Laterals and Malpractice: Clear and Present Danger

Even before the COVID-19 pandemic, hiring lateral partners was an inherently risky endeavor.

In 2017, insurance broker Ames & Gough released a survey of legal professional liability insurers specifically calling attention to the risks associated with laterals.

That year, nearly half the insurers Ames & Gough polled – which represent the majority of the Am Law 100 – reported an uptick in claims stemming from lateral hires. Alarmingly, half of these insurers traced malpractice claims to law firms not adequately resolving a conflict of interest.

Given the malpractice risk associated with such attorneys, Ames & Gough cautioned firms to tread lightly in hiring laterals, and to fully vet candidates. (In its coverage of the survey, American Lawyer put it more bluntly: “Don’t want to get sued for legal malpractice? Here’s one over-lawyerly solution: Don’t hire lateral partners.”)

Five years later, it remains true that lateral hiring is a minefield, with plenty of opportunity to cause collateral damage to law firms.

Consider the following statistics from the Decipher Investigative Intelligence’s 2021 Lateral Hiring Survey:

  • 21 percent of respondents had a lateral leave for client conflicts
  • 19 percent of respondents had a lateral leave for lack of required expertise
  • Eight percent had a lateral leave for actions the firm believed were unethical or illegal
  • Two percent had a lateral leave for a claim that originated at prior firm

Malpractice claims can cause significant harm to law firms in the form of negative headlines, embarrassing disclosures in RFPs, and actual and punitive damages (or all of the above). How can you safeguard your firm in the lateral recruitment process?

First, do not overlook the lateral partner questionnaire, one of the most effective tools at law firms’ disposal for fully vetting their lateral candidates. Law firms should deploy LPQs and insist on lateral candidates fully completing them.

A comprehensive LPQ should ask candidates about if they’ve had prior malpractice claims, lawsuits or disciplinary matters, as well as disclosures regarding their clients and conflicts. Firms should also work to verify the information provided to them.

Beware that shifts in the legal landscape toward law firm mergers, acquisitions and increased lateral hiring increase the risk of client conflicts — another point raised by Ames & Gough’s survey. Consider your conflicts of today as well as your conflicts of tomorrow: What other lateral candidates are in the pipeline, and what M&A transactions might be in the works?

Also don’t forget about laterals who come with “bad clients.” As highlighted during a session at Hinshaw & Culbertson’s most recent LMRM Conference, “Bad clients can get good lawyers in trouble. Representing dishonest or rogue clients is a leading cause of severe claims against lawyers. Representing bad clients can also lead to disciplinary proceedings and possible criminal liability, plus more mundane but still serious problems such as unpaid legal fees. Although dishonest clients typically pose threats to transactional lawyers, they can also expose litigators to sanctions and professional discipline.

Accordingly, recognizing potentially unworthy clients is an important risk management strategy.” Basic conflict screens will rarely identify a “bad client,” so a more careful explanation of a lateral’s projected clients and their underlying business interests and matters is critical to avoiding lateral-related claims.

Finally, look at the comprehensive due diligence – including feedback from clients and former colleagues. In vetting lateral candidates, we sometimes come across unhappy clients, including those who have initiated multi-year litigation with their attorneys. One such client told us that the candidate’s prior firm “has not demonstrated any particular strengths,” and expressed deep dissatisfaction about the firm’s work on their case.

“They lose big cases, they don’t properly and fully analyze the issues, and their writing abilities are mediocre,” the client said. “I am not happy with their work. They recently lost a huge case, which is the second loss in two years. I personally wouldn’t be inclined to use them again. The work product that they have delivered is not satisfactory.”

Those comments should ring alarm bells to a hiring firm, as law firms can be pulled into malpractice claims originating from a lateral’s former firm.

Attorneys from Hinshaw & Culbertson highlighted this issue in an August 2019 article in DRI’s For the Defense publication, recommending that firms should, during pre-hiring due diligence, carefully review the matters a lateral candidate is expected to transfer to their new firm for errors so that they may be addressed or mitigated.

Prevention is key to mitigating the malpractice risks associated with hiring lateral partners. Decipher reduces law firms’ lateral hire risks and costs by providing deep-dive intelligence about prospective laterals – before they’re hired. We help our clients identify potential red flags before they rise to the level of malpractice claims. To learn more, contact us today.

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