Malpractice Insurance - Avoiding Malpractice Claims

Malpractice claims have skyrocketed over the past decade, resulting in a six billion dollar malpractice insurance industry.  Once the exclusive burden of doctors, malpractice insurance has become must-have protection for CPAs, lawyers, consultants, and many other professionals.  Even clergymen, under attack from their own congregation, are protecting their assets from lawsuits.  

When you consider that one claim can take away everything you�ve worked for, the high premiums typical of malpractice insurance begin to seem more reasonable.  Plus, today�s America is so litigious that essentially baseless lawsuits are resulting in trials and settlements against business owners and companies.  It�s so intense that sometimes simply providing a proper service can land you in trouble.  (Remember the McDonald�s lawsuit over hot coffee?)  The best way to make sure you won�t need to use your professional liability insurance is to do everything possible to avoid a lawsuit in the first place.   

There are several things you can do to protect yourself.  Most of them fall into one of three categories.  Two of the categories are preventive: not overextending yourself and establishing effective communication.  The third is for your protection if you are sued: redundancy and documentation. 

Stay in Your League
As a professional, you know what you are qualified to do.  Your clients probably have a less clear idea.  For instance, you have mastered estate law in New York.  You�ve set up a longstanding practice and a strong rapport with the neighborhood, handling their wills and such with diligence and care.  To most of your clients, though, you are probably still simply �the lawyer.�  They might ask you to help them recover damages from an accident, or defend them in a criminal case.  Don�t do it.  Even though you are legally entitled to perform these services, you will be putting yourself at risk should something go awry because you have taken on a responsibility above and beyond your field of expertise. 

The advice holds true for other professionals as well: pediatricians should not diagnose their co-worker�s elderly mother, nor should corporate accountants file their friends� 1040s at tax time. 

When a client approaches you for a service you do not feel you should provide, it is best to refer the client to a trusted colleague or associate that specializes in their needs or to outsource the work.  Outsourcing is particularly attractive because you will generally incur little risk (assuming your contract with the outside agency makes that clear, which it should) while preserving some of the revenue from the work.  It can also help your business seem larger and more professional, as oftentimes the client will give you credit for work that you actually outsourced.   

Not overextending yourself is most difficult when a current or profitable client starts to grow.  The most important questions to consider: 

• Do you possess the staff, influence, and capital to provide the services your client will require?
• Are you familiar with the areas into which your client is expanding? 
• Do you feel comfortable and have experience performing the requested services?
• Has the company entered into practices you find distasteful or unethical?

A thorough consideration of these questions will suggest whether or not you ought to continue representing your client.  Though they are far from the only considerations, any negative answers are a red flag that you may need to change your business structure or terminate the client.    

Communication
With the economy�s current focus on speed and efficiency, communication is often lost in the shuffle of bits, bytes, and plain old paper.  Effective communication takes only a relatively short amount of time, but is a powerful tool for avoiding a lawsuit altogether. 

Communication does not mean writing down every little detail to cover yourself.  (See below.)  It means taking the time to explain to your client what you are doing, why you are doing it, when you expect it to be done, and then listening to their concerns and suggestions.  It�s that simple: a business conversation.  It can be done casually over lunch, as it is meant only to inform the client and soothe their psyche.  (For the same reason, it doesn�t offer much legal protection.)  A constant exchange of ideas and effective communication is not only good for your professional reputation, but also to make sure that you are doing the work your client actually wants and needs you to do.

In the end, though, you�ll need something stronger than a three-martini lunch to defend yourself if things turn ugly.  For more definitive protection, you�ll want to look at: 

Redundancy and Documentation
Redundancy is usually good for the professional but costly to the client.  A common example of redundancy is a specialist being called to check an internist�s diagnosis.  This limits the liability of the internist by placing some of the liability for the diagnosis on the specialist and would limit claims by showing the internist was careful to double-check his diagnosis.  Of course, specialists don�t come cheap: a quick �Yep, it�s what he said� can cost more than the original diagnosis.  

Even when the illness is quite clear, a doctor might call for a few tests to check his diagnosis and, therefore, further limit his liability.  The specialist might even call for a few more tests to rule out other possibilities... and limit his own liability.  The HMOs argue that this results in better care; doctors argue it results in higher costs and slower treatment.  

Whether it is good for the client or not, redundancy is certainly good for the professional.  Understanding how it works for the doctor�s benefit, it becomes obvious how redundancy can limit the liability of other professionals.  When a CPA checks over and files a tax return which a business has prepared they become responsible for inaccuracies, essentially limiting the business� liability.  A law firm should have a licensed lawyer look over and certify the work of a paralegal (in most cases) so that, in a worst-case scenario, they will be able to put an experienced lawyer on the stand to protect the interests of the firm.  Other professionals can make analogies for their specific circumstances, but the basic tenet is the same: double check everyone�s work, and share liability for each case to lessen the liability for everyone.  

Documentation is the formal end of communication.  It begins with a letter of engagement (which sets up the terms under which the professional is hired) and ends with a letter of termination.  Both of those correspondences should be sent return-receipt mail to confirm their arrival.  

Other than those two items, though, it becomes a judgment call.  The truly paranoid can document every phone call and meeting, but that is not only difficult but of limited value.  You should almost always document a new responsibility you take on for your client and detail how that responsibility is being handled.  In general, it is important to document major changes to your organization (mergers, acquisitions, etc.) and any change in the department relevant to the client (new key employees, retired management, etc.).  Depending on the situation, you might want to let your active clients know about financial or bookkeeping changes, such as a new billing system or file storage changes.  Anything you feel your client would find important should be somehow communicated to them; anything you feel is important should be documented.    

Ultimately, you could do everything presented here and still get sued for a princely sum.  By ensuring you did not over extend yourself and that you communicated effectively, you have gone a long way towards weakening the claim.  And all that tedious documentation will pay off when you can present in court structured and detailed proof that you performed your duties within the law and within the terms of agreement.  

Your advisor and/or lawyer can help you understand how to best limit your liability.  If you decide to let them act on your behalf to limit your liability, make sure to prepare a letter of engagement... well, you know that by now.  

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