Understanding the Requirements for a Legal Malpractice Case: Part 6 – Assessing Potential Damages

“My lawyer’s bad advice caused my business to fail.”

To this point, we’ve discussed legal malpractice claims from both the plaintiff’s (person suing) and attorney’s perspective, including ways to create and maintain a solid attorney-client relationship that minimizes the chances of a future claim. In this installment of the article series, we will review some types of damages that are likely to be claimed in a legal malpractice claim involving the failure of a business or lost opportunity. 

During tough economic times, there generally seem to be more legal malpractice claims. There are more business and deal failures, and participants often try to assign blame to other involved parties – including those in advisory roles. Lawyers who advised on the deal are usually considered targets – perceived as having deep pockets or big insurance policies to pay damages. As someone who sues and defends other lawyers for a living, I attest that it is often difficult to recover some types of damages.

Here is an example of a legal malpractice claim involving a failed business. You be the judge, and I will provide some commentary below.

Are there damages to be recovered?

A start-up company that provided outsourced HR, payroll, workers’ comp and health care insurance services received advice from their attorney about the company’s formation. The attorney advised that only a $10,000 bond was required to form the company. After launch, client claims, that the new company was obligated to pay, quickly surpassed $300,000. Total claims exceeded the meager reserves, so the new company was forced out of business.

The principals later learned that state law actually required a minimum $350,000 in reserve, much more than the $10,000 bond their attorney had advised. Had the principals known of the large capital reserve requirement, they never would have started the business in the first place.  After the company’s clients sued the company for unpaid claims, the company brought a claim against the attorney to recover lost profits as well as the amount of the claims the company was obligated to pay on behalf of its clients.

And the legal malpractice votes are in…..

Did the company have a valid claim? Yes. Can the company legitimately make a claim for lost profits and the amount of claims? No. Only the claims amount may be recoverable. In this case, the $300,000+ of unpaid claims are real damages, which claimants in a legal malpractice suit are entitled to recover. This was a brand new company, so there was no track record of revenue or profitability. The lost profits may be considered speculative damages, which are not recoverable in legal malpractice claims.

In a legal malpractice case, the person or entity suing the attorney has the burden of proving damages. That proof may require sound evidence and even expert testimony, showing that the damages claimed were proximately (generally) caused by the attorney’s negligence.

Speculative damages may include:

• Anticipated revenue or profit – when there is no documented, historical track record.
• Some mitigation expenses – like the cost of the marketing campaign trying to save the company.
• Interest on these types of damages claimed.
• Value of the claimants’ time suing the attorney – sorry, but that time is lost forever.

Real damages can still be quite extensive, but this isn’t a personal injury claim. Real damages may include:

• Specific claims against the individual or company – like in the example above.
• Revenue or profits – where there is a solid track record of revenue and profit stream.
• Litigation expenses – cost of lawyers and experts, not the claimant’s time.
• Anything else that you can specifically show that was proximately caused by the lawyer’s negligence and conduct.

Confused? Even punitive damages may be claimed in certain scenarios where applicable state law allows. Certainly, these concepts can be difficult to understand, and I often hear requests to recover everything from lifetime revenue to pain and suffering. How you approach a legal malpractice claim has an impact on the results, and making speculative damage claims may cloud the court’s ability to clearly delineate real damages. Seek the advice of someone with specific experience with legal malpractice claims, and set realist goals for real damage recovery.