Screening for High Risk Clients: Improve Profitability, Reduce Exposure to Claims
Margaret Hepper
(County Bar Update, December 2002, Vol. 22, No. 11)

Screening for High Risk Clients: Improve Profitability, Reduce Exposure to Claims

By Margaret Hepper, Esq., senior vice president, Lawyers Division/Larger Firms, Affinity Insurance Services, Inc.

Firm profitability improves with disciplined, thoughtful, and consistent client screening and selection. Yet, in an economic “correction,” firms frequently relax their client selection standards and accept anything that walks in the door. Experience has taught us, however, that those firms with a greater proportion of “high risk” clients encounter more fee disputes, a larger proportion of unpaid fees, and, ultimately, more claims filed against them. If nothing else, such clients often consume inordinate amounts of attorney and/or non-attorney time that is much better spent with more profitable clients. Using its own history as a guide, a law firm should discuss and develop “high risk” client profiles -- in response to which the firm should establish appropriate due diligence requirements that attorneys within the firm should follow when faced with a “high risk” prospective client.

What are High Risk Clients?

“High risk” clients are those that may have a greater than average propensity for (1) becoming collection problems, (2) demanding firm time and attention in amounts far exceeding what is appropriate for the legal matter, (3) creating conflicts of interest, (4) blocking other prospective clients that can bring more profitable, long-term work to the firm, and, in the extreme, (5) bringing ethics complaints or asserting malpractice claims against the firm and its attorneys. What defines “high risk” derives largely from the firm’s experience with its own client base, relative to the firm’s area(s) of practice. Other information sources include malpractice and ethics complaint statistics and general anecdotal information.

High Risk Client Identification

“High risk” client identification may involve one or more of the following:

--Negative “gut” instinct (“I had a bad feeling about that prospective client...”)

--History of problems with other firms

--Firing of previous attorney(s)

--Litigious or dishonest reputation within the community

--“Off-the-street” rather than referred

--Individuals who are inexperienced in dealing with attorneys and who do not seem to understand or listen to explanations concerning the costs, timeframes, or procedures involved with respect to their legal matter

--Projecting a negative or dismissive attitude toward quoted attorneys’ fees, costs, and retainer requirements

--Exhibiting belligerence or other unusual/inappropriate attitudes/behaviors

--Clients located outside the United States or Canada

--Relatives, friends, and “friends of friends” of firm attorneys or staff

--Limited resources, particularly corporate clients requesting that the firm take stock in lieu of fees or that the attorney otherwise invest in the business

--Legal services would create staffing constraints

--Area of practice involved is outside firm’s expertise

--Difficulty paying retainer

--Third party is paying legal fees

Establishing Due Diligence Guidelines and Procedures

All firms should establish due diligence guidelines and procedures with respect to new clients. Asking the right questions and documenting the answers is the key to effective due diligence and is best achieved through new business intake forms.

Adequate intake forms require basic client, matter, billing, and conflicts information. Exceptional intake forms require answers to questions that may actually expose a high risk client. Answers to these questions are reflected on the form, along with any due diligence documentation that is obtained. Typical questions include the following.

How did the client select the firm? Are prospective clients referred to the firm through other clients or business contacts, or are prospective clients contacting the firm “cold”? Is the attorney related to the prospective client or otherwise acquainted with the prospective client on a social level?

What is the client’s business, and who are the client’s competitors? What is the client’s business? (Check Web sites and Lexis/Nexis for articles, etc.) Where did the client come from (spin-off from another company, etc.)? How many law firms does the client retain? Are prospective clients one-time users of legal services, or do they have ongoing, long-term legal needs?

What is the financial situation? Client size (annual sales documentation and D&B search, if business; net worth, if individuals)? What is the outstanding debt load? What are the source(s) of funds to pay for legal work? What fee arrangement is being contemplated? What is the client’s ability to pay retainer? What is the client’s attitude toward “evergreen” retainers? Are there any outstanding judgments against them, either as a company or as individuals? Have there been any bankruptcy filings made (lien and judgment searches through Westlaw’s Information America or comparable resource)?

What are the legal needs? What is the nature of the work being contemplated? What is the expected duration of the assignment? What is the expected total volume of billings? What are the expectations of the client regarding the outcome of legal services? Do the legal needs comport with the firm’s strategic plan regarding the firm’s desired mix of business?

What is the client’s experience with other law firms? Which prior law firms have done work for the client on this or related matters? (Check these references.) If applicable, what are the client’s reasons for changing firms? How many firms does the client retain? How does the client allocate work among these firms? Has the client ever sued an attorney for malpractice?

Basic Due Diligence

--Reference checks, including funding sources

--Web site review, if prospect has one

--D&B search and/or review of financials, if company

--Credit reports run on individuals (with client’s permission)

--Conferences with prior/existing counsel, with prospective client’s permission

If due diligence uncovers a “high risk” client, then more due diligence is necessary.

Additional Due Diligence

--Litigation search (home state, at a minimum)

--Nexis search for articles, news, etc.

--Westlaw’s Information America

Firms should implement a separate review process for all new prospective clients, whether through a designated committee or an assigned individual partner. An objective review removes the temptation to accept undesirable clients, particularly in a difficult economy. If a high risk prospective client is identified, the firm’s reviewing body must have, and be willing to exercise, the authority to reject new business. The firm also needs procedures in place that set forth how it will deal with clients that it determines should not be rejected but closely monitored. Sometimes such clients can be dealt with if the firm implements safeguards, including thorough documentation of work and billings, retainers, and education of the client. In other situations, the firm may determine to have blanket policies in place that prohibit certain relationships; for example, family member estates cannot be handled by the lawyer/family member.

This article is intended to inform the reader of potential liability exposures for attorneys. This article reflects general principles only and does not render legal advice. Readers should consult legal, financial, insurance, and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association nor Aon and its affiliates assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of the information. Reproduction without written permission is prohibited. This article is made available to the County Bar Update by Aon Direct Insurance Administrators, administrators of the LACBA Sponsored Aon Insurance Solutions Program for LACBA Members.

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