HOW TO HANDLE THE MISHANDLED FILE
If you run your own law firm, the day will come when you must call your insurance carrier and inform the carrier of the possibility of a claim against your firm. This is one of the moments when you miss working for someone else. On this day, you wish you had a boss to hide behind, or at least a rock to crawl under.
It could never happen to ME, you say to yourself. Yeah, sure. Actually, it’s not that hard to do. If your process server makes a mistake, you are on the hook. If a per diem attorney fails to show up in court and the case is dismissed, you are on the hook. Here’s a sample scenario: One day, you pull out the litigation file to draft the summons and complaint in an action against the New York City Health and Hospitals Corporation for a medical malpractice action. Checking the date the Notice of Claim was served to insert it in the complaint, you declare: “Oops, not served on Health and Hospitals, served on the Transit Authority. So that’s why the office never received a notice for a 50-h hearing.” Flash back to the day the paralegal served the Notice of Claim after you gave such careful instructions. Flash back to the moment you dropped the Notice of Claim in the Litigation folder without checking that it was properly served. Flash forward to see your career flash before eyes.
If your first inkling of mishandled file comes with service of the summons and complaint, then your response is simple. Fax the complaint to your carrier and call the client into your office. More often, as in the above scenario, you will be aware of a potential claim before your client is aware of it. Upon realizing the possibility of a claim, obligations arise. You have an ethical obligation to keep the client apprised of significant developments in the case, including developments caused by your own mistakes. You have a contractual obligation to inform the carrier of the potential claim. You have a moral obligation to secure insurance coverage so that your client, to whom you owe a fiduciary duty, does not lose the opportunity to make a claim against your policy for your mistake.
The threshold issue is whether you need to call the carrier in the first instance. Upon first realizing there is a problem with the file, you will tell yourself many things: “maybe I can fix this and it will be okay,” “maybe the client will not find out,” “it was not such a good case anyway,” “maybe I can settle the claim without calling the carrier,” or “if I inform the carrier, my policy will not be renewed.” Upon cool-headed, steady-handed analysis, probably none of these are good reasons not to call your insurance carrier.
Read the notice requirements of your policy carefully. You have a contractual obligation to notify your carrier in writing upon becoming aware of a claim against the firm, or the reasonable possibility of a claim against the firm. If you become aware of a potential claim and do not put the carrier on notice, then the carrier will be happy to declare itself relieved of its contractual obligation to pay for your defense and indemnification on the claim, leaving you holding the bag, so to speak.
The obligation to notify the carrier may be quite broad. At the time of renewal, you generally will sign a statement that you have “made inquiry of all partners, officers and professional employees as to whether there are any circumstances that may result in a claim being made against the firm.” Thus, knowledge of a potential claim by the firm may be actual or constructive. The carrier may attempt to use this clause to disclaim coverage if any attorney in the firm knew of the malpractice. In Holloway v. Sacks and Sacks, Esqs1 the First Department held that Chicago Insurance Company could not disclaim coverage where a former associate actively concealed from the firm partners his mishandling of a case, but the court also affirmed the principle that innocently made material misrepresentations may result in disclaimer of coverage.
Indeed, the first review by the carrier will be to determine whether the company is obliged to defend or indemnify the claim. The most common basis of disclaimer is the failure to comply with the notice provisions of the insurance policy. If the adjuster assigned to your matter has any thought that there is a basis for the company to disclaim, then the matter will be turned over to “coverage counsel” who will parse the facts of the case to disclaim, if possible. Remember the carrier has a fiduciary obligation to its stockholders to save money and keep profits high.
Until coverage is secure, your relationship with the insurance carrier is adversarial. The carrier does not want to cover you. This is a time when you must proceed carefully, and if appropriate, under advice of counsel. If the circumstances are dicey, it is not a good time to be your own client. Don’t hesitate to get outside help if you need it.
In considering whether to call the carrier, you may conclude that you can fix the problem with the file and obviate the need for insurance coverage. You may well be able to fix it, but if your fix does not succeed and you have not put the carrier on notice of the potential claim, then you will have lost the insurance coverage you had for this claim. If it is an easy fix, then there probably will be no harm in calling the carrier and later informing the carrier that the problem was repaired. But if your prediction was wrong, and the fix does not work, then without proper notification, you may have lost the insurance coverage for that claim.
Your carrier will repeatedly urge you to notify the company at first awareness of a potential claim. Your carrier will likely inform you that the mere notice to the carrier of a potential claim may not adversely effect your application for renewal. While there are stories among attorneys of open files with the carrier at the time of renewal resulting in increased premiums or loss of the carrier, the failure to contact the carrier about a possible claim can result in disclaimer.
Even among experienced, careful, responsible attorneys, there is disagreement about when it is necessary to contact the insurance carrier. As a small firm practitioner, you are your own risk manager. Evaluate the consequences of disclaimer carefully as you weigh this decision.
You must tell the client about the error on the file. You have a professional, ethical obligation to do so2. It is helpful to discuss with your carrier what you will say to the client. For reasons of diplomacy and courtesy, tell the client in person, as soon as possible. For reasons of self-protection, consider, as well, confirming the information to the client in writing after the meeting. Depending on the nature of the mistake, the representation of the client may continue. If the statue of limitation is blown, you will terminate the relationship with the client. If the late notice of claim can be corrected with a motion, then make the repair and keep the client.
Settlement with the client directly can be highly risky. A general release obtained under such circumstances may not binding because you are the client’s fiduciary. Obtaining a release under such circumstances may even be an ethical violation because the disciplinary rules prohibit representation of a client in which an attorney may have a conflict of interest with the client.3 In addition, ethical obligations require that a lawyer shall not seek to limit prospectively the lawyer's own liability malpractice without advising the client that it is appropriate to consult with another attorney on the matter4. If you choose this path, proceed carefully and with expert advise about the details of your matter.
As unpleasant as it is, the firm can come through this experience without damage – if you handle it properly. You will handle it properly by planning ahead. Upon discovering a mistake, follow your head, not your emotions. Your emotional instincts will be all wrong. You will not want to call the carrier. You will want to hide from the client. You will want to close up the file, put it away and not look at it again. Pry open the file and look at the mess inside. Fix it and move on. Think about what you would want your attorney to do if you were the client. You’d want to know the facts, and proceed with a solution as quickly as possible. Do the same for your clients.
It may not feel like it at the time, but this is part of the “seasoning” that will make you a seasoned attorney, and ultimately, a better attorney.