Swiss Re recently experienced a complex, high exposure case related to improper file documentation. The case likely would not have been pursued if the insured had properly documented their client file.

To prevent experiencing a similar case, read on for proper file documentation tips.

Case Background

Our insured attorney represented debtors in a bankruptcy case. One of the pressing issues in the bankruptcy case was how to handle assets that were negatively impacting the debtor’s cash flow. The debtor’s representatives and the attorney agreed that the continuing cost to maintain the assets was greater than the value they added to the bankruptcy estate. After the insured discussed various options with his clients, a mutual decision was made to abandon the assets to the largest creditor. The advantage to this plan was thought to be the resultant credit against the debt owed to that creditor.

Unfortunately, the client’s relationship with the creditor was strained to a point where they were unable to agree as to how to value the credit to be applied to the debt. The insured suggested a proposed plan to perform an appraisal of the assets and then proceed with the abandonment, tendering the appraisal to the Bankruptcy Court. The insured contends that he discussed the risks associated with this plan, including the risk that the court would not be bound by the appraised value in determining the credit. The clients were in agreement with the plan. The insured, however, did not commit this discussion to writing.

Ultimately, while the bankruptcy court rendered certain favorable decisions to the insured’s clients, the court rejected the appraisal amount and assigned a lesser credit to the debt. The insured’s clients were not pleased with this result.

Lawsuit

The clients then filed a legal malpractice claim asserting that the insured attorney did not properly advise them about the possibility that the court would reject the appraisal in determining the value of the assets. The clients contended that if they would have understood the risks associated with the appraisal plan, they would not have been in agreement with the plan.

The insured’s communications with the clients were primarily oral, and there were no specific file documentation  to support the insured lawyer’s contention that the clients were advised of the risks and agreed to the plan.

The Importance of File Documentation Lesson

To avoid a similar case, always document your file regarding key strategic decisions to demonstrate that you advised the client of potential risks and allowed the client to make an informed decision regarding how to proceed. Too often, when a ruling is not favorable to the client, the client will deny that he or she ever understood the risks of any given plan. If a client denies certain conversations occurred, documentation can refresh the client’s memory or even prevent a more devious client from blaming their lawyer for a result they understood was possible. The writing can also greatly benefit the trier of fact. Without the writing, the lawyer will confront a “he said, she said” scenario.

Keep in mind that proper file documentation does not require drafting a lengthy and detailed formal letter at every turn. At times, a simple confirmation email is sufficient, especially if it requires an affirmative response from the client.

Just like you should send an engagement letter at the start of a new client relationship, you need to maintain that open communication throughout the case.

Copyright Swiss Re Corporate Solutions 2019. This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose.  Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article.  The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice.