Screening for High Risk Clients
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Improve Profitability and Reduce Exposure to Claims

By Margaret Hepper, Aon Law Firm Solutions

Firm profitability improves with disciplined, thoughtful and consistent client screening and selection, and 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 other, 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 are to 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...");
  • Area of practice involved is outside firm's expertise;
  • History of problems with other firms;
  • Fired previous attorney(s);
  • Litigious or dishonest reputation within the community;
  • Legal services would create staffing constraints;
  • "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;
  • Project a negative or dismissive attitude toward quoted attorneys' fees, costs and retainer requirements;
  • Exhibit belligerence or other unusual or inappropriate attitudes or behaviors;

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 for prospective clients should include the following:

How did they select the firm?

Are prospective clients referred to the firm through other clients or business contacts or are they contacting the firm "cold?" Are any attorneys related to the prospective client or otherwise socially acquainted with them?

What is their business and who are their competitors?

What is the prospect's business? (Check web-site, Lexis/Nexis for articles, etc.) Where did they originate? (spin-off from another company, sole-proprietor, etc.) How many law firms do they retain? Are they one-time users of legal services, or do they have on-going legal needs?

What is their financial situation?

Client size (annual sales documentation and D&B search if business; net worth if individuals)? What is their 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 their 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 their legal needs comport with the firm's strategic plan regarding the firm's desired mix of business?

What is their experience with other law firms?

Has the prospect used other firms on the matter in question? (Check these references.) If applicable, what are the client's reasons for changing law firms? How many law firms do they retain? How do they allocate work among these firms? Has the client ever sued an attorney for malpractice?

Regardless of the answers to questions provided by the prospect to the questions set forth above, the firm should perform the following checks:

Basic Due Diligence:
  • Reference checks, including funding sources;
  • Website 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 or existing counsel, with prospective client's permission.

If this 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. In this context, the firm should establish blanket policies that prohibit the representation of certain types of clients or particular kinds of matters. 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 special retainers, and increased documentation of all work and billings.