer has a duty to the insurer arising from the understanding that the lawyer's services are ordinarily intended to benefit both insurer and insured when their interests coincide.  This duty exists even if the insurer is a non-client."

Others have likewise found that no client relationship exists but have permitted such claims to go forward on a theory of equitable subrogation.  However, a right to pursue claims for equitable subrogation may be of little value to an insurer in cases where the insured itself is already pursuing a malpractice action of its own, however.  In Pine Island Farmers Cooperative v. Erstad & Riemer, P.A., 649 N.W.2d 444 (Minn. 2002), for instance, the Minnesota Supreme Court refused to find that defense counsel had a client relationship with the insurer and, furthermore, refused to permit the insurer to pursue an action for equitable subrogation to pursue rights accrued from the insured as, in this case, the insured itself had already sued defense counsel for malpractice.  

In a recent Mississippi case, however, the state Court of Appeals has suggested the possibility that an actual attorney/client relationship may be established as the result of contacts between defense counsel and the excess carrier.  In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, No. 2009-CA-01063, a nursing home in Mississippi was sued for failing to provide proper care to a resident.  The primary insurer (Royal) engaged local counsel to defend the case.  A year later, Royal hired the law firm of Quintairos, Prieto, Wood & Boyer to take over the defense.  The Quintairos firm is a large national law firm with offices throughout the South and Southwest but is not itself a Mississippi law firm.  This fact was pointed out to Royal by the nursing home in expressing concern that none of Quintairos' partners or trial attorneys were licensed to practice law in Mississippi.  Although Royal insisted on continuing to use the Quintairos law firm despite its insured's concerns, these concerns were magnified when, a few weeks later, the trial court struck down counsel's belated designation of a physician as an expert witness.  Thereafter, the law firm issued an updated evaluation of the case.  Whereas prior reports had given a settlement value of $500,000 or less, the March 19, 2004 report concluded that the case had a value of $3 million to $4 million, the first indication that Great American's excess policy might be implicated.  Thereafter, Royal tendered its limits and Great American ultimately settled the lawsuit for an undisclosed amount.

In the ensuing malpractice action against Quintairos, Great American sought recovery on theories of equitable subrogation and negligence, including claims for negligent misrepresentation based upon the trial report submitted to Great American by the law firm.  In 2009, the trial court granted the defendants' motion to dismiss, holding that Great American lacked standing to file suit because it had no attorney/client relationship with the law firm. 

In 2011, the Court of Appeal affirmed the trial court's dismissal of Great American's negligence claims but declared that it should be permitted to go forward on a theory of equitable subrogation.  In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 2009-CA-01603 (Miss. App. January 18, 2011), the Mississippi Court of Appeals has ruled that an excess insurer may sue defense counsel hired by the primary insurer for any alleged negligence that resulted in the underlying nursing home suits settling for sums greater than the primary limits of coverage.  The court held that Great American could not sue for malpractice, since it lacked an attorney-client relationship with the firm.  The court declined to allow a direct claim based upon the excess insurer's reliance on alleged misrepresentations with respect to case valuation.  Nevertheless, as have other courts, the Court of Appeals held that even in the absence of an attorney-client relationship, an insurer may bring a claim for equitable subrogation. 

It is logical that an excess-insurance carrier should be allowed to pursue a claim in the insured's place. Shady Lawn had no incentive to pursue a legal-malpractice claim against Quintairos even if it believed Quintairos to be negligent because it had insurance in place to pay the settlement. Also, Royal had no incentive to pursue a claim if it believed the settlement value to be at or near the policy limits of the primary coverage regardless of the alleged malpractice. "The only winner produced by an analysis precluding liability would be the malpracticing attorney." Atlanta Intern. Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991). ¶18. We recognize that a possibility exists that this may result in frivolous claims by excess-insurance carriers; but, for this Court to prohibit legitimate claims would leave the attorney who allegedly committed malpractice free from consequences if the primary insurer declined to pursue a claim. Also, we find that a conflict is not created by allowing Great American to seek equitable subrogation against Quintairos for legal malpractice. Great American and Shady Lawn have the same interest in this litigation -- Shady Lawn's competent representation. Further, Quintairos has already shared attorney-client communications and work product with Great American in the underlying cases. 

Last month, however, the full Court of Appeals withdrew the 2011 panel opinion and substituted a new decision declaring that Great American could pursue claims for negligence and equitable subrogation against the Quintairos firm.  Although the court "denied" Great American's motion for rehearing, its new decision effectively grants the relief that the excess insurer was seeking.  Whereas the Court's earlier opinion had only allowed the case to go forward on a theory of equitable subrogation, the court has now ruled 7-2 in Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 212 WL 266858 (Miss. App. January 31, 2012) that Great American had direct rights of action against the firm based upon misrepresentations that it made in reports from Quintairos to Great American.  Even though Great American had not hired the Quintairos firm, the court ruled that Great American was not a "stranger" to the attorney/client relationship.  The court found a relationship was implicit in the communications that defense counsel had been providing to the excess carrier, belying counsel's claims that permitting such a cause of action would interfere with the privilege attached to communications between defense counsel and its client.  

Under the circumstances, the Mississippi court ruled that any misrepresentations in the report that Quintairos had provided to Great American  would support a claim for malpractice and that the trial court had therefore erred in granting counsel's motion to dismiss.  Further, as before, the court recognized a right on the part of an umbrella carrier to bring a claim for equitable subrogation,

Writing in dissent, Justices Carleton and Russell argued that Great American lacked standing to raise these claims and that, "Creating a cause of action for legal malpractice wherein no privity of contract, nor attorney-client relationship exists, jeopardizes the sanctity of the attorney-client relationship."

It remains to be seen whether this Mississippi opinion will provide a template for other courts to imply a client relationship between excess insurers and defense counsel in cases where there were privileged communications between the parties and other trappings of an attorney-client relationship.  What does seem apparent is that courts are becoming less concerned about the formal relationships and are increasingly looking to the actual inter-relationships among defense counsel, primary insurers and excess carriers in determining whether the purposes and indiciae underlying the attorney-client relationship should extend to excess insurers.  It is less clear, however, that Quintairos would support the finding of a client relationship between an excess insurer and defense counsel where, as is more commonly the case, the excess carrier merely receives information from the primary insurer and has little or no direct dealings with defense counsel.

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Last week, the Wall Street Journal Law Blog wrote about a recent New York ethics opinion approving legal advertising on Groupon and other group coupon sites.  These services allow consumers to pay one price up front for a service that is more valuable. A restaurant, for example, may offer a $50 meal for $25 that is paid immediately. An attorney, like this one, for example, may offer to provide a will for $99.  New York wasn’t the first state to weigh in on the issue--South Carolina has, too--and it probably won’t be the last. 

Both New York and South Carolina have approved groupon lawyer advertising per se despite claims that it constitutes the improper sharing of legal fees with a non-lawyer. However, and probably of more practical use to one considering running a groupon lawyer deal, the opinion of each state shows that it is essentially a path fraught with dangerous ethical pitfalls.  For example, New York identified a laundry list of issues aside from fee-sharing that may be implicated in the typical scenario depending on the facts, including improper payment for referral, excessive fees, advertising violations, improper creation of the lawyer-client relationship, conflicts of interest, and improper scope of representation.

With these potential ethical pitfalls in mind, not to mention the questionable effectiveness and taste of such advertising, it is doubtful that legal service groupons will ever become too common. 

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Two undeniable and interconnected facts: the U.S. housing market remains virtually stagnant and the number of lawsuits against real estate professionals is on the rise.  Existing home sales have dropped steadily since 2005.  There is a glut of product on the market, yet relatively few ready, willing and able buyers.  During the same period, delinquency and foreclosure rates have grown at an alarming rate.  Real estate professionals have been under considerable pressure to adapt to the conditions of this weak and sputtering market.  Many have not fared so well, as there has been a noticeable increase in lawsuits filed against agents, brokers, inspectors and other real estate professionals.

A Deeply Troubled Housing Market

There is no concrete formula to calculate when the American housing “bubble” burst.   What we do know is that the market was thriving in or around 2004 – 2007 then began to fizzle in the following years.  New home inventory, whether completed or under construction, grew at a gradual rate between 1997 and 2003.  Then, in or around January 2003, new home development skyrocketed.  By 2005, Americans built more new homes than they had since the late ‘70’s.  By most indicators, American real estate was booming in the summer months of 2005 and 2006.

Based on the vast number of new homes built at the turn of the century, it would be fair to assume that this development was catered to a growing number of eager would-be homeowners on the market for a new home.  However, the supply far exceeded the demand.  Every year beginning in 2005 through 2008 resulted in a significant drop in existing home sales compared to the prior year.  In other words, Americans were not purchasing homes at the rate those homes were built.  By way of example, Americans purchased approximately 100,000 less homes in June 2007 than they had in June 2006.  During that same stretch, however, developers continued to build new homes at a staggering rate.  As a result, the market could not support itself and soon collapsed. 

Following the peak in 2007 – 2008, new home inventory dropped dramatically.  That drop continued until today when new home inventory nationwide is significantly lower than that recorded in decades.  As a result of that rapid decline, new homeowners found themselves living in property valued far less than the price they recently paid.  Houses were rapidly losing value nationwide.  By some accounts over 10 percent of mortgaged homes in 2008 – 2009 were “underwater”; or, the mortgaged amount exceeded the actual value of the property.  Some suggest that the number of underwater homes continues to climb.

Sub-prime lending, of course, also played a significant role in the rise, and fall in the real estate market.  Sub-prime financing, or high-interest loans, is catered toward high-risk borrowers.  As the market reached its peak, sub-prime lending also increased.  Only two percent of mortgages issued in 2000 were classified as sub-prime compared to nearly 30 percent in 2006.  When the market was healthy, lenders were willing to take on more risk and perhaps were more creative with their lending agreements.  Less documentation, reduced or zero down-payment, low initial interest rates that ballooned over time and other strategies were developed to get buyers in the door.  The problem: aggressive lending programs invited Americans to purchase homes that they literally could not afford.  What naturally followed was rampant delinquency and foreclosure.

During the good years, between 1995 and mid-2006, approximately 5 percent of all active loans were considered “delinquent” and about 1 percent was the subject of foreclosure proceedings. The delinquency started to slowly climb in ‘06 and ‘07 then took off in 2008 to a high of nearly 10 percent  of all active loans as of year-end 2009.  Foreclosures also increased to over 4 percent of all active loans.  In 2008 and particularly 2009 – 2010, a higher percentage of delinquent properties resulted in foreclosure proceedings which, in turn, resulted in more short sales and REO properties.  A disproportionate number of these foreclosures were the result of sub-prime financing.  Of course, real estate professionals suffered as a result.

Increased Claims Against Real Estate Professionals

No doubt due, at least in part, to the distressed real estate market, claims against real estate professionals have risen over the past several years.  Moreover, the types of claims against real estate professionals have changed due to the peculiarities of the recent rise and dramatic fall of the market.  Agency issues, mortgage rescue scams, breach of fiduciary duty, fraud, negligence, breach of contract, and false representation issues are among the classes of claims on the rise against real estate professionals.  Why the rise in claims?  Here are several plausible explanations: 

Dabbling: Due to the reduced work-load, the real estate professional may be more willing to take on work outside of his/her comfort zone in order to generate revenue, including property or construction management or providing credit counseling or quasi-legal advice as opposed to selling real estate.
Loan and Investment Fraud: Knowingly or unwittingly modifying transactional documents to mischaracterize the nature of a purchase to obtain more favorable loan terms.  For example, denoting the purchase of a Bed and Breakfast as a “residential” property rather than an “income producing” property to generate better financing terms and, hence, close a deal.
Lay Offs:  The termination of the most experienced (and most highly compensated) staff in order to reduce expenses while retaining a staff less able to meet the needs of their customers.
Misrepresentation:   Even good faith reliance on a desperate seller’s disclosures, which turn out to be false, may result in a fraudulent or negligent misrepresentation claim against a real estate agent for allegedly ignoring red flags.
Referrals: A real estate professional may be subject to “negligent referral” liability by suggesting that her client retain the services of a particular vendor of some kind (e.g. inspector or title agency) of there are flubs on the job.
Unauthorized practice of law:  A real estate professional walks a fine line between representation of her client, providing general advice and performing a legal function especially with respect to the financial end of a transaction.  Should an agent provide advice outside of her scope of expertise, she may be subject to a claim of negligence, misrepresentation as well as the unauthorized practice of law.
Short sales and foreclosures:  Perhaps more than any other cause, the most significant increase in real estate disputes of late is due to the foreclosure crisis.  Short sales lead to difficulties regarding property condition disclosures.  For example, since short sales can be a lengthy process, the condition of a property may change while the transaction is pending.  Often, lenders and sales agents insist on listing short sales “as is” which may result in unreliable or non-existent disclosures and surprises following settlement.  These surprises all too often lead to lawsuits. Moreover, these sales are overlayed with transactional complexity beyond the ken of less experienced real estate professionals, a hazard in and of itself.  By way of example, short sales and foreclosures may force a real estate professional to address priorities amongst multiple liens or lending and listing problems as a result of the fact that prior owners are typically not involved in these transactions.

What Lies Ahead?

Signals of a recovery remain distant and weak.  Fiscal policy at the macroeconomic level suggests continued pessimism and caution, as seen in sustained historic low borrowing rates, but these low rates continue to be foiled by far more rigorous underwriting standards.  What one hears is: there’s plenty of money to borrow for people who don’t need it.  So, those who earn a living off of the sale of real estate will find themselves under stress for the foreseeable future.
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