Claim of interest: scope of engagement letters
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On the claims side, we settled a complex and high exposure matter, which sadly, could have been mitigated by a simple scope of engagement letter.
Our insured represented a developer/owner in the refinance of a restaurant group. Our insured previously represented this client, who had been a friend of his for many years, in matters relating to the subject restaurant group and beyond. Unfortunately, our insured never implemented any engagement letters, scope of representation letters, nor disengagement letters for this client. After working with his client/friend for many years, the two trusted one another and all work generally related to his friend's restaurant empire.
During the subject transaction, and at the request of his friend, our insured agreed to also represent the private lender. No one wanted to hold up the deal, and it appeared to be a straight-forward refinance. The parties, including the buyer's attorney, orally agreed upon our insured's role.
Unfortunately, our insured's client ultimately defaulted on the multi-million dollar loan, and title issues on the property became apparent. While our insured advised us that his role never contemplated to involve the title search aspect of the closing, the group did not memorialize his specific role.
As a result, the lender sued not only his attorneys and the borrower, but also our insured. Cross claims ensued against our insured. Allegations greatly exaggerated his role. In addition, other related lawsuits involving the parties and the title company arose. All parties, including our insured's client, now being represented by new counsel, pointed to our insured. Because of the lack of written evidence regarding the scope of the retention, liability was a factual dispute.
LESSON: Regardless of whether your client is a friend or not, utilizing scope of engagement and disengagement letters potentially prevents or mitigates a claim against you. Under the heat of a mistake, with other attorneys involved, there is always a risk that your friend may blame you for the mistake. A friend will especially appreciate you clarifying everyone's relationship, as this helps protect all parties involved. Please visit our risk management website for some samples of these letters.
2024 Copyright Swiss Re Corporate Solutions
2024 Copyright Swiss Re Corporate Solutions
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