Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
“Target of Opportunity” – Why Me?
Mere good faith and honest intent will not protect the
practitioner who has caused a client loss.
Who are likely “targets of opportunity”?
–
–
–
–
–
–
Deep pockets
Insurance
Touted experience, skill and knowledge
Impersonal
Big guy vs. little guy
Frustration with the laws
Copyright 2011, The National Underwriter Company
1
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Simple vs. Compound Liability
• Simple liability for mere errors in judgment or
negligence
– Expensive mistakes that are part of the cost of doing business
• Compound liability for gross breach of fiduciary duty
–
–
–
–
–
Self-dealing
Active concealment
Fraud
Oppression
Gross negligence
Copyright 2011, The National Underwriter Company
2
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
To Whom is One Liable?
• General Rule: A duty is owed only to the person with
whom you have contracted, your client
• You also owe a duty to those with whom you have
privity
• An advisor is not liable, even for an act of negligence,
to someone to whom he owes no duty
Copyright 2011, The National Underwriter Company
3
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Six-Pronged Test to Determine Privity
1.
2.
3.
4.
5.
6.
To what extent is the transaction intended to benefit the
third person?
Can harm to that third person be foreseen?
How likely is it that the third person will suffer real injury?
How close is the connection between the advisor’s
conduct and the injury that the third party could suffer?
How “morally wrong” is the advisor’s action?
Would future harm to this or some other client be served
by finding privity here?
Copyright 2011, The National Underwriter Company
4
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
What Can Get the Advisor Into Trouble?
• If one says he knows, he’d better
– Skill, knowledge, diligence and care used must equal or exceed
that standard ordinarily exercised by others in the same
profession
• Not knowing who the client is
– For instance, interview both spouses and if there is marital
discord recommend separate counsel
• If one says he will, he’d better
– Do not create false expectations by making promises you do not
intend to keep or cannot deliver upon
• Overnight express
– Make sure to leave enough time to collect, analyze and act
upon information
Copyright 2011, The National Underwriter Company
5
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
How Does One Stay Out Of Trouble?
• Hiring and firing the client
– Ask why the client has chosen you
– Watch out for clients that are wealthy with poor cash flow,
perfectionists, hurried, angry, overly optimistic, overly feeconscious
– Turn down a client that requests something that is not quite
right or beyond your capacity
• Know the risk-taking propensity of the client and
the beneficiaries
– Maintain constant communication
Copyright 2011, The National Underwriter Company
6
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
How Does One Stay Out Of Trouble?
• Expertise boundaries
– Do only those things which you are licensed to do and can do
competently
• Resource limits
– Do not accept engagements that will require resources beyond
what you can cost effectively deliver
Copyright 2011, The National Underwriter Company
7
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
How Does One Stay Out Of Trouble?
• Outside experts
– When appropriate make a referral to another qualified
professional, give the client three names
• Keep Current
– Stay up-to-date with legal developments as well as events that
can influence client’s personal and business life
Copyright 2011, The National Underwriter Company
8
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Critical Elements of the “Engagement Letter”
• Scope of services and description of work product
• Period of time covered
• Responsibilities undertaken
• Responsibilities the client is expected to assume
• Fee arrangements - amount, terms, and frequency of
billing
Copyright 2011, The National Underwriter Company
9
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Critical Elements of the “Engagement Letter”
• Arrangements for update and extension of service
• List of parties represented and exclusion of those not
represented
• Intended use and distribution of advisor’s work
• Client’s acceptance signature and date
Copyright 2011, The National Underwriter Company
10
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Put It All In Writing
• Protecting one’s self means meticulous recordkeeping
– Keep detailed, contemporaneous notes
– Wherever possible quote the client’s exact words
• Have client sign off when they decline services
normally provided
• Secure a written agreement as to fees and billing
procedures at the onset of the relationship
Copyright 2011, The National Underwriter Company
11
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Put It All In Writing (cont.)
• Develop a comprehensive and accurate data
gathering system to minimize planner errors and
misunderstanding of the facts
• Verify property ownership and dispositive
arrangements from documents
• Include and have the client sign disclosures or
acknowledgements with regard to representation or
recommendation of any products by the planner
Copyright 2011, The National Underwriter Company
12
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Limits of the Relationship
• Correctly follow client’s instructions
– Obtain written memorandum signed by client
– If needed, develop an investment policy to document
•
•
•
•
•
Agreed –upon investment objectives
Risk parameters
Return targets
Volatility tolerance
Asset allocation ranges
– Obtain written consent for actions beyond scope of
relationship outlined in engagement letter
Copyright 2011, The National Underwriter Company
13
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Records and Systems
•
The right stuff
– Develop a presentation system that will prove all key areas of
estate planning were discussed with the client
– Develop a checklist for key issues, client circumstances and
client objectives
– Establish a retrieval system to locate documents and plans
that need updating for specific changes
– Keep the following in your client files
•
•
•
Research documents, analysis, and reports
Documents stating the tax law at the time decisions were made
Memos of client meetings and conversations
Copyright 2011, The National Underwriter Company
14
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Records and Systems
•
Trigger system
– Develop a checklist of follow-up procedures
– Create a tickler file (docketing system) to meet deadlines, to
produce client reminders, to set up a to-do list with who is
responsible for what and when
Copyright 2011, The National Underwriter Company
15
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Quality Control
• Understanding of ethical issues
– “A profound lack of knowledge of ethical problems can often
lead to professional liability claims”
• Who is the quarterback?
– On an estate planning team, this person makes sure
essential tasks do not fall through the cracks
– In a firm this person accepts responsibility for:
• Ensuring all staff members are kept informed
• Ensuring that there is a logical and automatic flow of
necessary information
• No tasks have been overlooked
• No efforts are duplicated
Copyright 2011, The National Underwriter Company
16
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Quality Control (cont.)
• Independent review of final products by a
qualified associate
• Review of staff competence, experience, and
qualification
– Appropriate supervision and continuing education should be
part of the firm’s business plan
Copyright 2011, The National Underwriter Company
17
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
External Communication
• Make it clear
• Make it often
• Avoid casual or informal advice
– Liability can be imposed even though you did not charge
a fee
• Call back promptly
• Avoiding “heel cooling”
– Do not keep clients waiting on the phone or in your office
Copyright 2011, The National Underwriter Company
18
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Avoiding (Neutralizing) Problems
• Conflicts with existing clients
– Duty of loyalty
– Be cautious about serving a client in more than one capacity
– Be cautious of representing more than one client in a single
transaction
– Duty not to disclose confidential information
– Disclose any possible conflicts of interest in writing or
withdraw without disclosure to maintain confidential
information
Copyright 2011, The National Underwriter Company
19
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Avoiding (Neutralizing) Problems (cont.)
• Conflicts with future clients
– Will acceptance of this client create a conflict for more
desirable work with another client in the future?
• Red flag procedures
– A procedure for identifying problems and quickly dealing
with them is essential
– Train the staff to recognize “red flags”
• Dealing with problems
– Review and deal with problems promptly
– Contact client immediately and explain the problem,
potential consequences, and alternatives
Copyright 2011, The National Underwriter Company
20
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Avoiding (Neutralizing) Problems (cont.)
• The problem team
– Group of designated people in a firm that meet to deal with
potentially dissatisfied clients and problems that could
develop into litigation
• Early active remedial conciliatory efforts
– The quicker an attempt is made to resolve the problem to
the client’s satisfaction, the less likely there will be litigation
– An apology might avoid writing a small check or defending a
large lawsuit
Copyright 2011, The National Underwriter Company
21
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
About Your Malpractice Insurance
• Sufficient levels of coverage
• “Claims made” policies
– The policy only covers claims that are first asserted and
reported to the insurer within the policy year
• “Prior acts” coverage
– This covers claims asserted during a policy year in which
the negligence giving rise to the claim occurred in some
prior year
Copyright 2011, The National Underwriter Company
22
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
About Your Malpractice Insurance (cont.)
• The “tail”
– Extended reporting option allowing conversion from claims
made coverage into occurrence coverage for any
negligence allegedly committed, but not yet reported up to
the end of the policy year
• The deductible – higher deductible means lower
premium outlay
Copyright 2011, The National Underwriter Company
23
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
About Your Malpractice Insurance (cont.)
• Settlement provision – limits insurer’s payment to the
amount specified in a settlement agreement with the plaintiff,
obligating the insured to cover other exposure on his own
• Duty to defend vs. duty to indemnify
– Duty to defend policy requires insurer to appoint defense
counsel and pay that attorney’s fees as billed
– Duty to indemnify policy allows the insured to select
counsel but he must fund his defense and will not be
reimbursed for defense costs until the case is concluded
Copyright 2011, The National Underwriter Company
24
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
About Your Malpractice Insurance (cont.)
• Definition of “damages” is crucial, check your policy
• Innocent partner coverage
– Partners are liable for the bad acts of other partners
– The insurer will deny a claim based on your partner’s fraud and/or
criminal activity unless there is innocent partner coverage
• Other key provisions
– Defense cost coverage
– Libel or slander coverage
– Defense of RICO claims
Copyright 2011, The National Underwriter Company
25
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
About Your Malpractice Insurance (cont.)
• Insurer’s financial stability, responsiveness, and
reputation for integrity are important
• Handling the Claim
1.
2.
3.
4.
5.
Notify the insurer immediately
Once notified of suit, say as little as necessary to suing client
Secure all work product immediately
Inform staff of problem and game plan
Do whatever is necessary to assist in the defense of the case
Copyright 2011, The National Underwriter Company
26
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Total Costs
• Direct costs
– Malpractice premiums
•
•
•
•
Loss of reputation
Loss of standing with peers
Psychological trauma
Hidden economic costs
– Loss of referrals
– Time required to gather documentation for defense
.
• Cut and run?
– As a last resort, if it appears a matter cannot be resolved,
discharge the client
Copyright 2011, The National Underwriter Company
27
Malpractice in Estate Planning
Chapter 6
Tools & Techniques of
Estate Planning
Summary
To reduce the success of malpractice claims, a planner
should:
–
–
–
–
–
–
–
–
–
Establish and improve client relationships
Control the management of client relationships
Improve office practices
Identify problem areas
Correct problems before they occur
Systematize a policy of internal and external communication
Practice common sense courtesy
Implement quality controls
Maintain a standard of high quality continuing education for
every member of the firm
Copyright 2011, The National Underwriter Company
28