Editor’s Note: The author of this post counsels law firms on risk management issues.
The increasingly competitive nature of the legal services market has shifted the balance of power between lawyers and clients. A potentially damaging result of this power shift is the now-common client indemnification clause included in many outside counsel guidelines (OCG), requests for proposal (RFP), or client-drafted engagement letters.
These clauses create risk for both lawyer and client. Depending upon the scope of the indemnity and size of the engagement, a law firm’s financial stability can be threatened. Because the indemnification provisions could also compromise insurance coverage, the client risks losing the financial protection presumed to be provided by its law firm’s malpractice insurance.
Despite the obvious drawbacks, it appears that client indemnification clauses are here to stay, so the real question is how to deal with them. In some instances, clients will negotiate the requirement, or change the language. In order to address the concern, though, lawyers must first be aware of the client’s request for indemnification, which brings up perhaps the most troubling issue of all.
Despite the potential for significant negative consequences to both firm and client, many firms have no idea that they’ve already agreed to indemnify their clients. See, Independence, Representation and Risk: An Empirical Exploration of the Management of Client Relationships by Large Law Firms, Smith & Vaughan (2015). The reasons for this are many, but two of the most common are that client indemnification provisions may first appear at varying steps of the intake process or even during the representation itself, and then most often in documents reviewed solely by the partner who’s attempting to bring in the business.
Because of the significant risks posed by agreeing to indemnify a client, there are a variety of steps firms should take to identify, screen for, and collect client indemnification provisions as part of the new client intake process and ongoing practice management.
To begin, it’s important that the firm take inventory of what it’s already agreed to. This effort entails a thorough review of existing RFPs, OCGs, and client-drafted engagement documents. To this end, scanning the documents into searchable PDF format and using search terms from boilerplate indemnity agreements should cut down on the time required. Although such a search may not identify each and every indemnity promise, the results will inform future efforts and education.
The firm should also ensure that all new engagements receive a thorough review. Partners must be educated on the importance of identifying indemnification requirements, as should staff who work in the client intake system.
Like existing documents, all new RFPs, OCGs, and client-drafted documents that govern the engagement should be scanned and searched. In addition, every attorney who opens a file should thoroughly review every RFP, OCG, or client-drafted engagement document, and provide written confirmation of that review.
Even after files are opened, and the work has commenced, your risk management work is not done. Clients will slip indemnification provisions into outside counsel guidelines or file management procedures that are delivered only after the engagement agreement is signed. If work continues on the file after receipt of the guidelines, the firm could be held to the terms contained in those documents.
Accordingly, firms should require ongoing review of all client guidelines or procedures received after the file is opened. Some firms request that the client send any OCGs together with the engagement agreement, in order to consolidate the review process.
Ideally, partners are committed to protecting the firm, and will therefore thoroughly review the documents and work with the firm and the client once an unacceptable indemnity request has been identified. However, because the pressure to bring in new work continues to build, lawyers’ efforts must be supervised. Depending upon the firm structure, the practice group could assist, but typically the risk management committee or general counsel is better suited for the task.
The firm can’t manage a client indemnification request unless the firm knows the request exists. The first step is to institute screening mechanisms to identify the requests, whenever they occur. Only then can the firm work with the client to obtain an outcome that benefits both.