Road Map of a Malpractice Lawsuit
Litigation is a punishing marathon. The process exacts an exhausting toll on the parties. A complex dispute can take several years from the date of the initial client dispute to the final verdict. And then, just when you think the dust has settled, there are almost always appeals. The whole process can cost hundreds of thousands of dollars, and could exhaust insurance coverage in an instant. Your insurance premiums (if you aren’t renewed, that is) will skyrocket. You will pay deductibles, come to understand exactly how expensive trial preparation can be, and lose revenue. Litigation is a punishing marathon that threatens your firm’s survival unlike anything you could have possibly imagined.
The unknown costs of litigation are often ignored, because they are eclipsed by the suit. Sure, everyone knows about attorney’s fees, but what about the lost income due to having to spend time defending a claim? How about the time and assets spent trying to control damage to a firm’s reputation as litigation progresses? What about the severe psychological and physical trauma affecting key members of the practice over the months and/or years spent trapped in litigation purgatory? As horrid as it may sound, these elements are what the plaintiff’s attorney will depend on to force an accountant into a large settlement.
Thankfully, the majority of malpractice cases settle before trial. It seems counterintuitive and downright unfair to settle a suit if you honestly feel that no wrong was done, but in many cases it can be a firm’s salvation. The potential costs to two both parties of a lawsuit can greatly outweigh the cost of settlement. Many claims under $50,000 are settled on a pre-trial basis for significantly less than the amount claimed in the suit.
Unfortunately, not all claims are settled and litigation becomes inevitable. Here are the seven stages to expect.
The Pre-Filing Stage
This is the stage where you first learn that either a client or third party is contemplating a claim against you. This could manifest itself as an uncooperative client, critical comments from the client or third party during an oral discussion or in correspondence, your firm being abruptly fired, or a client filing for bankruptcy protection, as just a few examples. You may also receive a curious request from a client or third party, or from an attorney associated with either, for a return of the entire file or for copies of file contents going back many years. A client or third party (or a successor CPA), directly or through counsel, might then give you formal notification of a claim, either verbally or in writing, demanding money or services as compensation for your alleged negligent act or breach of contract (there may also be a demand for files in connection with such a notification). . Sometimes the requests to review working papers from an engagement, the work product of the engagement, or correspondence relative to the engagement may come not from the client or a third party, but from a board of accountancy or other federal or state regulatory agency or a government investigator, either informally or by means of a subpoena, summons, or court order. And Attendance at a deposition or hearing may also be required.
Once you suspect that a claim may be forthcoming, receive a claim notification, or receive a request or demand for files, you should promptly contact your professional liability insurer. Your insurer will be able to analyze your firm’s exposure in connection with the claim or potential claim, as well as how best to respond to the file requests. Depending on circumstances, your insurer may retain legal counsel (local or otherwise) to assist you and the insurer in that analysis, working together as a team to devise contingency plans and strategy. At this early stage in proceedings, there may be an opportunity to avoid potential litigation. Review of the engagement letter will be helpful, especially if it includes an Alternative Dispute Resolution (ADR) or limitation of liability clause. Careful attention to the description of services is key, as well as limitation in services (e.g. limit responsibility for the detection of fraud). The team may choose to negotiate with the claimant and reach an amicable solution by using ADR via mediation or arbitration.
The Pleading Stage
A complaint is filed with the court and a summons is served upon the accountant. The defendant is given a certain number of days to respond. Suit papers (especially initial filings) are often aggressively worded, allege several causes of action, and demand excessive sums of money in compensation. These documents are often designed to deliberately upset the recipient, so it is especially important to remain as calm as possible, and forward these documents to your insurance carrier.
The Motion Stage
During the pleadings stage both sides in the litigation make motions before the judge. Generally, the process begins with a motion to dismiss, which is then followed by a formal denial of the allegation(s) in the complaint and also lodging any counter-claims against the plaintiff. Both sides can make various motions during this period, and even appeal to a higher court if motions are denied. The motion stage alone can be an incredibly lengthy, soul crushing experience. In fact, plaintiffs often hope that if a suit can survive this stage, the prospect of suffering through the discovery and trial stages will incentivize the accountant to settle.
The Discovery Stage
Discovery is a court-supervised process involving the disclosure of information relevant to a case. This includes depositions, interrogatories, production of documents and records, requests for admissions and stipulations. This is a long process and can run concurrently with motions to solicit court rulings on the propriety of questioning, compulsion of testimony, and admission of evidence. Accountants and staff can be occupied for weeks preparing for testimony, and in court. Costs can easily soar into the hundreds of thousands of dollars, effectively changing a legal battle in to one of financial attrition.
The Pre-Trial Stage
During the discovery and motion phases of a trial, the Judge and parties to the suit review the current facts of the case. Defendants will press for summary judgment – essentially a complete dismissal of the case – while both sides look for errors and inconsistencies that can provide an advantage in a potential settlement or ultimate trial. A pre-trial conference is often held after discovery and can be requested by either party, or both, or the court. This is to expedite the litigation and to force a settlement discussion. If agreement cannot be reached, the last activity before a trial is preparation of a pre-trial order that encompasses the various objections and stipulations. This can encompass: deposed testimony and other pre-trial proceedings; lists witnesses and evidence; and contains each party's legal briefs and proposed jury instructions.
As the trial date gets closer, the accountant is increasingly involved with legal counsel in trial preparation. This entails a detailed, painstaking review of both sides of the case: examining and re-examining evidence, facts, prospective witnesses, and strategies. The accountant must prepare for testimony; they must know every detail concerning the dispute and must prepare themselves for the ordeal of trial examination, and become aware of the potential snares set for them by plaintiff attorneys. Finally, there should be a battle plan to present the case in a manner that will have maximum effect on the judge and jury.
This phase make take more weeks and months, as well as the focus and income generation of the accountant. Legal costs and stress levels are significant.
The Trial Stage
The trial period can last anywhere from a single day to several months, and tie up many staff for extended periods. The litigants can decide between a jury trial and a trial in which the judge is the arbiter--a bench trial. Jury trials are generally longer and subject the parties to the capricious perceptions of laymen. After all, “a jury of your peers” does not mean “a jury your professional peers.” That being said, many judges may also struggle to full grasp the technical nuances of a particular matter. They aren’t experts on everything, but they can tap into legal resources (case law) for guidance.
Plaintiffs, using their procedural right, often call the defendant accountant as the very first witness.
The idea - or hope – is to uncover any unfavorable facts or admission from the very outset. It’s a strategy that attempts to capitalize upon the defendant’s discomfort and/or fear of being in a courtroom setting. It is absolutely imperative that the accountant must communicate the complexities of their practice in plain language in order to establish their authority and set the proper tone for the rest of the trial. They must never appear the slightest bit untruthful or deceitful. No snarky comments or wry looks when opposing counsel asks obvious or absurd questions. They must – at all times – appear competent, courteous, and professional, because they don’t just stand to lose the case, but also irreparably damage their reputation.
The Post-Trial and Appeal Stage
The trial does not usually end with litigation. Either party may file one or more appeals that could go through various level of court and take many years to resolve.
While we’ve repeatedly stated that litigation is a punishing marathon, it is equally important to keep in mind that marathons can be won. Litigation is unpleasant, but can be significantly less stressful once you understand the process. And understanding the stages can provide a roadmap that will allow you to adjust your expectations, and may even give you an advantage over an uninitiated plaintiff.
Of course, the best solution is to avoid litigation in the first place and this can often be achieved by choosing the right clients, using a strong engagement letter and adopt effective and frequent communication techniques with the client. The best malpractice claims are the ones you prevent.
Jason M. Subbie is Vice President of Underwriting at Jorgensen & Company and specializes in writing professional liability insurance. During his tenure, Jason has managed four nationally recognized professional liability insurance programs including: LawGold, The Firemark, CPAGold, and AdvisersGold.
Ralph G. Picardi, Esq., a former CPA, is the managing member of PICARDI LLC, a legal and consulting services firm located in Arlington, Massachusetts. For most of his career, Mr. Picardi’s professional practice has concentrated almost exclusively in the areas of defending accountant professionals in malpractice actions, and advising accountants and their professional liability insurers in matters of claim/incident analysis and risk management through national hotlines, seminars, publications, and direct consultations.
The statements and opinions in this article are intended solely for general educational purposes, to give the reader a broad outline of the legal provisions discussed. They are not intended to provide specific legal, accounting, or other professional advice for use in connection with the reader’s jurisdiction, practice, or clients. The author makes no representations or warranties as to their technical accuracy or compliance with any law or professional standard, and assumes no responsibility to correct or update them for any reason, including changes in any law or professional standard. Before taking any action in connection with the legal provisions discussed, the reader should consult the actual text of those provisions, and obtain specific legal and/or accounting advice.