In our last newsletter Bob Breetz alerted you to the need to read a client’s fire policy for contractually shortened periods of limitation to bring suit and for requirements that the client/insured give a sworn statement to the insurance company. A New York law firm learned the hard way that you also need to read a client’s comprehensive general liability policy to investigate whether the client has insurance to cover litigation expenses. The firm represented the client in patent and trademark infringement cases charging substantial fees. The client initially paid some of the firm’s fees, but after running up an unpaid bill of almost $150,000 was sued by the firm for fees, costs, and interest of $206,954.
The client counterclaimed for malpractice for failure of the firm to advise that the client's comprehensive general liability insurance policies might pay litigation expenses. The lawyers who replaced the firm immediately raised this possibility that insurance may cover litigation costs. Upon inquiry the insurer agreed to cover litigation costs going forward, but denied coverage for all prior litigation expenses. The client claimed that there would have been no litigation expenses if the firm had met its duty to minimize liability by investigating the availability of insurance. The court concluded that "the plaintiff's failure to investigate the defendants' insurance coverage or alert them to the potential availability of insurance to cover their litigation expenses may have constituted legal malpractice. The issue whether the plaintiff committed legal malpractic raises numerous question of fact, including but not limited to, the sophistication of each party regarding potential insurance coverage and the scope of the plaintiff's engagement. It is particularly noteworthy that counsel who succeeded the plaintiff promptly pursued the insurance issue to the defendants' substantial benefit." The case was returned for trial. (Darby & Darby P.C. v. VSI Int'l Inc., N.Y. Sup. Ct., N.Y.County,9/15/98; Current Reports, p.468, Vol. 14, No. 19, 10/14/98, ABA/BNA Lawyers' Manual On Professional Conduct)
Lawyers often criticize risk management advice not to sue clients for fees. Nonetheless, the most consistent predictor of a malpractice claim is suing a client for fees. This case is just another example of how things can blow up when you do. In all likelihood not only will this firm not collect unpaid fees, but paid fees will have to be refunded. If you are determined to sue a client for fees, risk manager Stephen M. Blumberg recommends to first consider the following checklist: