Is Making a Referral Risky?
Referrals of all types are commonplace in the practice of law. They are often made after work is declined. Staff may pass a name along in response to a cold call or to a client who needs a service that your firm doesn’t provide. Referrals can occur during dinner conversations, at social events, via email or text, or after a presentation given to the general public. Names may be passed along to family members, friends, colleagues, and especially clients. After all, what firm doesn’t want to make sure their clients are well taken care of! Heck, if done judiciously, referrals can even be a useful tool in growing a practice.
Too often, however, referrals are made to a variety of professionals without any thought about the potential malpractice exposure. Is such casualness justifiable? Unfortunately, the answer is occasionally no. While I will readily admit that the risk is quite low, this doesn’t mean the risk can be dismissed out of hand.
One reason why is the “hunt for a deep pocket” concern. Suppose you make a specific referral and the person the referral is given to relies on your “advice” to work with whoever it was you referred them to. This person is then harmed in some fashion due to the negligent acts of the person you referred them to, and it turns out that this professional is uninsured. It happens, and when it does a hunt for a deep pocket might mean that a negligent referral claim is about to land in your lap.
Still have doubts? Then consider this. Thinking just about our own profession, I can assure you that a significant number of attorneys actively practicing here in the US are indeed uninsured. Some attorneys don’t believe that malpractice insurance is necessary. They prefer to protect their assets in other ways. Others simply can’t afford the premium payment, particularly during economic hard times. And I have even had a few attorneys tell me that they believe having malpractice coverage simply invites claims. As they see it, if they have no insurance no one will bother suing them. I know this is contrary to widely held beliefs, but it is true nonetheless.
A more serious concern is when an attorney accepts a referral fee. This is a concern because such fees are too easily viewed by a client as payment for your legal advice to have the client work with the other attorney. Remember, clients need to be made aware of fee splits, so acceptance of such a fee can come with liability for the other attorney’s missteps — particularly if the misstep is a blown statute of limitations date and the other attorney is uninsured. To avoid this risk, never ask for a referral fee and if one is offered, it’s best to decline or suggest that the referral fee be refunded to the client.
That said, if your practice is to accept referral fees, proceed fully aware of the risk involved and act accordingly. Be up front with the client about the arrangement because when you share fees, you share liability. Think about Rule 1.5 of the ABA Model Rules of Professional Conduct, which states that a division of a fee can only occur if the division is in proportion to the services performed and the client agrees in writing. In addition, the fee must be reasonable, and each attorney will assume joint responsibility for the representation. This rule clearly requires that a referring attorney who will be accepting a referral fee inform the client of the presence of the referral fee and obtain written consent to the fee division. Given all this, at a minimum, it would seem prudent to stay in contact with the other attorney in order to monitor critical dates and see that work is completed on time because there is no free lunch here.
Now, two side notes are in order. First, prior to ever making a referral where a referral fee is expected, consider making certain that the attorney you are referring to has malpractice insurance in place and that the limits are adequate for the size of the matter being referred. Do not accept verbal verification of coverage. There are attorneys who will say they are insured in order to obtain the business. Ask the other attorney for a copy of her declaration page to her malpractice policy prior to ever making this kind of referral. Some attorneys rationalize this concern away by thinking this isn’t necessary because the folks they refer to are all highly competent professionals. In response, know that competent professionals can and sometimes do make mistakes or miss critical deadlines. Again, it happens.
Second, occasionally an attorney who has recently been disbarred will seek to refer clients and request a referral fee. If the referral happened to be made while this attorney was in good standing with the bar, payment of the referral fee would be acceptable. However, if this attorney is seeking to make the referral and asking for a fee after being disbarred, the payment of a referral fee would be prohibited under ABA Model Rule 5.4(a) which prohibits the sharing of fees with a non-attorney.
Acceptance of a referral fee is not the only method of creating a liability from a referral. Referrals to specific individuals or a referral made with a promise such as “Ms. Jones is the finest (CPA, financial planner, personal injury plaintiff attorney, whatever the case may be) in the area and always gets great results” can also create liability. So, another way to avoid exposure for a negligent referral claim is to always provide a minimum of two to three names and make no promises. Of course, suggesting the individual contact a referral service, such as a state or local bar in the case of attorney referrals, would be another way to go.
Next, be extremely cautious when making a referral to an officemate in an office-sharing situation. By their very nature office sharing arrangements create added vicarious liability for everyone in the space. Internal referrals just increase the risk. Here again, it’s important to give at least two to three names, one of which can be an officemate. If so, be certain to disclose that one of the names provided is an officemate, make no promises about that person, and be certain that the individual receiving the referral understands that the officemate is completely independent from you. Of course, never refer someone to an officemate who is uninsured or underinsured. This risk simply isn’t worth it.
The final issue concerns staff. Occasionally a firm will have a sound referral policy in place that all attorneys understand and follow yet some staff members may be completely unaware of the policy or the reason the policy is in place and thus not follow the rules in every instance. There is no ill will here, just an honest desire to try and see that clients and others get the best help possible. Their motivation is to provide good service. These staff will sometimes make a specific referral to an attorney or other professional whom they know and think highly of, blissfully unaware of the associated risks. For clients who are upset, staff may even try to reassure them by making certain “harmless” promises about the person they are referring someone to, for example, “Attorney X is a very good attorney and well respected by our firm.” This is not something you want to have happen for all the reasons discussed above.
In order to avoid this problem, make certain that all staff understand your firm’s policy and procedure for referrals and also the reasons why such a policy is necessary. Develop a referral list with three names for the various types of matters the firm will refer out and make it available to everyone in the office. If this list doesn’t cover a referral request, have the staff pass the matter on to one of the attorneys, politely decline by stating the firm does not make referrals, or have them recommend an appropriate referral service.
Authored by: Mark Bassingthwaighte Risk Manager
Since 1998, Mark Bassingthwaighte, Esq. has been a Risk Manager with ALPS, an attorney’s professional liability insurance carrier. In his tenure with the company, Mr. Bassingthwaighte has conducted over 1200 law firm risk management assessment visits, presented over 550 continuing legal education seminars throughout the United States, and written extensively on risk management, ethics, and technology. Mr. Bassingthwaighte is a member of the State Bar of Montana as well as the American Bar Association where he currently sits on the ABA Center for Professional Responsibility’s Conference Planning Committee. He received his J.D. from Drake University Law School.