Beware The Belief Your Response To Auditor A Colossal Waste Of Time

Some lawyers may create more potential professional liability over the coming months by drafting a single letter in response to their client’s independent auditor’s request for information than they will throughout the entire rest of the year.

The problem arises primarily because after 40 years of writing these letters to independent auditors, too many attorneys and auditors haAudit-Report---04-08-18ve concluded the entire process is a colossal waste of time.

As a result, too many, especially solo attorneys and small- to mid-size law firms, have failed to develop and implement appropriate internal policies to insure they handle these auditor’s requests according to the professional standards required of them.

Consequently, a sizable number of attorneys remain blissfully unaware of the specific duties owed and the professional liability created when done so improperly, leading to a waiver of client confidentiality, misleading financial reports, and host of other problems.

The American Bar Association issued its first “Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information” on January 7, 1976, and have updated it twice since in 1998 and 2003.

And yet, outside of a very few attorneys in the large, downtown corporate law firms, few attorneys responding to these requests have ever read the ABA Statement of Policy, much less the American Institute of Certified Public Accountant (AICPA) rules.

The auditor’s request for information to a client’s attorney arises from the generally accepted accounting principles (“GAAP”) with respect to loss contingencies set forth in Accounting Standards Codification (“ASC”) 450-20 (formerly Statement of Financial Accounting Standards No. 5).

The AICPA requires an attorney’s client to account for a loss contingency if two conditions are met:

  • “Information available before the financial statements are issued or are available to be issued . . . indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements” and
  • “The amount of loss can be reasonably estimated.” Six factors should be considered when the accountant assesses the probability of an unfavorable outcome for the contingency;
  • The nature of the litigation, claim, or assessment;
  • The progress of the case (including progress after the date of the financial statements but before those statements are issued or are available to be issued);
  • The opinions or views of legal counsel and other advisers, although, the fact that legal counsel is unable to express an opinion that the outcome will be favorable to the entity should not necessarily be interpreted to mean that the condition [for accrual] is met;
  • The experience of the entity in similar cases;
  • The experience of other entities;
  • Any decision of the entity’s management as to how the entity intends to respond to the lawsuit, claim, or assessment (for example, a decision to contest the case vigorously or a decision to seek an out-of-court settlement).

If any one of the conditions are not met, the accounting standard requires the client to disclosure the contingency only if it is reasonably possible that a loss may have been incurred. In such case, the disclosure must include an estimate of the loss, but only if the loss is estimable. No disclosure is required if the loss is remote.

The client owes no duty to disclose a loss contingency of an unasserted claim “if there has been no manifestation by a potential claimant of a possible claim or assessment” unless: (1) it is considered probable that a claim will be asserted; and (2) there is a reasonable possibility that the outcome will be unfavorable.

In response to the AICPA’s standards, the ABA issued its own “Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information” (the “ABA Statement of Policy”). Together, the two documents, often referred to as the Treaty.

The two standards seek to balance the client’s auditor’s need for information with the client’s attorney’s duty to protect the client’ confidential information.

It should be noted, however, that the accounting profession continues to insist that the ABA Statement of Policy does not control, and it is the AICPA standards that govern the auditor’s request for information.

The ABA Statement permits an attorney to ethically comply with an auditor’s request for information under limited circumstances. First, no attorney should ever disclose information to the client’s outside auditor without the client’s written consent.

The attorney, however, shall not disclose to the auditor a confidence, a secret, or an evaluation of a claim. The ABA Statement cautions that an adverse party may assert that any evaluation of a potential liability is an admission by the client.

The attorney must always be cognizant that a client’s voluntary request for disclosure to its accountant almost always waives the attorney-client privilege. United States v. Deloitte, 610 F.3d 129, 139-40 (D.C. Cir. 2010).

Federal law, and few states, provide any confidentiality protection to an accountant’s work-product. United States v. Arthur Young & Co., 465 U.S. 805 (1984). Even an attorney’s oral communications to the auditor are not privileged if the auditor includes the discussions in its work papers. United States v. Deloitte, 610 F.3d at 143.

Otherwise, the attorney may disclose information to the auditor without further client consent for:

  • overtly threatened or pending litigation, whether or not specified by the client. The ABA Statement of Policy defines “overtly threatened litigation” to mean that “a potential claimant has manifested to the client an awareness of and present intention to assert a possible claim or assessment unless the likelihood of litigation (or of settlement when litigation would normally be avoided) is considered remote.”
  • a contractually assumed obligation when the client specifically identifies and requests disclosure in the inquiry letter;
  • an unasserted possible claim or assessment the specifically identifies and requests disclosure in the inquiry letter. “Unasserted claims” are matters “where there has been no manifestation by a potential claimant of an awareness of and present intention to assert a possible claim or assessment.” Disclosure of an unasserted possible claim is required only if the enterprise concludes that (1) it is probable that a claim will be asserted, (2) there is a reasonable possibility, if the claim is in fact asserted, that the outcome will be unfavorable, and (3) the liability resulting from such unfavorable outcome would be material to the client’s financial condition.

The ABA Statement of Policy requires an attorney responding to an auditor’s request for information should only offer an opinion on the outcome of litigation, in the rare case, when the outcome is “probable” or “remote.”

An unfavorable outcome for the client is “probable” if the prospects of the claimant not succeeding are judged to be extremely doubtful and the prospects for success by the client in its defense are judged to be slight.

An outcome is “remote” if the prospects for the client not succeeding in its defense are judged to be extremely doubtful and the prospects of success by the claimant are judged to be slight. The commentary in the ABA State provide examples of such situations, including the following:

  • a catastrophe, accident or other similar physical occurrence in which the client’s involvement is open and notorious;
  • an investigation by a government agency where enforcement proceedings have been instituted or where the likelihood that they will not be instituted is remote, under circumstances where assertion of one or more private claims for redress would normally be expected, or
  • a public disclosure by the client acknowledging (and thus focusing attention upon) the existence of one or more probable claims arising out of an event or circumstance.

An attorney should never provide an estimate of the amount or range of a potential loss unless the attorney believes that the probability of inaccuracy of the estimate is slight. The ABA Statement of Policy also requires that the attorney must confirm to the auditor:

“the client’s understanding that, if in the course of performing legal services for a client with respect to an unasserted claim which may call for financial statement disclosure, the lawyer has formed a conclusion that the client must disclose or consider disclosure concerning the unasserted claim, the lawyer, as a matter of professional responsibility to the client, will so advise the client and consult with the client concerning the question of such disclosure and the requirements of ASC 450-20.”

The ABA Statement provides different illustrative examples of response letters for “inside” and “outside” counsel. In general, the outside counsel may limit its response to particular matters to which it provided substantive attention or representation; whereas the inside general counsel represents he has general supervision for the company’s legal affairs and has “reviewed litigation and claims threatened or asserted involving the Company and [has] consulted with outside legal counsel” where appropriate.

The ABA Statement does not specifically address government investigations of a client. Attorneys should consider most government investigations unasserted claims. The investigation may well constitute potential for a claim, however, the investigation has not ripened into an overt threat of litigation, claims, or assessments. The ABA Statement only requires the attorney disclose unasserted claims when the client specifically identifies them and asks the lawyer to comment.

The client may, however, request the attorney to report all investigations in the same manner the attorney would report pending litigation. Even where the client requests it, however, the Committee noted that in most cases, “the lawyer will not be able to provide any information to the auditor concerning the investigation other than the existence thereof and the fact of the client’s involvement.”

The Committee advised that whichever approach to reporting is adopted, the “approach should be consistently followed with respect to such client until the auditor has been advised of a change in approach.”

The attorney should clearly disclose to the auditor the limited scope of its engagement by the client, and that he is only disclosing terms considered material.

The attorney also should always provide the date on which any information is provided, and disclaim any ongoing agreement to update the information even when the attorney becomes of aware of changed facts or circumstances.

The ABA Statement contemplates that the attorney may incorporated the Statement by reference in the lawyer’s response by the following statement:

“This response is limited by, and in accordance with, the ABA Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information (December 1975); without limiting the generality of the foregoing, the limitations set forth in such Statement on the scope and use of this response (Paragraphs 2 and 7) are specifically incorporated herein by reference, and any description herein of any ‘loss contingencies’ is qualified in its entirety by Paragraph 5 of the Statement and the accompanying Commentary (which is an integral part of the Statement).”

While incorporating the ABA Statement by reference is permitted by Paragraph 8, the attorney, however, should consider instead stating clearly that the auditor alone shall use the letter solely in connection with the audit of the client.

The attorney also should state the letter shall not be quoted in any financial statements of the client or related documents. The attorney also must state that no one, including the client, should file it with any governmental agency or other person, without the attorney’s prior written consent.

As discussed above, the ABA acknowledges that an auditor may assume the lawyer, as a matter of professional responsibility to the client, will advise the client concerning the question of such disclosure is required and of the applicable requirements of FAS 5.

The ABA makes clear that every attorney owes a professional obligation to not knowingly participate in any violation by the client of the disclosure requirements of applicable securities laws.

The ABA or applicable state code of professional responsibility also may require the attorney to resign his engagement under some circumstances if his advice concerning disclosures is disregarded by the client. The ABA Statement says withdrawal is very undesirable.

For more than a decade commentators have expressed that there appears to be a continual increase in the number of inquiry letters that do not conform to the ABA-AICPA Compromise. Firms should resist responding to inquiries that are outside of the ABA-AICPA Compromise. Some recent examples of non-conforming requests include:

  • Request for information regarding financing statements filed under the Uniform Commercial Code;
  • Request for information regarding assignments of the client’s assets;
  • Requests for examinations of income tax returns; and
  • Request for information regarding compliance with fiduciary duties.

The professional liability risk created from failing to follow the ABA-AICPA Compromise is real. For example, Sarbanes-Oxley Act heightened the risk of potential firm exposure in connection with responding to inquiring letters because attorneys are covered as “persons acting under the direction” of corporate officers and directors, and therefore, can be held liable if their actions are deemed, under a negligence theory, to “result in rendering financial statement materially misleading.”

Best professional practice demands that every attorney or law firm review the ABA-AICPA requirements before responding to Auditor’s Request for Information. Every law firm should implement an internal procedure for responding to auditor’s request for information. The procedure should at minimum include:

  • Development of written firm policies and procedures to insure consistent implementation;
  • Review and approval of acceptance of the Inquiry Letter to insure compliance with the ABA requirements;
  • Designation of a single partner in charge of overseeing the initial draft;
  • Firm review, approval of the initial draft, and execution of a final draft; and
  • A designated partner and internal procedure to update prior response letters.

Those law firms who do not regularly prepare such audit’s request for information letters, would be well advised to consult with outside counsel to confirm that their internal procedures are sufficient and their letters comply with their professional liability requirements as set forth in the AICPA-ABA requirements without waiving client confidentiality. Firms who do neither must beware of the risks they assume.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. He is admitted in Texas and Oklahoma. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at

Another State Bar Rules “Spymail” And Other Email Tracking Software Unethical

Lawyers and law firms using “spymail” and other “tracking” software in emails sent to opposing counsel and clients are inviting an ethics complaint and potential disbarment as more and more states ban the use of this developing technology in the practice of law.

The specific technology, operation, and other features of such email “tracking” software vary widely, but essentially a sender may use email “tracking” software application embedded in eashutterstock_195946787ch email to secretly monitor the opposing attorney’s and party’s receipt and subsequent handling of the email message, including any attachments.

In a recent advisory Opinion No. 18-01, the Illinois State Bar Association ruled an attorney’s use of such “tracking” software is unethical, holding:

“A lawyer may not use tracking software in emails or other electronic communications with other lawyers or clients in the course of representing a client without first obtaining the informed consent of each recipient to the use of such software.”

Illinois joins at least three other jurisdiction that have addressed this evolving area of technology and its impact on the legal profession. (See Alaska Bar Association Ethics Opinion No. 2016-01; New York State Bar Association Ethics Opinion 749; and Pennsylvania Bar Association Formal Opinion 2017-300.)

The Illinois committee began its analysis by stating the obvious to even the most technologically-challenged attorney: “an Illinois lawyer can no longer decide not to use email or to avoid dealing with electronic documents.” Illinois, like most every state including Texas and Oklahoma, now requires all pleadings filed in court include an email address to which service may be directed.

The Texas Supreme Court joined those states that decided email is here to stay when it amended the rules in 2014. Rules 21(f)(2) and 57, now require all pleadings and documents that are electronically filed to contain an attorney’s email address. See, Tex.R.Civ.P. 21 and 57. New Rule 21a allows parties to serve documents by email.

In its opinion, the Illinois State Bar committee held that because email is so pervasively used in the practice of law, the undisclosed use of email “tracking” software by a lawyer, without the informed consent of the recipient, conceals the fact that the sending lawyer is secretly monitoring the email message and violates existing rules of professional conduct.

“Any competent lawyer receiving an email from an opposing counsel would obviously wish to know that the opposing counsel is acquiring instantaneous and detailed private information concerning the opening and subsequent handling of the email and its attachments. At a minimum, concealing the use of tracking software constitutes “dishonesty” and “deceit” within the meaning of Illinois Rule 8.4(c).”

See, ABA Model Rules 8.4(c). The committee conclude this type of deception, if used in email correspondence with another lawyer in the course of representing a client, covertly invades the client-lawyer relationship between the receiving lawyer and that lawyer’s client. The committee concluded:

“If the professional conduct rules require lawyers to promptly notify the sender when client confidential information is received by inadvertence, to permit the sender to take protective measures, then those rules should not be interpreted to permit lawyers to procure the same type of information by stealth.”

New York State Bar Association Opinion 749 (December 14, 2001) was among the first in the country more than 16 years ago to hold that “in light of the strong public policy in favor of preserving confidentiality as the foundation of the lawyer-client relationship, use of technology [web bugs] to surreptitiously obtain information that may be protected . . . violate[s] the letter and the spirit” of the New York Rules.

In Alaska Bar Association Ethics Opinion No. 2016-1, the committee there cited two persuasive examples of such interference before concluding that the use of tracking software was unethical.

The first involved the attorney’s client who had moved and did not want her new location disclosed or known. If opposing counsel sends a tracked email attaching a document for to her attorney to be forwarded for her review or signature, the tracking software will reveal the client’s general location as soon as she opens the forwarded email to read or download the documents.

The second example explained that by inserting tracking software in an email forwarding a settlement proposal or contract for review, the sending lawyer could determine how often and how long the receiving attorney and opposing party reviewed any particular page of the settlement proposal. Such software gives the sending lawyer access to “protected information and extraordinary insight as to which sections of a document the lawyer and her client found most important,” the Alaskan opinion concluded.

Attorneys who might consider the use of such tracking software to only lead to a slap on the wrist should note that there is a long history of disciplinary proceedings, including disbarment, of lawyers who in the traditional sense just “eavesdrop” on opposing attorney’s confidential communications with a client. See, In re Neary, 84 N.E.3d 1194 (Ind. 2017) (four-year suspension of prosecutor who violated Indiana Rules 4.4(a) and 8.4(d) by eavesdropping on two private client-lawyer conversations).

There are no studies reporting how prevalent the use bof undisclosed “tracking” software (sometimes known as “web bugs,” “web beacons,” or “spymail”) might be among attorneys and other professionals. One can reasonably surmise it is more common that you might think.

More importantly, with the ever-increasing use of advanced technology among the millennial generation of attorneys who are beginning to emerge into leadership positions in firms, its use likely will become frequent in the absence of more states imposing these ethical restrictions.

Typically, “tracking” software simply inserts an invisible image or code into an email message that is automatically activated when the email is opened. Once activated, the software reports to the sender, without the knowledge of the recipient, detailed information regarding the recipient’s use of the message.

Depending on the vendor, the information reported back to the sender may include:

  • when the email was opened;
  • who opened the email;
  • the type of device used to open the email;
  • how long the email was open;
  • whether and how long any attachments, or individual pages of an attachment, were opened;
  • when and how often the email or any attachments, or individual pages of an attachment, were reopened;
  • whether and what attachments were downloaded;
  • whether and when the email or any attachments were forwarded;
  • the email address of any subsequent recipient; and
  • the general geographic location of the device that received the forwarded message or attachment.

The committee noted that tracking software is commonly used in various commercial settings, “ostensibly to gauge the effectiveness of marketing materials.”

The committee also noted that many basic email programs offer a “read-receipt” function, which acts as a sort of electronic version of certified mail, allowing the recipient the option to notify the sender that an email was received.

The committee concluded that because this function provides only a confirmation of receipt rather than information concerning the subsequent handling of an email, it does not appear to raise the client protection concerns.

The committed held that if a lawyer wishes to use tracking software in email correspondence with another lawyer, the sending lawyer must receive prior, informed consent. Any email seeking such consent must itself:

  • be free of tracking software;
  • contain no other substantive content; and
  • give the recipient a clear, explicit, and non-technical plain-language explanation of the features of the particular software that the sending lawyer proposes to use.

The receiving lawyer should also obtain the informed consent of any affected client before agreeing to accept email that may contain “tracking” software.

Frighteningly, as reported by the Illinois State Bar committee, no generally available or consistently reliable devices or software programs capable of detecting or blocking email “tracking” software appear to be readily available in the marketplace.

The full scope of these opinions and the actual impact on professional liability for lawyers and other professionals also is largely unknown.

For example, Illinois is among the majority of states that has imposed an affirmative duty on lawyers to “ . . . keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology.” See, Comment [8] to Illinois Rule 1.1, as amended effective January 1, 2016.

A related provision, Paragraph (e) of Illinois Rule 1.6, adopted effective January 1, 2016, provides: “A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.” This simple requirement creates a potential minefield of professional liability.

It remains unknown what burden these rules place on an lawyer or law firm to employ defensive software to protect its email correspondence from unscrupulous attorneys that would use email “tracking” software despite the fact it is violation of their professional rules of conduct. Currently, a lawyer must act,

“ . . . competently to safeguard information relating to the representation of a client against unauthorized access by third parties and against inadvertent or unauthorized disclosure by the lawyer or other persons who are participating in the representation of the client or who are subject to the lawyer’s supervision. The unauthorized access to, or the inadvertent or unauthorized disclosure of, information relating to the representation of a client does not constitute a violation of paragraph (e) if the lawyer has made reasonable efforts to prevent the access or disclosure. Factors to be considered in determining the reasonableness of the lawyer’s efforts include, but are not limited to, the sensitivity of the information, the likelihood of disclosure if additional safeguards are not employed, the cost of employing additional safeguards, the difficulty of implementing the safeguards, and the extent to which the safeguards adversely affect the lawyer’s ability to represent clients (e.g., by making a device or important piece of software excessively difficult to use).”

Illinois Rule 1.6, Comment [18]. In fairness, the committee concluded that to require the receiving lawyer to first discover and then defeat every undisclosed use of “tracking” software would be “unfair, unworkable, and unreasonable.”

The committee further opined “it would be neither appropriate nor reasonable to charge all lawyers with an understanding of the latest version of tracking software that might be chosen, and then employed without notice, at the option of opposing counsel.”

That reasoning will likely not survive for long, however. Attorneys already are obligated to understand the use of things like metadata and “other ubiquitous aspects of common information technology” that only a few years was beyond the comprehension of the vast majority of lawyers. Now, e-discovery and use of metadata is commonplace.

In Texas, the state bar has ruled in Opinion 665 that “the Texas Disciplinary Rules do not prohibit a lawyer from searching for, extracting, or using metadata and do not require a lawyer to notify any person concerning metadata obtained from a document received,” including when the metadata was inadvertently included in the document by opposing counsel.

The question remains then, what steps should the reasonable attorney take to prevent an unscrupulous, opposing attorney from secretly obtain confidential information and analytics that can be obtain using “spymail” or other email “tracking” software and then used against the client?

For example, one easily can envision that a future state bar grievance committee could conclude it is a violation of an attorney’s ethical duties to protect client confidences when the attorney forwarded to his client an opposing counsel’s email and attachment embedded with tracking software rather than take the additional, simple, straight-forward step to download the attachment, scan it, and then send the “bug-free” scanned version to the client.

Such additional steps may seem ridiculously archaic, cumbersome, and time-consuming in our click-and-forward age of email, but when has that ever stopped a state bar grievance committee from sanctioning honest, hardworking attorneys?

The developing law to prohibit the use of “tracking” applications for emails also appears at first blush to run contrary to the trend in many states to permit attorneys to surreptitiously record telephone calls and advise their clients to do the same to gain any available advantage.

In Formal Opinion 01-422 (June 24, 2001), the American Bar Association reversed a prior long-standing position, holding that recording a telephone conversation without the knowledge of the other party to the conversation does not necessarily violate the ABA Model Rules.

The ABA opinion made clear, however, that a lawyer could not record telephone conversations in violation of state law that forbids such conduct without the consent of all parties, nor falsely represent that a conversation is not being recorded.

While Illinois remains among those states that prohibits attorneys from secretly recording a private telephone conversation without the consent of all parties to the conversation unless certain specific exceptions apply, that did not seem to be critical to the state bar committee’s prohibition on the use of “tracking” software; although, it did reinforce that to do so likely was “dishonest” and “deceit.”

Technology seems to be overtaking the practice of law in every aspect. Many older lawyers readily admit that they are feeling overwhelmed in the attempt to keep pace.

It is only a matter of time before this kind of email “tracking” software is readily available and likely built into off-the-shelf email programs. In their own best interest, internal best-practices, policies, and procedures to strengthen their reasonable attorney defense should be implemented by every lawyer and law firm before a crisis arises.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. He is admitted in Texas and Oklahoma. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at

Risk Management Best Practice Starts With Open Lines Of Communication

The best way to avoid problems arising on any construction project is to maintain open lines of communications.

Too many costly claims and lawsuits against design professionals begin as nothing more than a simple miscommunication among the owner, contractor, subcontractor, and design professional.

The key to all communication is to be pro-active. Recognizing that an issue or miscommunication has popped up is the most important first step.

Maintaining open dialogue with your clients will keep costs lower and improve overall business relationships. Many times, simply keeping open lines of communication can prevent a problem on the job site from developing into a claim or potential lawsuit.

Weigh the value of involving experienced professional liability attorney early. Involving an experienced counsel early could protect your communications with the owner, contractor, or subcontractor as “settlement negotiations,” and possibly prevent discussions from being used against you in any subsequent lawsuit.

Involving inexperienced counsel early, however, could have the unintended consequence of elevating the situation before it can get resolved by the parties. Not all lawsuits can be avoided, but working together with experienced professional liability counsel, and possibly the insurance carrier, is often risk management best practice.

If you choose to communicate without an attorney, speak in one voice. Designate a single person to respond on behalf of the company.

Once a serious issue arises, activate the company’s “Litigation Response Team” immediately. If the company doesn’t have a Litigation Response Team, you should work with the company internal risk manager and attorney to develop one, and make sure every key leader understands their role at each stage of the process.

For example, while “Requests for Information” are a normal part of the construction process, be wary. Some contractors generate RFIs to lay a foundation for future claims for delays or extras.

The design professional should always respond promptly to a request for information even if the request is unrelated to the design professional’s responsibilities. Always, communicate in writing and copy all necessary parties, including the owner.

Be prepared to discuss the problem honestly and professionally. Be prepared to compromise even if you technically may not be at fault. The design professional, however, should avoid giving an opinion or advice about how to resolve the problem that is outside his scope of work to avoid creating future liability.

The design professional should weigh the costs of early repairs against the risk of future claim for damages, litigation costs, attorney fees, and loss of a future business relationship.  Sometimes, being willing to give an inch will stop an owner from going the extra mile of filing a lawsuit out of anger.

Be careful about making voluntary payments, however, because it could prevent you from recovering those payments from the truly liable party later.

The design professional also should always check with his insurance agent and broker to determine if voluntary remediation is covered under the policy because every insurance policy is unique.

The design professional should remember that while their professional liability insurance carrier generally will be understanding about protecting long-term, valuable relationships with important clients, a professional liability insurance policy is only meant to cover errors in design.

Never assume a voluntary payment will be covered without first consulting with an insurance professional and experienced legal counsel, who also can advise the design professional on when it should put the insurance carrier on notice to preserve the design professional’s rights under the insurance policy.

When an allegation arises, find out the source of the complaint as quickly as possible. Determine who the “decision maker” is and open a direct line of dialogue as quickly as possible. Get out in front of the problem early with the ultimate decision maker.

Consider taking advantage of “Pre-Claims Assistance” potentially offered as part of a professional liability insurance policy.

The best professional liability insurance policies often provide pre-claims assistance, including hiring an experienced professional liability attorney to help the design professional evaluate the risk faced, develop an effective strategy to minimize exposure to damages, and hopefully, avoid a lawsuit entirely.

Every design professional should fully understand their professional liability insurance policy before a lawsuit or claim is filed. Every Litigation Response Team should have one person designated to fully understand the terms of any insurance policy that may be available.

Contrary to what many design professionals sometimes believe, their professional liability insurance policy may provide such pre-claims assistance at no cost to the insured even if the company may eventually owe a large deductible if a lawsuit is filed.

When a claim is asserted, it’s not uncommon for design professional firms to think they are saving money by hiring their regular company attorney to “settle” a claim outside the insurance policy, or worse, doing it themselves.

However, some professional liability insurance policies may offer incentives to the insured, such as reducing the insured’s out-of-pocket deductible by as much as half, if the claim is resolved by formal mediation with the involvement of the insurance carrier.

Why would the insurance carrier do that?

The reason is simple: insurance carriers want their design professional insureds to take advantage of the insurance carrier’s experienced claims people – and experienced professional liability attorneys – rather than try to “do it themselves.”

In the long run, the insurance carrier knows it reduces the risk of future claims and saves the insured and insurance carrier money.

The design professional should create a “Claim File” at the first sign of a potential claim. Pull together all relevant communications with all other parties involved, including the contract, specifications, change orders and critical documents.

Every design professional should implement an effective internal email retention policy and be certain to enforce it throughout the company.

Maintaining a thorough, consistent system of documentation can prove invaluable when a claim does arise.

Before communicating about a problem, get your facts right the first time. Don’t assume anything. Send the message early to the other side, your attorney, and insurance carrier that you:

(1)  have identified the problem;

(2)  understand the cause;

(3)  have developed a solution if appropriate and within the scope of the contract; and

(4)  are prepared to defend your position that you are not to blame should a claim or lawsuit arise.

Be flexible. Respond to combative emails quickly. Respond in writing. Do not ignore accusations, but always stay professional.

Take the high road whenever possible, especially during the “Pre-Claim” phase. Remember the adage about an ounce of honey.

Never forget that everything you do, say, and write may eventually be used against you. Working together with an experienced professional liability attorney can often help avoid cringe-worthy emails from eventually being read out loud to a jury.

Every design professional wants to get paid. At the first sign of problems such as the project may be over-budget or underfunded, communicate with the owner to discuss payment as set forth in the contract.

While putting everything in writing is sound advice, nothing will replace face-to-face communications.

Don’t shy away from setting up a meeting to sit down with the appropriate people to confront the issue. If you do have a meeting, send a follow up letter, summarizing the agreements you believe were reached and the plan of action agreed on by the parties.

If the contractor or owner refuses to meet with you in person, that may be a good sign that a claim or lawsuit is on the horizon, and you can start preparing further.

Whatever you do, don’t overreact. Be professional, and keep the lines of communication open as long as possible or until your attorney advises you to stop.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. He is admitted in Texas and Oklahoma. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at


Oklahoma Strikes Down Certificate Of Merit Statute As Unconstitutional (Again)

When tort reform swept the country more than a decade ago, many states imposed numerous pre-suit requirements to weed out meritless claims against medical and non-medical professionals.

Tort reform, however, hasn’t been at the top of most states’ legislative agenda in years.

Now it appears that some appeals courts may be pushing back against one of medical and non-medical professionals’ key, hard-earned defenses – certificates of merit.


In October 2017, the Oklahoma Supreme Court became the latest to strike down its state’s certificate of merit statute as unconstitutional.  John v. Saint Francis Hospital, Inc., 405 P.3d 681, 687 (Oct. 25, 2017).

The John Court held: “the thrice incarnated affidavit of merit requirement found in Okla. Stat. tit. 12, § 19.1 (Supp. 2013)” “is an impermissible barrier to court access and an unconstitutional special law.”

The John Court held “[t]he courts of justice of the State shall be open to every person, and speedy and certain remedy afforded for every wrong and for every injury to person, property, or reputation; and right and justice shall be administered without sale, denial, delay, or prejudice.” Okla. Const. art. 2, § 6. 

Oklahoma’s newest certificate of merit statute was among the broadest in the country. Oklahoma Statute, Title 12, Section 19.1. It required plaintiffs to serve with their petition a certificate of merit to establish a breach of the standard of care by the defendant professional in any civil action for negligence. Id.

Oklahoma’s Supreme Court had struck down an earlier certificate of merit statute limited only to medical malpractice claims. Wall v. Marouk, 302 P.3d 775 (Okla. 2013).

The John Court held: “To be clear: whether in the context of a medical liability, professional liability, or – as in this case – expert liability, court access cannot be conditioned upon a plaintiff’s ability or inability to pay ‘some liability or conditioned coercive collection devices’ . . . Simply stated, section 19.1 is constitutionally infirm.”

As a result, the opinion likely brings sweeping change to the certificate of merit requirements in the state because the Court went out of its way to not limit the holding to the medical malpractice claims raised by the plaintiff.

Oklahoma plaintiffs, therefore, likely are for the foreseeable future no longer required to file certificates of merit as a pre-condition to filing suit in any other negligence claim against architects, engineers, accountants, insurance brokers, real estate agents, and other such professionals.

At least, Washington, Arkansas, and Ohio, however, have joined Oklahoma, concluding that the laws interfere with access to the courts or violate precepts like “separation of powers” or “equal protection.”

In contrast, the majority of courts that have considered the issue have declined to hold that certificates of merit pose a constitutional due process concern. See, Sisario v. Amsterdam Memorial Hospital, 159 A.D.2d 843, 845 (3rd Dep’t 1990).

The Court in Sisario expressly held the New York statute serves the legitimate government purpose of preventing frivolous malpractice suits. Id. at 844.

Some states, however, recently have taken their own steps to curtail such statutes’ scope and effectiveness even if they have not concluded their state’s certificate of merit statute is unconstitutional.

In July 2014, the Texas Supreme Court engaged in legal gymnastics to partially gut the state’s certificate of merit statute as to third-party plaintiffs in construction-related claims. See Tex.Civ.Prac. & Rem.Code § 150.001, et. seq. (engineers, architects, land surveyors, and other design professionals).

The ruling has no impact on medical claims because Texas is among those states that divides its certificate of merit requirements for medical and non-medical professionals. See Tex.Civ.Prac. & Rem.Code § 74.001, et. seq. (medical malpractice).

In Jaster v. Comet II Const., Inc., 438 S.W.3d 556, 571 (Tex. 2014), the Texas Supreme Court read the state’s statute as literal as possible, holding it does not apply to “third-party plaintiffs,” but rather only to “the plaintiff who initiates an action . . .” Id. at 571 [emphasis added].

The statute considered in Jaster requires that a certificate be filed with the original petition.

Filing with an amended petition is insufficient. Sharp Eng’g v. Luis, 321 S.W.3d 748, 751 (Tex. App. – Houston [14th Dist.] 2010).

In Texas, the consequences of outright failing to file a certificate of merit in cases against design professionals can be severe.

Section 150.002(e) grants a trial court broad discretion to dismiss a suit with prejudice if the plaintiff does not serve a certificate of merit contemporaneously with his lawsuit.

The statute provides an exception to the contemporaneous filing requirement only where:

  • the limitations period will expire within 10 days of the date of filing of the lawsuit; and
  • time constraints prevent preparation of the necessary certificate for filing with the suit.

See, TEX.CIV.PRAC. & REM.CODE § 150.002(c).

As the dissent pointed out in Sharp, Texas’ statute is more of a “trap for the unwary,” than a mechanism to prevent frivolous lawsuits. Sharp, 321 S.W.3d at 754.

As a result, a plaintiff who is either unaware of his duty (which happens all the time) or who is unable to obtain a pres-suit certificate of merit against a design professional (more common) may sue a cooperative contractor.

The plaintiff then simply waits for the contractor to initiate the inevitable third-party action against the design professional.

The design professional is left with a choice: risk the plaintiff will not be able to develop its own certificate of merit after discovery, or settle a possibly meritless claim that it previously would have been able to dismiss immediately.

If an expert’s report (certificate of merit) is developed later in discovery, the plaintiff can then seek to initiate suit against the design professional even if the plaintiff was unaware of its initial statutory obligation to do so.

Even if the contractor never files a third-party petition, the design professional may be forced to incur substantial attorney’s fees to defend the meritless claim at least until the defendant can file a motion for summary judgment, which frequently can take months.

In California, the state legislature fortunately drafted a better statute.

California Code of Civil Procedure Section 411.35 expressly requires that both plaintiffs and cross-complainants provide a certificate of merit when their claims arise out of the negligence of a professional architect, engineer, or land surveyor.

The Texas legislature, however, has shown little interest in correcting the absurd result it created with its poorly worded statute.

No one disputes that in the years since pre-suit certificates of merit statutes were passed, most states have seen a dramatic drop in the number of negligence claims against medical and non-medical professionals.

In Texas, medical malpractice claims that do not involve catastrophic injury or damages have all but disappeared in many venues.

No one also can ignore that many appellate courts have shown little inclination to reign in increasingly emboldened trial judges eager to fulfill their “gate keeper” role.

In recent years, trial judges are commonly finding deficiencies in certificates of merit that only a few years ago would have been deemed adequate at least at the initial stage of litigation.

It’s possible, however, the recent opinions in Oklahoma and Texas should cause those who regularly handle and defend professional liability claims to prepare for the possibility that the pendulum may be swinging back the other way with regard to certificates of merit statutes.

It appears that at least some appellate courts may be willing to re-examine the role pre-suit certificates of merit should play in weeding out claims at the earliest stage of litigation.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at


Nicole Ward Headshot - 10-31-17Nicole Ward is an associate with Kennedy Attorney & Counselors At Law. She graduated from the University of Oklahoma College of Law in May 2017.  Her practice focuses on healthcare law, labor and employment law, construction defect litigation, and corporate law. She previously interned in-house for the general counsel at a nationwide building materials supplier and for an Administrative Law Judge at the Equal Employment Opportunity Commission (EEOC). At OU, she was a member of the Order of Solicitors, and won the Best Brief Award at the 29th Annual Ruby R. Vale Interscholastic Corporate Moot Court Competition. She served as a member of the Organization for the Advancement of Women Lawyers and served as a CASA volunteer.



Design Professionals Often Overlook Importance Of Design Changes Clause

Construction contracts are unique in some ways among legal contracts. They anticipate and plan for changes during the project not included in the original contract. In fact, some industry surveys suggest the typical commercial project will involve as many as 50 change orders or more.

All design changes will be governed by the “Changes Clause” in the contract. The “Changes Clause” could be the most important clause in a construction contract because it specifies how the owner can make changes or other alterations the owner deems necessary to complete the work.

The design professional, on the other hand, is obligated by the changes clause to perform changes to the work according to the owner’s instructions, provided the contract provides for the contractor to be compensated.


To avoid claims and potential lawsuits, a design professional should pay special attention to the “Changes Clause” in both the design professional’s agreement – and in the prime contract. Before taking on a project, a design professional should clearly understand what is required and how they will be compensated for design changes during the project.

Some design changes may be minor. But too often, design changes lead to costly claims and lawsuits because the design professional relies on an handshake agreement with an owner or contractor regarding the design changes to be made.

Any design professional who fails to obtain a written change order may find it difficult to prove the change was not his fault and even more difficult to get paid.


In my experience, most design changes occur to correct faults in the original contract and several other common factors,  including:

  • a poorly defined scope of work;

  • compressed project schedules;

  • unrealistic cost constraints;

  • time and material changes; and

  • owner-directed acceleration.

A design change simply is the difference between what is called for in the original contract and what is requested after construction begins. Changes can be requested by an owner, contractor or any third party. Changes may be directed changes or constructive changes. Such changes typically are expected and are accounted for in the contract.

Direct changes usually are easier to identify. These changes usually originate from the owner. They may include changes such as: additions or deletions of work, or a change in materials or scheduling.

Constructive changes are typically caused by the action or inaction of the owner or others involved in the project. They may arise from such things as a failure to disclose conditions on the job site, untimely inspections by government entities, or a failure of a subcontractor to meet a deadline.

Constructive changes frequently give rise to claims because the owner or contractor may be unwilling to acknowledge that a design change is necessary, or the design professional was not at fault for foreseeing and planning in advance for the changed condition.

A “Cardinal Change” arises where the purpose of the original agreement has been frustrated or made impossible by the extent of the requested change. A “Cardinal Change” amounts to the owner breaching the contract, and the design professional would be relieved of performance.

For example, assume the design contract called for the construction of a restaurant with an outdoor playground. Should the owner choose to eliminate the playground, the original purpose of the restaurant would not be violated, and the design change likely would be permissible under the contract. But if the owner sought to elimination of the restaurant entirely, it would violate the purpose of the original contract and constitute a breach of the contract.

Most claims from design changes can be avoided. Never relay on a verbal design change or promise to pay by a contractor or owner. Always document design changes in a written change order. When the need for a constructive change arises during construction, check the contract immediately to determine any deadlines to provide notice to the owner or contractor.

Typically the contractor owes the duty to put the owner on notice, But if in doubt, confirm that the responsible party has provided the owner timely notice. The notice clause prevents a contractor or design professional from prejudicing the owner’s rights to investigate, mitigate, and document the change.

Never rely on the contractor without confirming notice was provided in writing. A design professional who relies only on the contractor, depriving the owner of rights to object to the change, may find it difficult to get paid for any work performed related to the design change. At worse, the design professional may become the subject to an owner’s claim or lawsuit for damages.

Confirm the scope of work anticipated by the design change. Confirm the amount of reimbursement and the terms of payment are clearly spelled out before work on the change begins. When a potential change is identified, create a potential change order file. It is important to correctly classify the nature of the change early in the process.

Review the contract to determine whether the change meets the minimum contract requirements. Be sure to follow the correct procedures to document the change.  Be thorough.

Documentation Is the key to avoiding costly claims and future lawsuits. At the beginning of a project, the project management staff should insure the use of standardized procedures and logs. The project team should maintain a documents log that includes all relevant contracts, specifications, proposed changes, reports, analysis, or other documents..

In addition, create an issues log. At a minimum it should contain the date created, a description of the issue, the party responsible for the issue’s resolution, personnel or work affected by the issue, documents involved, and the date closed.

Implementing best practices to systematically document the need for design changes, confirm authority to proceed, and define the scope of the design change and reimbursement, can avoid future costly claims and potential lawsuits against you.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at

Rapidly Developing Law On Attorney’s Fees Increases Risk Of Legal Malpractice

The law surrounding attorney’s fees continues to change rapidly, posing a serious risk of legal malpractice for any attorney who fails to keep abreast of this developing area.

For example, in Texas, any portion of work performed on a case must be segregated in claims where attorney’s fees are recoverable from the work on claims where attorney’s fees are not recoverable.

The Texas Supreme Court first set forth the basic standard of care for segregation in 2006 in Tony Gullo Motors v. Chapa. A reviewing court can reverse the award and remand the case for new trial on attorney’s fees if fees are not segregated as required by Chapa.

shutterstock_331053875Other state courts also have emphasized the importance of segregation of unrecoverable from recoverable fees. In Seeley v. Seymour and Johnson v. Grayson, two California courts reversed an attorney’s fee award and remanded a case, holding the plaintiff failed to submit billing statements to distinguish between prosecution of a slander of title claim and services performed to remove cloud on title because it was possible to separate the claims and the issues were not too closely related.

Attorneys also must be careful to timely disclose in discovery how fees are segregated to ensure evidence is admissible at trial. The Federal Rule of Civil Procedure 37(c) states a party cannot use information to supply evidence on motion, at a hearing, or at trial, if the party failed to provide that information. Similarly, Texas Rule of Civil Procedure 193.6 provides that a party who fails to make, amend, or supplement a discovery response in a timely manner may not introduce such material

An attorney must segregate his time unless the legal services performed are so intertwined that they advance both a recoverable and unrecoverable claim. As recent at October 2017, the United States District Court for the Southern District of Texas in Cypress Engine Accessories v. HDMS affirmed the requirement to strictly comply with the standard set out in Chapa. The Court held that HDMS failed to segregate recoverable fees earned in defending a DTPA claim from unrecoverable fees earned in defending tort claims.

HDMS’s claim for attorneys’ fees was based on two theories: (1) Section 38.001(8) of the Tex.Civ.Prac. & Remedies Code provides for recovery of reasonable attorneys’ fees for a breach of contract claim; and (2) Cypress Engine brought its DTPA claim in bad faith, which entitles HDMS to fees and costs under Section 17.50(c) of the Tex. Bus. & Com. Code.

In response, Cypress Engine argued that: (1) HDMS failed to plead its attorney’s fees as special damages; (2) Texas law does not support recovering attorney’s fees as actual damages, not only as damages incidental to actual damages, which HDMS cannot prove; and (3) Section 38.001(8) does not apply to Cypress Engine because it is a limited liability corporation.

The Court held that a claimant must segregate recoverable fees from unrecoverable fees and that the facts in Cypress Engine were not so sufficiently “intertwined” as to make the tort fees recoverable. The court held that regardless of how nominal, an attorney must segregate unrecoverable fees that do not advance a recoverable claim for attorney’s fees, and a failure to do so, subject the award of attorney’s fees to reversal.

Several other states impose similar requirements. For example, Illinois has set out similar rules for disclosure and segregation of attorney fees in discovery. Article II, Rule 201(b) of the Illinois Supreme Court Rules states that full disclosures are required for any matter relevant to the case and Illinois Rule 219(c) provides that failure to comply with orders or rules of discovery could result in varying punishments from a stay of proceedings to default judgment.

So how does an attorney comply with the standard of care set forth in Chapa? In general, attorneys are not required to keep and produce separate time and billing records for separate claims, but doing so may well be the best practice until the courts further clarify the outer limits of the requirement.

Opinion testimony is a commonly used method to prove the amount of recoverable attorney’s fees. Testimony may come from disinterested attorneys or from the attorney whose fees are in question. Generally, the testimony of an attorney whose fees are in question merely raises a fact issue to be determined by the jury. However, the testimony of an interested party may establish facts as a matter of law if the testimony is accurate, clear, and uncontroverted.

Any attorney preparing to present evidence of attorney’s fees at trial should be aware that a trial court may demand more than mere opinion testimony, however, including an ability by the party seeking to recover attorney’s fees to identify specific evidence in attorney billing records on which the party’s expert’s opinion is based.

The failure to object to the opposing side’s failure to segregate also can serve as the basis for a future legal negligence claim. Best practice requires an attorney to object at trial during the presentation of evidence on attorney’s fees, but an attorney at minimum must object to a party’s failure to segregate at the time the issue is submitted to the jury and include an appropriate jury charge.

Attorneys who do not ordinarily prosecute claims where attorney’s fees can be recovered also are sometimes surprised to learn some states now permit the “lodestar method” to calculate fees in ordinary breach of contract claims. A failure to permit the court to consider a “lodestar” can result in a significantly lower award of attorney’s fees.

The lodestar method has two steps. First, the court determines the reasonable hours worked and reasonable hourly rate for the work performed. Second, the court multiplies the hours worked by the hourly rate, which equals the base fee or lodestar. Next, the court is free to increase or decrease the loadstar if the court believes such adjustment is necessary.

As set out in detail in Cypress Engine Accessories v. HDMS, some attorneys also are surprised to learn that Texas courts that have fully analyzed Tex.Civ. Prac. & Rem. Code §38.001 have concluded the some states do not provide a right to recover attorney’s fees from a limited liability corporation or limited partnership despite years of trial court’s allowing such recovery. An attorney’s failure to object to the submission of attorney’s fees against an attorney’s limited liability corporation or limited partnership is clear legal malpractice.

Statistically, we’ve known for decades that attorneys who sue clients to recover their fees invite counterclaims for legal malpractice.

Now, a rapidly changing area of law as to how and when attorney’s fees can be recovered creates even more risk of exposure for lawyers that fail to properly comply with the standard of care to segregate attorney’s fees and that fail to properly object in discovery and at trial when attorney’s fees should be denied.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at


Nicole Ward Headshot - 10-31-17Nicole Ward graduated from the University of Oklahoma College of Law in May 2017.  Her practice focuses on labor and employment law, professional liability, construction defect litigation, corporate law, and bankruptcy. She previously interned in-house for the general counsel at a nationwide building materials supplier and for an Administrative Law Judge at the Equal Employment Opportunity Commission (EEOC). At OU, she was a member of the Order of Solicitors, and won the Best Brief Award at the 29th Annual Ruby R. Vale Interscholastic Corporate Moot Court Competition. She served as a member of the Organization for the Advancement of Women Lawyers and served as a CASA volunteer. Contact her at


Trying To Live In An Ethically Challenged World

We live in an ethically-challenged world. The every-day pressures of business economics, project deadlines, and client demands conspire against all design professionals every day to drive “professionalism” out of their practices. Design professionals, however, must strive to maintain an ethical practice because quite simply – lives depend on it. Integrity Ethics

The National Society of Professional Engineers (NSPE) states as its fundamental Canon of Ethics that all engineers shall “hold paramount the safety, health, and welfare of the public.”

And yet, every day, not infrequently with catastrophic consequences in terms of lives and financial costs, some engineers succumb to a corporate culture that tolerates or even promotes placing project economics ahead of an ethical responsibility to the public.

Strong, corporate ethics programs make sense financially. At least one industry consulting group, FMI, calculates clients lose between $5,000 and $50,000 for each million dollars spent on a project. FMI also acknowledges unethical behavior negatively impacts employee morale, project safety, and long-term company reputation.

Some companies have implemented stringent ethics programs to comply with the Federal Acquisition Regulations (FAR). FAR does not set forth any specific requirements or how a company should best implement its ethics program. Any company contemplating federal work should be aware that FAR requires the following minimum:

Within 30 days of being awarded a contract:

  • Prepare a written code of business ethics and expected conduct, if one does not already exist, and provide it to all employees.
  • Implement a due diligence program to detect and prevent criminal conduct.
  • Promote a corporate culture encouraging employees to exercise ethical conduct and comply with the law.
  • Implement an ongoing ethics awareness and compliance program, including ongoing effective ethics training for employees.
  • Promote a corporate culture encouraging employees to exercise ethical conduct and comply with the law.
  • Implement an ongoing ethics awareness and compliance program, including ongoing effective ethics training for employees.
  • Establishment of an employee business ethics and compliance awareness program and internal system of controls if such program does not already exists.

Within 90 days of being awarded the contract:

  • Establishment of an employee business ethics and compliance awareness program and internal system of controls if such program does not already exists.
  • Implementation of an anonymous hotline for reporting improper conduct and specific instructions to employees, encouraging them to make such reports.
  • Implementation of an anonymous hotline for reporting improper conduct and specific instructions to employees, encouraging them to make such reports.

Any company can implement a strong ethics program once leadership has made a commitment to do so.

The NSPE Code of Ethics provides a clear outline to follow to protect the health, safety and welfare of the general public, and preserve the integrity of the profession. The key to every strong ethics programs should be reinforcement of the basic tenants set forth in the NSPE’s Code of Ethics.

In ever corporate ethics policy, public safety trumps everything. All design professionals must be empowered by their corporate ethics policy to take decisive action to protect the public safety free of public pressure or economic concerns related to a project.

The NSPE, for example, directs an engineer to first report his concerns to the building owner, manufacturer, or other professional to take remedial actions. The engineer, however, must take action to report a safety concern to the appropriate authorities if no action is taken to remedy the situation within a reasonable time by the owner, manufacturer, or other professional. To fail to do so, is an abrogation of the professionals’ fundamental responsibility and obligation.

A corporate ethics policy must empower all employees to strictly adhere to the letter and spirit of all applicable federal, state, and local laws and regulations.  A strong ethics policy, however, should clearly advise the design professional that no obligation exists for a professional to become a zealot. The NSPE limits the duty to report to appropriate legal authorities where the engineer’s personal safety concerns are not supported by “scientific consensus” or “widely-accepted engineering standards.” The standard for most policy should be one of acting “reasonably.” The NSPE, however, permits the engineer to decline to perform additional services on the project, and a strong ethics policy should reinforce the professional’s same option.

A corporate ethics policy should encourage design professionals to “stick to their guns” and not yield to the economics of business on issues of public safety. The professional should seek to become the voice of reason on the project. An ethics policy should reinforce that everyone involved in the project that some matters can never be compromised despite the potential costs because the potential risk of loss is simply too great.

The NSPE, for example, acknowledges that fire codes are among the most fundamental requirements for the protection of the public health and safety. An engineer can make no concessions where they believe the public safety is at risk in such circumstances, and must continue to report their concerns up the chain of command if the concern is not resolved.

No design professional should ever feel compelled to work outside their area of competency. Clients and employers rarely want to hear from a professional that another yet professional with a particular expertise must be retained on a project. A good corporate policy however, will remind the professional to not try to become “all things to all people” despite the pressures to avoid costs.

This aspect of any corporate policy can be tricky to implement. Most state licensing agencies identify broad categories rather than sub-specialties. For example, a civil engineer may be highly qualified to prepare plans for a public park, but not possess any specific experience with a particular kind of pedestrian bridge called for by a project design.  An engineer should never feel compelled to affix her seal to project plans even if they are obtained from or prepared by some else highly qualified in the field.

No one ever wants to become the company “snitch,” but any valid corporate ethics policy must provide clear directions, and equally clear support, for reporting an impaired colleague. In addition to the public safety concerns, every professional and corporation should fully appreciate the legal liability arising from continuing to permit an impaired design professional to work on a project after any suspicion or knowledge of an impair arises. A decision to ignore or failure to intervene can form the basis of a negligence finding against any professional or corporation who fails to act.

In addition to reporting a colleague, a strong ethics policy must also empower the design professional to report impairment or violations by other contractors and professionals working on adjacent job sit not within the reporting engineer’s immediately control. The NSPE requires the engineer to at minimum report to his immediate supervisor.

In the absence of a state “Good Samaritan Law” that imposes a duty under such circumstances, the design professional likely could not be held liable for a failing to report even where an injury or death occurs. But a design professional who reports such a safety concern because the corporate ethics policy supports his decision to do could prove the key to a successful defense or even the key to avoiding litigation altogether.

Professional excellence can only be maintained by a culture of honesty, integrity and fairness.  A strong ethics policy must clearly prohibit employees from conflicts of interest, and impose a duty to make a full disclosure of all potential conflicts to the appropriate company personnel and client. In the event of an apparent conflict, the company should obtain a written waiver from the client.

Conflicts of interest may arise from, but are not limited to, some of the following examples:

  • Any attempt by employees to use their positions within the company for personal gains.
  • A professional owns shares in privately-owned companies, which do business with the company. Typically, this prohibition would not apply to shares held in publicly traded companies
  • A professional’s family member possesses a role as director, partner, shareholder or influential employee in companies or businesses which have any form of business dealings with the company.
  • A professional accepts gifts from contractors doing business with the company that could place an employee in a position where his independent business judgment may be prejudiced.  A strong ethics policy should place clear limits on the types and value of gifts that can be accepted, and require all such gifts to be disclosed.
  • Any professional’s acceptance of payments, services, loans or bribes from a supplier, contractor, subcontractor or other third parties should be prohibited.
  • A professional’s acquisition of property acquired as a result of company information.

Once a decision to implement a strong corporate ethics policy has been made and drafted, the real hard work begins. Construction companies and design professional firms notoriously suffer from a disconnect between management and the frontline field personnel. Any corporate ethics policy must be handed down from the top, straight from the board room and president’s office. Otherwise, an ethics policy will never become instilled as part of the “corporate culture.”

A successful ethics policy should be simple and concise. A successful policy will set forth clearly defined procedures and guidelines for an employee to follow when confronted with a uniquely challenging situation, but it is the basic principles loudly endorsed by senior management of “do the right thing” that will prove most effect. Some of the most ethical companies have developed their reputations as a result of generations of employees and senior managers who have never known any other way to do business.

The company must provide ongoing, meaningful ethics training at all levels of the company from employees to supervisors to senior management. No corporate ethics policy can succeed until the rank-and-file employees see first-handed the senior company leadership taking an active leadership role in ethics training sessions, policy initiatives, and implementation.

Every truly effective ethics policy requires a champion at the senior leadership level, who becomes the face and voice of the company’s ethics policy. Every company who leaves even a hint of doubt that senior management does not wholeheartedly endorse long-term, top-to-bottom ethical behavior over short-term business financial decisions has doomed the company ethics policy from the start.

The board of directors must publicly embrace the commitment to ethics. FAR guidelines require continuing board interaction with the company ethics program. An effective ethics policy should be announced by a strong, clearly worded board resolution announcing its implementation. Regular reporting to the board and from the board will signal to every level of the company that the ethics policy is more than “lip service,” but rather an established part of the company’s culture.

Just like professional sports programs talk about bringing in “good character” guys to provide leadership in the locker room, a company must endorse character and ethics as an integral part of the hiring and promotion process. The newest generation of graduates place a high emphasis on going to work for companies with strong values and ethical cultures. Companies who promote long-term ethical behavior will create corporate cultures where they find it easier to hire and retain the best and brightest stars within their companies.

The hallmark of any successful ethics program is self-reporting and an open-door policy. The program must include regular risk assessments, confidential evaluations of management level positions by employees, and even outside, independent audits and reviews.

Many times companies implement successful helplines for employees to call when confront with a uniquely challenging situation. Mentoring programs can be very successful to help develop a corporate culture that fosters ethical behavior in the promotion process. Every corporate ethics program should be constantly evaluated and updated, becoming an integral part of the ongoing business strategies.

Finally, no corporate ethics policy can be successfully implemented without adequate resources devoted to taking action when a situation arises. Internally, senior management must be empowered to take decisive action to protect the interest of both the company and the employee who reported unethical or professional misconduct. The consequences of violations of the policy should be clearly articulated, as should any retaliation against the person reporting, including public reprimands, suspension, and termination.

The company must established guidelines that empower the appropriate individuals within the company to determine whether to retain outside legal counsel to investigate reported unethical or professional misconduct. Typically, outside legal counsel should be retained early in the process, including even before a violation of the policy has been confirmed, to should preserve attorney-client confidentiality of such investigations against future litigation.

Corporate ethics policy will become wide-spread in the next decade as the commitment to ethics increasingly becomes an expected part of the bid process. Like the federal commitment to FAR, private owners are increasingly placing a premium on corporate relationships with any other companies who are viewed as ethical.

Design professional companies can not expect to change their corporate cultural overnight. But a long-term commitment to ethical conduct will pay dividends in the future as the company successfully avoids risk, manages loss, and creates an positive climate to do business with other likeminded companies.


  • Establish written ethics policy
  • Adopt an ethics policy resolution by the board of directors
  • Appoint an ethics omnibusman
  • Establish a confidential ethics hotline
  • Establish a confidential ethics helpline
  • Establish an internal ethics committee
  • Establish an internal conflicts of interest policy
  • Implement regular employee ethics training
  • Establish an internal due diligence process to investigate complaints
  • Implement an internal ethics compliance program
  • Establish a pre-existing relationship with qualified legal counsel

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at


#PLUSin30 – 2017 International Professional Liability Underwriters Society

20170712_113656Privileged that Professional Liability Underwriters Society (PLUS) asked me to participate in its #PLUSin30 series for the 2017 PLUS International Convention held in Atlanta, Georgia on October 31 to November 3, 2017.

Seltzer Chadwick Soefje, PLLC is proud to be actively involved with PLUS since our founding. As a firm, we’ve act as a Gold Sponsor of the PLUS Texas Chapter. Our partner Bob Chadwick served as PLUS Texas Chapter from 2005-2008, and as Co-Chair of the PLUS International Chapter Development Committee.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. He is admitted in Texas and Oklahoma. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at

Legal Dabbling: Hurricanes Create Calm Before Legal Malpractice Storm Surge

As Texans continue cleaning up the destruction of Hurricane Harvey and Floridians brace for Hurricane Irma bearing down on them, many lawyers in the regions will be seduced by the money to be made from the sheer number of insurance claims and lawsuits soon to be filed.

Unfortunately, many of these lawyers will instead find themselves professionally devastated by a legal malpractice claim because they chose to “dabble” in an unfamiliar area of law into which they never shoulMan Storm Umbrellad have ventured.

We already have seen several law firms ramping up on social media and in news reports to grab a piece of the inevitable FEMA, inverse condemnation, and first-party insurance claims to come.

Both massive storms, however, will spur other kinds of complex litigation as well.

We will inevitably see an uptick in claims involving professional negligence against architects, engineers, and design professionals; director and officer liability; building owners, real estate development and management companies; and landlord-tenant disputes just to name a few.

None of these types of claims are any place for a novice. Unfortunately, attorneys unfamiliar with an area of practice often simply don’t know what they don’t know.

Each of these areas of law are exceedingly complex and nuanced. Issues relating to liability, defense, and damages often are not easily identifiable by an inexperienced attorney. A single misstep can lead to disaster for the client and attorney.

The American Bar Association Rules and every other state impose a duty that “a lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” ABA Model Rules 1.1.

“Dabbling” in an area of law in which an attorney is not familiar, however, remains among the top five reasons for legal malpractice claims nationwide despite the ABA model rules, state bar rules, and the legal and insurance professions’ constant warnings.

The ABA “Profile of Legal Malpractice Claims: 2012-2015” reports that 46 percent of all legal malpractice claims involve “substantive errors,” including a failure to know or apply the law, failure to know or calculate deadlines, inadequate discovery, and errors in procedure strategy.

The ABA report found that more than 60 percent of all malpractice claims involve an area of the law in which the subject attorney works less than 20 percent of the time. Attorneys who practice in a single area of the law account for less than 7 percent of all legal malpractice claims.

According to panelist on a recent ABA webinar, “Avoiding Common Malpractice Missteps: What Every Lawyer Needs to Know (On-Demand CLE),” 13 percent of legal malpractice claims arose specifically because the attorney did not know the area of law.

A recent 2017 study by professional liability insurance leader Ames & Gough reveals that the number of new legal malpractice claims is stabilizing. Claims, however, remain well above historical experience in years preceding the 2007 – 2009 recession that forced many attorneys to expand into unfamiliar areas of practice.

Any lawyer considering assuming the representation or defense of a claim outside the lawyer’s ordinary practice area should answer several basic questions before taking on the client.

  • How complicated is the matter and area of law?
  • What is the amount in controversy?
  • Are the potential fees recoverable worth the risk?
  • How familiar are you with the jurisdiction or venue?
  • Can you spend the additional time necessary to get up to speed on the area of law?
  • Do you have the financial resources to take on the representation in an area where you will need to spend considerable time to learn the law?
  • Can you associate with or turn to experienced attorney for help on the matter?
  • How difficult will the client to be, and does the client have unreasonable pre-claim expectations?
  • Do you have adequate professional liability insurance coverage?
  • How devastating will a legal malpractice claim on the case in question be on your overall law practice and personal life.

If an attorney decides to take on a case outside their regular practice area, the attorney can take a few simple steps to help minimize the risk of a future legal malpractice claim such as:

  • Draft a clear engagement agreement signed by the client.
  • Engage experienced co-counsel early.
  • Research the law and procedure thoroughly upfront before taking on the case.
  • Designate time each day or week to continue learning the law and to work on the claim.
  • Take advantage of continuing legal education courses available online and from the state and local bar association.
  • Participate in networking opportunities with experienced attorneys in the area.
  • Prepare internal memorandum and case evaluations on legal issues as they are identified.
  • Keep the client thoroughly informed as the case progresses.
  • Don’t be afraid to ask for help.
  • Withdraw immediately if it becomes clear you’re over your head.

No lawyer should ever be unwilling to expand their scope of practice simply because of the fear of a legal malpractice lawsuit. No lawyer, however, should ever think that circumstances like Hurricane Harvey or Hurricane Irma present an economic windfall simply because of the volume of legal work that can be expected to result.

Now is no time to “dabble” in an unfamiliar area of law.

Attorneys also should resist the temptation to even “do a favor” for a friend or family member because it usually helps no one. The “favor” often gets pushed to the bottom of the attorney’s stack of things to do, and the client ultimately suffers from delays, missed deadlines, or less than competent representation.

If an attorney decides that now presents a unique opportunity to expand into a new area of practice, be willing to commit upfront the substantial time and resources necessary to comply with ABA Model Rule 1.1, or be prepared for the personal and professional devastation that inevitably will come from a legal malpractice claim.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at

Arbitration Clauses Remain Popular, But Frequently Misunderstood And Poorly Drafted

Arbitration continues to serve as a popular forum for resolving construction-related disputes, but unfortunately, clauses compelling arbitration frequently are poorly drafted and misunderstood by the parties involved.

Each state’s laws compelling arbitration are unique and continue to evolve, especially when it comes to compelling arbitration by non-signatories to the arbitration agreement itself. For example, in May 2017, the United States Supreme Court overturned a state-court opinion, ruling that an attorney-in-fact could waive the right to a jury trial on behalf of a decedent even where state law otherwise conveyed to the decedent a “God given right” to a jury trial.

In Kindred Nursing Centers, Limited Partnership v. Clark, the Supreme Court held that the Federal Arbitration Act requires state courts place arbitration agreements “on equal footing with all other contracts.” In so ruling, the Supreme Court overruled the Kentucky Supreme Court’s ruling that to agree to arbitration, “the representative must possess specific authority to waive his principal’s fundamental constitutional rights to access the courts [and] to trial by jury.”shutterstock_376726306

Arbitration presents numerous disadvantages often overlooked by inexperienced parties. Architects, engineers, and other design professionals should consent to a mandatory arbitration clause in their contracts only after a thorough consultation with an experienced, local attorney to fully understand the unique advantages and disadvantages of arbitration in the specific jurisdiction.

Many design professionals wrongly believe that arbitration always offers a more cost-effective and predictable alternative to the jury trial system. While this can be true in some large, complex litigation matters, arbitration can be exceedingly more expensive than some parties believe.

The expense of an American Arbitration Association arbitration, especially if it is a mandatory 3-member panel, easily can exceed five or six figures, which would not be incurred if the case is presented to a judge or jury.

A surprising number of design professionals do not understand exactly what rights they are giving up. Design professionals should fully understand that once they agree to arbitration they almost always waive all rights to appeal except in a few, limited circumstances. Typically, the right to appeal will exist only in cases of corruption, fraud, evidence of partiality or misconduct by the arbitrator, exceeding jurisdiction, or refusing to postpone an arbitration hearing for a good cause.

The limited right of appeal and sweeping decision-making power of a single arbitrator often creates significant levels of anxiety among the participants, especially in high-exposure cases involving issues of law that have not been well-settled in the jurisdiction. Such uncertainty may present a strong incentive by one party to settle a claim it otherwise might be willing to try to a jury if the right of appeal were not waived.

The parties also should carefully draft arbitration clauses to agree in advance about what rules of discovery and evidence will apply to avoid future misunderstandings and confusion. For example, it is not uncommon for design professionals to be surprised that pre-arbitration settlement offers and the limits of existing insurance policies regularly are made known to the arbitrator. Such offers of settlement or existence of insurance policy limits rarely would be shown to a jury in a typical jury trial. Many believe such knowledge of pre-suit offers and insurance policy limits can sway arbitrators to award at least some damages to a party that may not otherwise be awarded.

Arbitrations also have distinct advantages of course. Generally, the parties can obtain a final resolution substantially sooner than with a jury trial. It is not uncommon for an arbitration, even in a complex construction matter, to be scheduled within 6 months to a year. The same matter may take 24-36 months to reach a jury trial. When you consider the waiver of any right to appeal, matters routinely are resolved much quicker in arbitration.

Design professionals, however, are often surprised to find that the other side can frustrate the process by refusing to pay their share of arbitration. This can lead to unexpected delays, which frustrates the purpose of arbitration. A well-drafted arbitration clause should include a harsh penalty for any party that fails to fund its share of the arbitration promptly.

One of the significant advantages of arbitration is the ability to adopt more lax rules of evidence and procedure than available in a court of law. This can make it substantially easier to obtain and admit evidence and witness statements (ie., affidavits). This can prove especially helpful in some construction claims, where work crews who are key fact witnesses have moved on to projects in other states or countries.

The ability to selected arbitrators with specific industry experience and technical backgrounds not usually possessed by a trial judge presents another strong factor in favor of arbitration. While the use of such specialized arbitrators can be substantially more expensive, many design professionals prefer arbitrators experienced in their industry because they believe they can more readily predict the results. If the design professional considers this a significant factor, the requirement to use an arbitrator with specific industry experience in construction-related claims should be included in the arbitration clause itself.

Some design professionals prefer arbitration because it affords the parties the opportunity to resolve their dispute without the public nature of a jury trial. The private resolution of disputes can prove especially advantageous when it involves a high-profile claim, the loss of life on a project, or the potential for long-term, reputational damage to the design professional that may far exceed the amount involved in the dispute.

Finally, many design professionals believe arbitration can level the playing field where they are the “out-of-town” party or the less influential or politically-connected party, such as in disputes with local governmental entities or a large, local employer.

Undoubtedly, arbitration clauses are here to stay in the construction industry. Design professionals, however, should carefully review with an experienced attorney whether arbitration may be the right choice on the project, and then carefully draft an arbitration clause that achieves the benefits intended.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates. 

20170712_113656Timothy B. Soefje is Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at or contact him at

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