The First Indemnity Professional Liability Blog

Posted By: John Randolph

Filing Suite Over Legal Fees? What You Need to Know

From time to time, your hard work successfully advocating on behalf of your client will result in some unpaid bills. Especially if the legal matter did not turn out as favorably as your client hoped, you could find yourself in a situation where your client refuses to pay appropriate legal fees for services rendered.

While these situations are usually rare, they are not uncommon.

My advice to attorneys in this situation is to consider the ramifications of pursuing these clients. Most attorneys will notify their clients to let them know they are in breach of their agreement for services rendered if the clients are not paying their bills. It's the step that comes next – instituting a lawsuit or pursuing fee arbitration or mediation – that has the potential to harm the attorney.

Once a lawsuit (or arbitration or mediation) is instituted over legal fees, most often the client in question will file a counter claim of professional negligence. It's that counter claim that immediately engages the attorney's Errors & Omissions policy and its corresponding deductible.

It's because of the insurance risk that the American Bar Association offers a cautious warning to attorneys who are considering suing their clients over legal fees.

Attorney's must carefully weigh the value of pursuing these unpaid fees along with the likely corollary rise in their insurance premiums. The typical rate increase on an attorney's liability insurance coverage can be 10 percent following a claim. As a result, most attorneys can think twice about pursuing legal action on unpaid fees unless those fees are in excess of $25,000.

Further, in addition to the risk of higher insurance premiums, many insurance underwriters will see professional negligence or malpractice insurance claims as red flags on a renewal application. This means the worst-case scenario is not just higher rates—it could be having your coverage dropped entirely.

The good news is for those attorneys who follow the rules and adhere to the highest ethical standards of practicing law, instances of suing clients over legal fees will be rare, if they occur at all. In a typical legal career of 30 or more years, I have only seen about three instances of attorneys needing to turn to the legal system to have their fees paid by reluctant clients. As such, this is not a frequent problem many attorneys face, and it is typically restricted to certain types of legal practices: family law, estates and trusts and divorce law.

Less common is when a client determines to sue his or her lawyer over legal fees. They may feel they were overcharged or promised results that didn't materialize or, worse, that you failed to act in their best interest and provide an appropriate level of representation.

While such instances are rare, they do happen.

To protect yourself, pay close attention to your billing practices. Most often when such legal disputes arise, the manner and detail of your billing practices can make the difference between a quick win or a costly mistake. These billing practices include:

Over-staffing a legal matter or case

Non-itemized billing

Billing for time spent on fee collection or firm accounting matters

Failing to delegate routine legal work where applicable

Charges for non-legal personnel or clerical services

Rate increases without prior notification to the client

Understanding the insurance implications of suing a client over unpaid fees – or not focusing on your own billing practices to avoid being sued over said fees – can have a major impact on your practice's bottom line.