States warm to the disclosure of liability coverage
Posted Nov 1, 2009 8:00 PM CDT
By Richard Acello
Rules requiring attorneys to disclose whether they carry liability insurance are rapidly becoming, well, the rule.
As of Aug. 27, 25 states (PDF) had some form of liability disclosure requirement, reports the ABA Standing Committee on Client Protection.
While that number represents only half the states, it also signifies the rumblings of a trend that can be traced to 2004, when just nine states required such disclosure.
But that year the ABA House of Delegates approved a model court rule (PDF) that, if adopted by a state, would require lawyers in private practice to report on their annual registration statements whether they carry insurance. The ABA rule exempts government lawyers and lawyers who exclusively represent organizational clients, as well as those not engaged in the active practice of law. The rule also provides for administrative suspensions for lawyers who fail to comply, but such a failure would not be reported as a disciplinary offense.
Five years later, 18 states have adopted the ABA rule. Seven others—including New Mexico and California, the two most recent states to adopt insurance disclosure rules—require that disclosure be made, not with annual registration, but directly to clients. Insurance disclosure requirements are under consideration in another four states.
But even as more states adopt some form of insurance disclosure requirement, a rule mandating that lawyers carry liability insurance continues to be “a bridge too far” in all jurisdictions but one: Oregon.
Malpractice insurance has been mandatory in Oregon since 1977, when the legislature passed a statute, with the endorsement of the state supreme court, authorizing the state bar to implement the requirement and create a wholly owned subsidiary to sell coverage to the state’s lawyers. (Practicing lawyers in Oregon must be members of the state bar.)
Lawyers must purchase a policy from the bar’s Professional Liability Fund that provides coverage of $300,000 both per claim and in the aggregate, according to Jeff Crawford, the fund’s director of administration. More than half of Oregon’s lawyers also buy excess coverage. Lawyers in smaller firms tend to purchase that coverage from the state fund, while larger firms often purchase it on the outside market. “The vast majority of lawyers are very happy with the system,” Crawford says.
The creation of Oregon’s mandatory insurance system was a “serendipitous action” that came together during one of the insurance shortages that occurred during the 1970s and ’80s, says Crawford. “It’s an appropriate model for a smaller state,” he says, “but I’m not sure it works as well for a larger, more diverse state, where it might be very difficult to get all the stakeholders together.”
The experiences of other states appear to support that view.
A mandatory insurance system was considered by the Washington State Bar Association in 1987, but it was voted down 4 to 1 by the membership. “People in Washington don’t like the word mandatory much,” observes Robert D. Welden, the bar’s general counsel. He chaired the ABA’s Client Protection Committee during its efforts to win approval from the House of Delegates for the model disclosure rule.
In 2008, a mandatory insurance proposal suffered a similar fate in Virginia, which follows the ABA’s model disclosure rule, says James M. McCauley, ethics counsel for the Virginia State Bar.
“The proposal died in our state bar council,” says McCauley, who serves on the ABA Standing Committee on Ethics and Professional Responsibility. Among the arguments made by opponents of the proposal was that “Oregon was the only state that had implemented it, so the other states didn’t find it necessary,” he says. “Also, in Virginia, 80 to 90 percent of members certify that they have malpractice insurance, so we already have voluntary compliance.”
But while Oregon is the only U.S. jurisdiction that requires practicing lawyers to carry malpractice insurance, Canada applies the mandate to all its full-time private practitioners.
“There’s been no resistance to it,” says Su Forbes, program administrator and claims counsel of the Lawyers Insurance Fund of the Law Society of British Columbia. “The mandate is to protect the public interest and regulate the conduct of lawyers to ensure that they have insurance to protect themselves, but also plaintiffs in the event that they made a mistake that caused the plaintiff loss, so it was very much with the public service aspect in mind that this came in.”
The LSBC is the only provincial bar group to operate its own insurance fund, according to Forbes. “The plan works exceedingly well,” she says, “because when you insure all the lawyers in the jurisdiction and when your motive is not a profit motive you can actually provide coverage at a reasonable price—certainly more reasonable than general commercial insurance can provide.”
In addition to keeping premiums down, Forbes says, “you can also tailor the coverage to suit the environment. You can pick up the risk you want to pick up; you can exclude the risks you want to exclude. We control the policy wording, coverage and pricing. You can also do a lot of loss prevention and risk management with the info you collect on claims, and you can assist the profession to manage the risk of practice to avoid claims.”
RUNNING AROUND NAKED
In the United States, meanwhile, even the less-drastic malpractice insurance disclosure requirements continue to stir controversy.
Welden recalls that the ABA’s Client Protection Committee unsuccessfully floated insurance proposals twice before it hit on a disclosure formula that would pass the House of Delegates—and even then, it just squeaked by in a 213-202 vote. Proponents acknowledged that disclosure doesn’t necessarily mean that coverage is adequate.
Many opponents maintain, for instance, that disclosure requirements actually might mislead clients as to the type of coverage a lawyer carries, as well as its limits and exceptions. And generally, the rules don’t require lawyers to furnish their clients with that kind of information.
A bit of “don’t tread on me” attitude may be at play, as well. “The profession tends to look at this as ‘Something is being done to me’ rather than ‘This is something we’re doing together,’ ” Crawford says.
Some lawyers, especially practitioners in smaller firms, question whether they’re really better off carrying malpractice insurance. Some experts agree that “going naked” can be an effective strategy for avoiding lawsuits, but it comes at the cost of protecting the interests of clients.
Robert Fellmeth, executive director of the Center for Public Interest Law at the University of San Diego School of Law, estimates that 20 percent of lawyers in California run naked, with no coverage at all.
“When you run naked it means you’re immune—no one’s going to sue you. Malpractice attorneys don’t sue attorneys who don’t have coverage. What’s the point of getting a judgment and you don’t know whether you can execute on it? Attorneys know how to hide assets. If you’re a marginal practitioner, it pays to go naked. So the consumer has no recourse, and it’s a disgrace.”
In June, Texas joined the short list of states—the others being New York, Utah and Vermont—where insurance disclosure requirements are under consideration.
The Grievance Oversight Committee of the Texas Supreme Court has recommended that the court incorporate insurance disclosure into the state’s rules of professional conduct. The proposed rule would require practicing lawyers in Texas to disclose to new clients if they do not have liability insurance in amounts considered satisfactory by the State Bar of Texas. Last year a state bar task force voted 6-5 against recommending a disclosure rule.
While the Texas disclosure proposal is expected to trigger debate, in general, tensions over insurance disclosure requirements tend to ease once they’re in place.
In Alaska, for instance, there have been few complaints from lawyers about a disclosure rule adopted in 1999 that is essentially the same as the one proposed in Texas, says Stephen J. Van Goor, counsel to the Alaska Bar Association. “There was more complaining about having to have fee agreements for fees over $500,” Van Goor says. “There’s general agreement that the rule is important for client protection.”
Slow But Steady
Oregon is likely to remain the only state that requires practicing lawyers to carry professional liability insurance for some time to come.
Meanwhile, the number of states that require lawyers to disclose whether they have insurance is gradually rising.
Here’s the breakdown as of the end of August:
Disclosure required on annual registration statement: Arizona, Colorado, Delaware, Hawaii, Idaho, Illinois, Kansas, Massachusetts, Michigan, Minnesota,Nebraska, Nevada, North Carolina, North Dakota, Rhode Island, Virginia, Washington, West Virginia
Disclosure to client required: Alaska, California, New Hampshire, New Mexico, Ohio, Pennsylvania, South Dakota
Disclosure requirements proposed: New York, Texas, Utah, Vermont
Liability insurance mandatory: Oregon
Source: ABA Standing Committee on Client Protection, “State Implementation of ABA Model Court Rule on Insurance Disclosure,” Aug. 27, 2009.