Risky Business - Some Thoughts on Legal Malpractice Insurance

Reprinted from:
Published 2/07

Malpractice is a predominant concern for the profession, and more so for small firms and independent practitioners. Mandatory disclosure of malpractice liability insurance is a growing trend and with that comes increased risk of a malpractice suits. This article investigates these recent trends in malpractice insurance and provides preventative measures you may take to avoid malpractice.

Lawyers in most states face mandatory requirements to join the state bar association and to undertake a certain number of continuing legal education hours. Now there is a growing trend to make lawyers disclose - whether at the time of engagement, on their web sites or in some other way - whether they carry malpractice liability insurance. The ABA's House of Delegates approved a mandatory disclosure rule in 2004 and nearly 20 states have adopted disclosure rules that either disclose evidence of malpractice insurance to the public or place it on file with the state bar. A public interest group, HALT, advocates making mandatory disclosure nationwide.

Who Is At Risk?

Malpractice allegations are obviously a major concern for the profession. In my home state of California (which is likely to put mandatory disclosure rules into practice this year), lawyers spend 80% of their dues each year to support the State Bar's disciplinary system. Typically these complaints are not over gross malfeasance such as misappropriation of trust funds. To the contrary, over half of disciplinary actions involve clients' allegations of practice management failings: poor service, unreturned phone calls, inaccurate arithmetic on the billing statements and so on. Malpractice actions often are based on the same failings.

Because such conduct is so prevalent, malpractice insurance is expensive. The least costly annual premiums for experienced lawyers range from $4,000 to $7,000 per lawyer. It's not surprising that this burden falls heaviest on small firms and solo practitioners. In California, where one-quarter of all lawyers earn $50,000 a year or less (an income level that is beyond many sole practitioners in other parts of the country), nearly 20% of lawyers lack malpractice insurance coverage. A recent survey in Illinois showed that 20% of all lawyers - and 40% of solos - similarly lack coverage.

Mandatory malpractice disclosure will likely have little impact on large firms. They already carry malpractice insurance and are not concerned that their clients will worry about coverage. However, for a firm of any size, placing this issue in the engagement agreement will raise the consciousness of clients to the potential for malpractice and cause an increase in litigation against lawyers. Since the lawyer mentions coverage, why not sue? The assumption is that any settlement or damages will come from the lawyers' malpractice insurer.

Are There Malpractice Red Flags?

The bottom line is that every lawyer, even the most competent and conscientious, faces the risk of a malpractice lawsuit. The truth is that certain red flags indicate a greater risk of being sued.

Areas of Practice

Personal injury litigation practice accounts for about one-third of all malpractice claims. Add the related area of medical malpractice claims and the percentage is even higher. The reasons for that are simple. If the personal injury lawyer misses or misreads the applicable statute, the liability is clear-cut and irrevocable. And if the attorney misses the statute, the client can always claim, with 20-20 hindsight, "the jury would have given us a big award." The single most important protection for the attorney against such a claim is to document everything that goes into the analysis and communication process - every letter, every staff contact, every phone call. If you can demonstrate that you were on top of things, the client can't prove otherwise.

Difficult Clients

Clients who should be suspect as prospective sources of malpractice litigation can often be identified when discussing the engagement letter. Think twice about clients who:

  • Will not discuss or agree on fees, or will not sign a fee agreement or pay a retainer.
  • Insist that their matter is "life and death" and thus can initiate minute emergencies that may result in errors under pressure.
  • Use pressure tactics to urge that their matter be handled first once the engagement begins.
  • Demonstrate a negative or know-it-all attitude toward lawyers and the judicial system.
  • Cannot articulate what they want you to achieve.
  • Have employed two or more lawyers before you on the same matter.

Technological Incompetence

Lawyers who do not use at least the minimum amount of technology may be committing malpractice per se. One of the Rules of Professional Conduct requires that a lawyer be competent to handle a given matter. And one criterion for competency is the standard of care in the local community. Facing lawyers who are significantly more sophisticated in the use of technology may set a standard of care against which you are measured. If you don't use technology effectively for research, file management and the like, you may be perceived as willfully less competent than your competitors. And that's malpractice.

Lack of Communication

A study several years ago contended that doctors talk three minutes longer with their patients (clients) than other professionals (lawyers) and that doctors are sued less than lawyers. This may be extreme, but it is true that the focus of the conversation between a professional and a client should be to understand the intent and desires and wants of the client. Only then will you know the services required. If you inform the client (so the client understands clearly) what to expect, there is far less likelihood of a malpractice claim.

Special Appearances

There can be a real malpractice problem when an attorney makes a special court appearance on behalf of another lawyer. This generally occurs in smaller communities, but quite a few attorneys in major metropolitan areas routinely make appearances for other lawyers as a professional courtesy and source of income to help out with a schedule conflict or to handle a routine matter. The lawyer who engages the contract "pinch hitter" becomes responsible - in a malpractice sense - for any errors committed even in a seemingly simple case. This may seem obvious. But court decisions have also upheld malpractice findings in the reverse situation, where the attorney making the special appearance becomes liable for the errors of the primary lawyer or even of other lawyers who made previous special appearances.

What Can Be Done?

In recent years the perception has grown that a primary purpose of Bar Associations is to protect the public. Such thinking shapes the primary argument about legal malpractice disclosure: it is in the best interests of the public to know this information. There is really no good answer as to why. There is no reporting requirement to disclose auto, fire, liability, homeowners or other insurance premiums. Why is malpractice insurance different?

If Bar Associations really cared about "the public good," they would take two important steps: educate the public about what malpractice insurance costs add to their legal bills and make affordable malpractice insurance available to all lawyers. State bar associations should communicate the complexities of the malpractice insurance industry and work with the insurance industry to create affordable malpractice insurance coverage.

The best example of what can be done is the state of Oregon's Professional Liability Fund, which is the mandatory provider of primary malpractice coverage for Oregon lawyers. Since 1978, the Professional Liability Fund has provided coverage of $300,000 per claim/$300,000 aggregate to all attorneys engaged in the private practice of law in Oregon. In 2006, the basic assessment for this coverage was $3,000 for each attorney. The coverage provided by the Fund is on a "claims made" basis. Note that the assessments are much less than the nationwide average payment for malpractice insurance and that all lawyers are covered. The playing field between large and small firms is at least manageable. And the public is truly protected.

If mandatory disclosure of malpractice insurance is to be a nationwide trend, there should be no insurance disclosure requirement without enabling lawyers to obtain affordable malpractice insurance. The Oregon model shows that it can be done. The alternative imposes an unaffordable malpractice insurance burden on the majority of lawyers who can least afford it.

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