For attorneys, conflicts of interest allegations can lead to several undesirable outcomes, whether a formal malpractice claim, costly litigation, disciplinary issue, or problems with insurance. It’s a situation best avoided.
Yet recent studies of attorney malpractice claims indicate that conflicts of interest allegations are on the rise. While some claims assert an attorney had divided loyalties, others contend there were adverse interest issues. All claims have the potential to inflame juries and attract the attention of ethics review boards.
For lawyers, it’s important to take the threat of conflicts of interest malpractice claims seriously.
Managing the Divided Loyalty Risk
Many conflicts of interest claims can arise from your dealings with former or current clients. It’s important to recognize and manage the risk of perceived or actual divided loyalties. Here are four key ways you can take control:
It’s risky to rely on memory to identify current and former clients. Instead make use of technology. Check for and identify potential conflicts upfront using a centralized database to track the following:
- Current, former and declined potential clients
- Opposing parties and interested non-parties
- Officers, directors and principals of corporate clients
- Principals or owners of any partnerships
- Entities for which firm members serve as directors, officers or managers
- People related to your firm’s attorneys and employees
Where needed, expand and customize the data you track.
Use engagement letters to clearly identify the client. If there are other interested parties who may need separate counsel, include a statement to this effect in the letter.
Designate and follow set procedures to help firm lawyers avoid a potential conflict. Check for conflicts before any disclosure of confidential information or acceptance of any documentation from a prospective client and share new potential client information with your firm’s attorneys and staff within the first 24 hours.
If your check turns up a minor conflict, make a disclosure in writing to the client. If the client then consents to representation, have the client sign a waiver agreement containing the disclosure statement. Include circumstances under which the client may need independent legal counsel or that might cause the firm to withdraw.
Managing the Adverse Interest Risk
Other conflict claims may arise from a lawyer’s own adverse interest. It can be particularly problematic for a jury if you were to:
- Invest in client business ventures
- Act in a management position for a client business
- Become a trustee for a client with power over funds or investments
- Be designated a beneficiary or distributee of a client’s estate
As these activities may not be covered under your professional liability policy due to exclusions or limitations, it’s best to avoid them. However, there are certain precautions that may be beneficial should an adverse interest claim arise. Always:
- Provide the appropriate disclosure and advise clients to retain separate legal advice to review contracts surrounding transactions.
- Seek the advice of experts for management or investment decisions. Document the advice given and the reasoning for the decision taken.
- Ensure any entity for which you serve as a director or officer has a directors and officers liability policy with adequate limits.
- Ensure your actions regarding client investment transactions are fair, reasonable and fully explained in writing.
While not all conflicts of interest will result in a malpractice claim, it’s still best to minimize your risk. Have a system in place to check for potential conflicts, avoid the appearance of adverse interest, review your jurisdiction’s Rule of Professional Conduct and know your professional liability policy exclusions. With these steps, you’ll help minimize conflict of interest concerns.
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 Corporate Solutions 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. Insurance products underwritten by Westport Insurance Corporation, a member of the Swiss Re Group. Copyright 2018 Swiss Re Corporate Solutions.