Everyone Loses in Fee Fights with Clients
Here’s a risk management tip: always go the extra mile to resolve fee disputes with your clients without resorting to litigation.
If you sue your client to collect the unpaid fee, there’s an excellent chance you’ll be hit with a counterclaim alleging professional negligence. And if your client sues you over a questionable fee, your malpractice policy may not cover the claim.
That happened recently in Connecticut, where a federal appeals court affirmed a district court decision denying coverage to an attorney who was sued by a former client over disputed fees. The U.S. Court of Appeals for the Second Circuit said under Connecticut law no coverage was available because the requested relief did not constitute “damages” as defined by the policy and because the insured was not performing “legal services.”
“The result is doubly problematic for attorney,” writes Seth Laver for Professional Liability Matters. “He lost out on a contingency fee and then was forced to defend himself out of pocket in the resulting lawsuit. Perhaps the takeaway here is that counsel must tread carefully when contesting a fee with a client. Often, the result is a malpractice claim or, worse still, a denial of coverage.”
The case is Continental Cas. Co. v. Parnoff (2019 WL 6999867 - 2d Cir. Dec. 20, 2019). Read the opinion here. Read analyses of the case here and here.
Note: This was a Connecticut case, decided under Connecticut law. If you have questions about whether your professional liability policy provides coverage for a claim or counterclaim regarding fees, talk to your carrier before taking action.
When you’re insured with Lawyers Mutual, you get the expertise of an experienced and proven claims team. They can guide you through difficult situations with clients. The Policy Team can answer all your questions about coverage and deductibles. And the Client Services Team has a wealth of resources to keep your practice safe and successful.
Tip #1: Get Lawyers Mutual’s Attorney-Client Agreements Toolkit.
From the Toolkit: “A significant number of legal malpractice claims begin as a counterclaim filed in response to an attorney’s suit to collect fees. After repeated failed collection attempts, the attorney resorts to suing the former client for the unpaid bill. The former client responds by filing a counterclaim alleging malpractice. Such claims are often without merit, but must nevertheless be reported to Lawyers Mutual and usually trigger the firm’s deductible. At its simplest and most basic level, a professional malpractice policy for an attorney serves to insure against claims of malpractice. The devil is in the details, of course.”
Download the Attorney-Client Agreements Toolkit here.
Tip #2: Know the NC State Bar Rule 1.5 on Fee Disputes.
Rule 1.5, Comment : Participation in the fee dispute resolution program of the North Carolina State Bar is mandatory when a client requests resolution of a disputed fee. A lawyer’s obligation to respond timely to all requests for information from the fee dispute resolution facilitator continues even if the lawyer and the client reach a resolution of the dispute while the fee dispute petition is pending. Before filing an action to collect a disputed fee, the client must be advised of the fee dispute resolution program. Notification must occur not only when there is a specific issue in dispute, but also when the client simply fails to pay. However, when the client expressly acknowledges liability for the specific amount of the bill and states that he or she cannot presently pay the bill, the fee is not disputed and notification of the client is not required. If the address of the client is unknown, the lawyer must use reasonable efforts to acquire the current address of the client. Notification is not required in those instances where the State Bar does not have jurisdiction over the fee dispute as set forth in 27 N.C.A.C. 1D, .0702.
Rule 1.5, Comment : If fee dispute resolution is requested by a client, the lawyer must participate in the resolution process in good faith. The State Bar program of fee dispute resolution uses mediation to resolve fee disputes as an alternative to litigation. The lawyer must cooperate with the person who is charged with investigating the dispute and with the person(s) appointed to mediate the dispute. Further information on the fee dispute resolution program can be found at 27 N.C.A.C. 1D, .0700, et. seq. The lawyer should fully set forth his or her position and support that position by appropriate documentation.
Rule 1.5, Comment : A lawyer may petition a tribunal for a legal fee if allowed by applicable law or, subject to the requirements for fee dispute resolution set forth in Rule 1.5(f), may bring an action against a client to collect a fee. The tribunal's determination of the merit of the petition or the claim is reached by an application of law to fact and not by the application of this Rule. Therefore, a tribunal's reduction or denial of a petition or claim for a fee is not evidence that the fee request violates this Rule and is not admissible in a disciplinary proceeding brought under this Rule.
Lawyers Mutual is the only legal professional liability insurance company that has been protecting North Carolina lawyers continuously since 1977. Our motto, “Here Today, Here Tomorrow,” is more than a tagline. It’s our commitment to the lawyers in this state.