The Risk Manager, Summer 2004
Too many lawyers still believe that if someone accusing them of malpractice is not a client they have no standing to assert a claim. These lawyers are unaware of the modern trend to expand liability to nonclients that is a major reason for the increased malpractice exposure lawyers face today. The most recent example of this for Kentucky lawyers is the Kentucky Court of Appeals decision in Cave v. O’Bryan (No. 2002-CA-002601- MR, 3/23/2004).
In this case a lawyer advised a client on an estate plan to carry out the client’s wish to leave his home to his second wife and personal assets to other relatives. The testator’s intent was implemented by deed establishing ownership of the home in the testator and wife as joint tenants and a will leaving personal property to specifically named relatives. Upon the testator’s death the wife renounced the will effectively halving the amount of personal property named heirs in the will received. One of the heirs then sued the lawyer for malpractice alleging that the lawyer negligently failed to advise the testator of the wife’s renunciation option. The Circuit Court granted a motion for summary judgment by the lawyer based in part on a finding that the heir lacked standing to make a malpractice claim because he was not the lawyer’s client. The Court of Appeals reversed the Circuit Court and remanded the case.
This opinion contains a good review of Kentucky law on nonclient liability and contains the strongest language to date on the standing of intended beneficiaries to claim malpractice:
“As Kentucky law clearly permits intended beneficiaries to hold attorneys liable for damages caused by negligent performance, irrespective of privity, the question is thus reduced to the application of this rule to claims by will beneficiaries against estate planning attorneys. The clear trend among courts is to hold that estate beneficiaries are intended to benefit from the services rendered by attorneys to their clients.
Therefore, in light of current Kentucky law, we conclude an attorney owes a duty of care to the direct, intended, and specifically identifiable beneficiaries of the estate planning client, notwithstanding a lack of privity. Applying this "intent to directly benefit" standard to the facts alleged in the present case, [the lawyer] owed a duty of care to appellant as a third-party beneficiary who was directly and specifically identified in [the] will.” (footnotes omitted)
This case is pending before the Supreme Court on the attorney's motion for discretionary review. The Court of Appeals did not address the effect of the attorney's uncontradicted testimony that he advised the testator that the widow had the right to renounce his will. The opinion of the Court of Appeals appears to mandate that the attorney should have refused to prepare the deed even after the client was advised of the risk and wanted to proceed anyway. Nonetheless, in light of the strength of the Court’s language this is a good time to republish risk management guidelines that we have identified for nonclient liability. They first appeared in the KBA Bench & Bar article Negligence Liability to Nonclients that is available on our Website:
“What follows are some ideas on how to assess your exposure to negligence liability to nonclients and what to do about it. First, be alert to these risky situations:
- The farther you get from the adversarial courtroom the greater the risk that a nonclient will claim reliance on your actions. Friendly business transactions when nonclients are not represented are especially treacherous.
- When you provide information verbally or in writing directly to a nonclient in a business transaction there is always the risk that your role will be misunderstood and the nonclient will later claim reliance on your “advice.”
- When you provide information and opinion letters to clients that you know will be passed on to nonclients it is reasonable to expect the nonclient to rely on that information. This usually exposes you to liability for erroneous or misleading representations.
- When you represent a business entity client there is always the risk of giving nonclient officers and employees, the erroneous impression that you are their lawyer and acting in their interest.
- When you do a legal service favor for a nonclient “just” to facilitate your client’s business there is a risk that this favor will justify the nonclient’s reliance on you as if they were also a client.
- When you disburse all funds to the client with the understanding that the client will pay amounts due nonclients there is a risk that you will end up with the nonclient bill.
Now for some risk management ideas:
- Make sure everyone (including you) knows whom your client is. In any ambiguous situation clarify your role early. If necessary to make your position perfectly clear, advise nonclients to get counsel. Make sure that officers and employees of business entity clients no matter how high ranking understand you represent the business -- not them.
- Avoid tempting reliance on you by nonclients through your affirmative conduct (accommodative minor legal service to get the deal done) and passive conduct (allowing impressions to stand that you are acting in the nonclient’s interest as well as your client’s).
- In appropriate circumstances caution your client that your advice is offered in the client’s best interest and should not be passed on as “good advice” to nonclients involved in the same business transaction.
- Carefully prepare opinion letters by:
- Specifying the scope of the opinion, its purpose, authorized uses and restrictions.
- Setting out the facts and assumptions on which the opinion is based. Be specific about facts based on your own knowledge and those provided by others who bear responsibility for their accuracy. If others are preparing evaluations on other aspects of the transaction, clearly exclude those parts from your opinion. If you are relying on an expert opinion as part of your analysis (e.g., an environmental assessment), spell it out in your opinion.
- Being complete -- include the pro’s and con’s of the matter. Do not expose yourself to the accusation that you misled by omission. Material limitations must be disclosed.
- Establish office procedures for quality control of opinion letters. Procedures should indicate who is authorized to sign and release opinion letters for the firm, provide for a formal and cold review before opinion release, and require careful screening for prior inconsistent firm opinion letters. Unrealistically short deadlines for the production of opinion letters should not be accepted from clients and requests for additional information from the client should be made without hesitation. Because opinion letters carry a high risk for claims against both you and the client, they require extra time and often much more than the client anticipates. Be sure the client understands this and is prepared for the high billing that usually goes with a good opinion letter.
- If you deliver documents to a nonclient for your client, be sure you know what information is in them. If the documents do not contain some semblance of truth, you will in all likelihood be held responsible for their accuracy along with the client.
- Be sure to cover with the client in writing (preferably a letter of engagement) precisely how client funds are to be disbursed.
- Get written authority to pay creditors with an interest in the recovery or settlement. This is particularly important for those you have personally engaged such as medical services required to develop a personal injury case. If your client gets all the recovery proceeds and stiffs those people, you could be liable. Maybe as bad, it is your credibility that suffers on the next case when you try to get needed services.
- Get client approval before hiring experts and incurring other high expense aspects of a case or transaction. At final disbursement don’t surprise your client with a huge nonclient claim on funds.
- Consider getting the client to pay large expenses directly while the case or transaction is ongoing and prior to final disbursement. This simplifies things at the conclusion of the matter for all concerned.”