Imagine you helped a client navigate a complex case for more than a year, spending countless hours and late nights to complete background research and build a case, making every deadline and ultimately achieving the best possible outcome for your client. All is going well until – they refuse to pay their final bill.
What happens next? An attorney’s knee jerk reaction could be to sue the client for unpaid legal fees. However, attorneys who choose that route could see a substantial increase in their professional liability insurance premiums and even expose themselves to a possible countersuit.
A client refuses to settle up and I pay the price?
A 2022 Legal Trends Report by Clio found 11% of all hours invoiced to clients are never paid. In a high-profile example, former New York City Mayor Rudy Giuliani made POLITICO headlines just a few months ago after his ex-lawyers of Davidoff Hutcher & Citron LLP claimed Giuliani failed to pay $1.36 million in legal fees.
Though it certainly happens, suing in these scenarios is viewed by most insurers as a notable risk factor. If a law firm demonstrates a pattern – even just one or two claims – of having to sue clients for unpaid legal fees, it can open itself up to malpractice countersuits. As such, those countersuits can prompt a firm’s professional liability and malpractice insurance premiums to rise.
Best Practices for Avoiding and Managing Unpaid Client Invoices
Law firm leaders need not sit back and ignore unpaid invoices, but they should be diligent and thoughtful about their next moves. Let’s look at a few ways law firms can address unpaid legal fees.
- Keep track: For many years, the legal industry did not have an industry standard method to track hours or time spent on clients. With the emergence of time-tracking software programs, law firms now have access to time management tools and technology solutions that can help track and analyze billable hours, invoices, client communications and more. Using such tools can help to ensure the firm is billing correctly and regularly and allows for prompt follow-up on any outstanding balances. This data can also help law firms determine the best payment structure for certain clients such as retainers, fixed or capped fees or payment plans.
- Thorough screening: Prospective clients should be thoroughly screened before the firm agrees to represent them. During the screening process, attorneys should discuss costs and pay attention to the client’s reaction. If price is a concern at the beginning, it will likely be a concern down the line. Other signs might be client history. For example, if a client has had multiple attorneys work on a case in the past, that could be red flag. This could suggest personality conflicts or inability to pay. In some cases, even a cursory credit check might be recommended if there are any concerns about the client’s ability to meet their financial obligations should the firm provide representation.
- Sue only when absolutely necessary: In a case like Giuliani’s, a lawsuit was likely the only option. Despite their best efforts, any attorney could find their law firm in a similar position. To safeguard their professional liability and malpractice insurance costs, leadership must be certain moving forward with a lawsuit is the only viable and remaining option to secure payment for services rendered. Every member of leadership should be involved in making the decision to sue and it should be discussed in detail with the client’s written agreement in mind. If there is no other option and a viable breach of the written agreement is apparent, leadership should take a moment to review their insurance policies with an insurance professional who specializes in the legal space to ensure any impact on their policy and its related premiums is factored into the decision.
While it might seem logical to consider legal action when a client seemingly ducks out on their legal fees, it is not always worth it. Consider, instead, taking a more proactive approach to billing and client screening to protect your law firm’s client portfolio and bottom line.