Is Mandating Disclosure in Your Fee Letter That You Do Not Carry Malpractice Insurance a Sound Idea?
by Rodney Snow
The Utah Bar Commission meeting was progressing quite nicely. It was my first experience. George Daines was professional, pleasant and organized as he kept the meeting moving through the agenda. While there was discussion, there was little controversy until the new proposed amendment to Rule 1.4 was disseminated, requiring attorneys who carry less than $100,000 in malpractice insurance (hereafter MPI) to disclose that fact in their fee letters. To say that a lively debate ensued is an understatement. I was impressed at the breadth of the Bar Commission's work and the professional manner in which it was being accomplished. I also noted that all points of view were presented and well argued. Based on the discussion, it became clear that the policy behind the proposed change is to encourage all attorneys to carry MPI. As part of the discussion, I voiced some concern regarding the proposed change to Rule 1.4. I have now been 'invited' to present the loyal opposition to the proposed amendment.
I have defended a number of attorneys who have been sued for professional negligence in the last several years. A few of those cases have involved millions of dollars in alleged damages. I am convinced that lawyers engaged in the private practice of law should carry malpractice insurance. It is not only that we might make a costly mistake, it is also that we may get sued even though we did not commit an 'error or omission.Ó Lawyers get dragged into litigation as defendants in a variety of surprising ways. When the onslaught of attorney malpractice suits began in earnest some twenty years ago, a representative of the insurance industry remarked, 'the lawyers are eating themselves.Ó Whether sued for good cause or otherwise, your clients, the public and you will be well-served if you have the protection of MPI. The debate surrounding the proposed change to Rule 1.4 is not about whether it is a good idea to carry MPI. It is definitely a good idea. Rather the debate is about the need and efficacy of requiring, as an ethics rule, disclosure in a fee letter that you do not carry MPI.
The ABA Standing Committee on Client Protection has been wrestling with this concept for several years. A proposal similar to the Utah Bar's current suggested amendment was made by the Client Protection Committee in 2002, but was never brought before the House of Delegates because it received such a tepid response from state and local bar associations. See, Nicole D. Mignone, The Emperor's New Clothes?: Cloaking Client Protection Under the New Model Court Rule on Insurance Disclosure, 36 St. Mary's L. J. 1069, 1075 (2005). However, in 2004, the ABA House of Delegates did adopt 'The Modern Court Rule on Insurance Disclosure.Ó This rule is generally referred to as the Modern Insurance Rule. This rule requires that members of the Bar report to the highest court in their respective state whether they carry MPI and/or if such insurance has been terminated. The Court (presumably in conjunction with the Bar) is to then determine how this information is made available to the public. This year the Utah Bar requested this information as part of the licensing procedure, on a voluntary basis. Some have suggested that perhaps as many as 50% of private practitioners in Utah do not carry MPI. We should await the outcome of a survey of the current licensing applications to see if this figure appears accurate, otherwise we have a proposed solution chasing a problem that may not exist.
Interestingly, the ABA Professional Liability Committee and ABA Tort Trial and Insurance Practice Section criticized the Modern Insurance Rule. Their claim is that advising a client or the public that an attorney has insurance could well be misleading. Insurance and coverage, they point out, are two entirely different concepts. Id. at 1084-1085. This rationale also has some application to the pending proposal in Utah. Allowing a client to presume an attorney is insured because lack of insurance has not been detailed in the fee letter or agreement may mislead the client into a false sense of security. Most policies today are 'claims madeÓ contracts; that is, coverage exists for the year in which the claim is made. This does not mean there will be coverage in a later year for a mistake made in a earlier year. Moreover, some attorneys (let alone clients) do not fully understand the extent of their coverage. The existence of MPI does not necessarily mean a client has coverage for a particular claim. Thus, disclosing that you do not carry MPI may be an unfair and useless exercise since 'coverageÓ for an insured attorney may be inadequate under a variety of circumstances.
Other reasons have been advanced for and against a disclosure requirement by several commentators. See, James E. Towery, The Case in Favor of Mandatory Disclosure of Lack of Malpractice Insurance, 29-Fall Vt. B.J. 35 (2003) and authorities cited therein. Edward C. Mendrzycki, who chairs the ABA Standing Committee on Lawyers' Professional Liability, writes against mandatory disclosure as part of the Towery article referenced above. Mr. Mendrzycki argues, as noted above, that clients will be misled in the first instance by just the concept of MPI. An early discussion with clients as to what your coverage may include and what appears to be excluded, and whether your insurance company will file a declaratory judgment action to attempt to avoid coverage, hardly seems practical or productive. As one of our colleagues joked, 'maybe we should just attach a copy of the policy to the fee letter.Ó Disclosure of your experience and knowledge of the area for which you have been engaged seems more productive and would be consistent with the requirements of the existing rules.
Of course some clients may ask about MPI. When that happens we would be well advised to make adequate disclosure of our coverage, in writing. A caveat that you make no warranty as to whether the carrier will acknowledge the validity of any particular claim might also be considered.
Mr. Mendryzycki also postulates that our ethics rules exist as guidelines to protect clients from potential abuse by lawyers. The abuse prohibited by the ethics rules is generally not insurable negligence. Using the ethics rules to force disclosure of a lack of MPI is at least arguably not addressing an ethics problem.
Mr. Mendryzycki argues that a disclosure rule will work a distinct disadvantage to those lawyers whose practices function on a limited budget or on a part-time or restricted basis. The rule could impair attorneys (and therefore their clients) who offer services to underserved segments of our society because they can do so inexpensively. While one might argue that those in our society who can not afford counsel are certainly entitled to an insured lawyer, generally such people are not looking for an attorney who carries insurance. They are happy to hook up with any attorney who is willing to help provide some assistance.
Other concerns articulated by the commentators and bar members opposing mandatory disclosure of not carrying MPI include:
1. The cost may be prohibitive or will result in an increase of fees to clients who can least afford the increase.
2. Such a disclosure could potentially impose unfair negative connotations regarding an attorney's competence. We are not aware of any empirical data that suggests that insured attorneys are more competent than those who are not insured, although most insurance companies require law firms to establish polices and procedures that tend to minimize claims.
3. The slippery slope of compelled disclosure could result in additional restrictions on the ability to practice. Once the Bar starts requiring written revelations, where will it end? 'I have insurance but I did get sued last year.Ó Or, 'I have a good track record but I did lose my last two cases.Ó Or, 'we dropped the amount of coverage we carry because we could not afford higher limits.Ó The rules as they now exist require a candid appraisal and perhaps disclosure of our expertise and experience in the area for which our advice or services have been sought. No objection. Mandating MPI insurance and related written disclosures may open the door to a future regulatory morass.
4. Some have expressed the concern that if MPI becomes a de facto ethical requirement, the insurance industry will become the regulators of our noble profession.
5. There does not appear to be any empirical data on unrecoverable losses from uninsured attorneys to support the arguments of the proponents of the amendment.
6. Finally, disclosure of insurance or a lack thereof may encourage clients to seek out insured attorneys, which may result in an increase of litigation.
We have mandatory CLE. Our Rules require that we represent clients competently, diligently and free from conflict of interest. They require communication with the client and disclosure regarding fees, confidentiality and expertise. They have served us well. I would prefer to adopt the ABA Modern Insurance Rule, with clarification as to how this information will be available to the public. While we need to find better ways to encourage all attorneys in private practice to carry MPI, it is my view that the disclosure rule may not be the best approach. It deserves at a minimum more discussion and thought, if not a slow death.