Requiring lawyers only to disclose whether they have malpractice insurance can do more harm than good.

So, this is an issue that states continue to “struggle” with from time to time, and the latest I am aware of is Vermont. Michael Kennedy has alerted the public to a pending proposal in Vermont that is now out for public comment that would require Vermont lawyers to disclose on their annual registration statements whether they have or do not have malpractice insurance.

The problems I have with all of these kinds of proposals, including ones that go further and require lawyers to actually have malpractice insurance, are the focus of today’s post.

But, first, just to be clear, I obviously recognize that ideally all lawyers everywhere would recognize that having malpractice insurance is better than not having malpractice insurance and that there are likely far too many lawyers practicing who do not have any malpractice insurance. Also, I want to admit that — while almost all of the information is anecdotal – I have no doubt that most consumers of legal services just blithely assume that the lawyers that they retain actually have some form of insurance coverage.

While all of that is true, I have a strong opinions that trying to regulate and require it in the ways that states have tended to do is not a helpful approach to the issue and, particularly when all that is sought to be required is disclosure of coverage vel non, can actually end up hurting rather than helping consumers.

Here’s why I say that. Given that the predominant nature of lawyers’ professional liability insurance is that it is issued on a “claims made and reported” basis, I don’t think that making available to a consumer information about whether, during a discrete window in time, a lawyer has an available insurance policy actually provides useful information. The notion that a lawyer may have had coverage at a particular date in the past does not give any clear reason to believe that the lawyer has a policy in place for a time frame that is relevant to when an act or omission might have occurred nor whether it covers any particular conduct nor any information about whether the attorney has provided timely notice to make sure not to lose coverage for the particular set of circumstances. And, if we assume the consumers will make decisions about whether to hire a lawyer based on whether or not they might have insurance that could help pay for any mistakes, the disclosure could well be unhelpfully misleading.

Here is the moment where I admit that I am now hopelessly old, forgetful, and sadly self-referential. I just spent some time trying to find someone that had eloquently made the point more clearly about how this kind of requirement could be counterproductive and even misleading. In so doing, I found … I’ve already done this and forgot. Sigh. So, here’s a link to that post from what is now almost 7 years ago.

Admittedly, actually requiring lawyers to obtain and have in place malpractice insurance is not a failsafe solution either, but if the concerns expressed by the jurisdictions that require notice of status are really to be addressed, it is a remedy that comes significantly closer to addressing the concern than does merely requiring notice of status at a given snapshot moment in time.

Official dishonesty and the consequences for lawyers – 3 of the latest examples

A common theme in many disciplinary proceedings brought against lawyers involves dishonesty.  This should not really be a surprise given that lawyers are human beings and human beings have a tendency toward being dishonest when they can get away with it.  Although there is an ethics rule that, on its face, makes it unethical for a lawyer to engage in any kind of dishonesty at all, lawyers usually only get taken to task for a category I’ll call today official dishonesty.

One such type of official dishonesty involves failure to make full disclosure in connection with an application for admission in some other jurisdiction.  The consequences of this kind of official dishonesty can be severe as is demonstrated by the one year and one day suspension now being imposed on this Pennsylvania lawyer for failing to disclose prior discipline against him when he applied for admission to the federal court in the Eastern District of Pennsylvania.  As luck would have it, the lawyer’s failure to make disclosure involved a 1996 suspension, also of 1 year and 1 day, which was itself brought about by failing to disclose a prior arrest on his original application for admission to practice law in Pennsylvania.

Disciplinary proceedings are not, of course, the only negative outcome that can result from a lawyer engaging in official dishonesty or failure to make full disclosure.  Another kind of negative outcome, discussed before in this post, involves losing out on coverage from your insurer for legal malpractice/professional liability claims.  Law360 has the story of another lawyer who, already faced with defending a legal malpractice lawsuit, is now faced with having no coverage for it as a result of a ruling this month by the Indiana Court of Appeals.

The issue of misrepresentation alleged by the lawyer’s carrier is a common one – a claim, with the benefit of hindsight, that the lawyer was aware he faced a potential claim and should have disclosed such on a 2011 renewal application.  As is also often the story, the claim about which the carrier says the lawyer should have been aware is the same one now being litigated and about which the carrier has refused coverage.  In this instance, the lawyer’s client’s case had been dismissed as a discovery sanction and that dismissal was still on appeal in the Indiana system at the time the 2011 renewal application was completed by the lawyer.  The Law360 piece grabs the salient quote from the court of appeals ruling (which actually reversed a trial court that had sided with the lawyer’s argument that he’d made no material misrepresentation):

“Therefore, because of the severity of the trial court’s remedy – dismissal of the cause – any reasonable attorney in [the lawyer’s] position would realize that his client might pursue a potential legal malpractice claim against him should the Supreme Court affirm the trial court.”

For lawyers, there are quite a few ethics rules that are implicated by acts of dishonesty, RPC 3.3 (false statements to tribunals), RPC 4.1 (false statements to third parties), RPC 7.1 (false statements about the lawyer or their services) but the rule that has the broadest reach, and to which I referred at the beginning of this post, is RPC 8.4(c).

That rule says that “[i]t is professional misconduct for a lawyer to … engage in conduct involving dishonesty, fraud, deceit or misrepresentation.”  Unlike many other ethics rules, the text of RPC 8.4(c) does not limit itself to things done in the course of representing a client.  Figuring out what it does, and does not, actually apply to can be less than an exact science.  For example, I’m confident that I’ve never violated RPC 8.4(c) by telling my kids when they were young that Santa Claus was real nor by bluffing in a friendly game of cards.  But figuring out where the lines are realistically drawn on other issues of dishonesty unrelated to anything the lawyer is doing in the practice of la involves a case-by-case analysis, but if there is an “official” component to the dishonesty, you can count on RPC 8.4(c) finding a way to apply.

A Maryland lawyer learned earlier this month that the price of having been dishonest about something unrelated to his law license was disbarment.  The lawyer in question established an LLC called Carefree Construction Services within a few months after becoming a lawyer and then performed home improvement work through the LLC.  The lawyer, however, was not properly licensed in Maryland as a home improvement contractor and was actually using his brother’s license to do the work without his brother’s permission.

In its opinion, the Maryland court, citing another 2014 decision, expressly addressed the fact that the dishonest conduct had nothing to do with practicing law was of no consequence and that the conduct did violate RPC 8.4(c).  The court also explained that since the conduct involved a misdemeanor (performing the home improvement work without a license) that it considered the lawyer to have committed the kind of criminal conduct that violated RPC 8.4(b) as well.

The opinion also went to some length to explain that, in its totality, the lawyer’s conduct amounted to a violation of RPC 8.4(d) – conduct prejudicial to the administration of justice — and that determination also played a role in ramping up the discipline meted out.  The lawyer had filed a number of lawsuits for non-payment against home improvement customers who had learned of his unlicensed status and, as to one such set of customers, threatening them by email and “attempt[ing] to leverage his position as an attorney to intimidate” the customers into paying him more money.  One example quoted in part in the opinion, involves the lawyer, in an email exchange, with the dissatisfied and fully-informed customer, writing:  “Are you forgetting, I AM A CONSTRUCTION ATTORNEY.  There is nothing about construction law that you can learn on the internet that I am not an expert on.”

A reminder (for you) about the importance of coverage issues and (for me) that there is a second side to most stories.

This is an update on the California lawyer who successfully compelled arbitration of a client’s salacious claims that he treated her as essentially a “sex slave” that I wrote about here.

While I talked about that case as an example of the growing power of arbitration provisions in the arena of attorney-client contracts, I did not mention two things that could have, should have, been mentioned.  One was shortsighted in a way I strive not to be — which is that I failed at the time to acknowledge explicitly that nothing had been proven and that there may well be a second side to the story that the accused lawyer had not yet told.  The second thing I failed to mention was just an ancillary point at the time — the opportunity to note that if the lawyer had lost on the arbitration argument it might have meant he would be looking at his carrier claiming not to have to provide coverage.

A lawsuit filed in federal court by the lawyer’s carrier seeking a declaratory judgment and rescission of an insurance policy gives me an opportunity to address both things.  Law360 had an initial story about this that prompted me to find and read the federal declaratory judgment suit brought by the carrier.  Unlike your run-of-the-mill declaratory judgment suit, it makes for an interesting read.

In addition to arguing — relatively undaunted by the fact that court hearing the underlying suit decided the allegations arose from the attorney-client relationship — that there should be no coverage for the claim because it does not involve the delivery of any legal services, the declaratory judgment action seeks rescission of the insurance policy on the basis that the lawyer failed to disclose known circumstances that amounted to a claim, or could have amounted to a claim, at the time the firm applied for the insurance policy.

It is the carrier’s pleading setting out those circumstances that the potential second side to this lawyer’s story comes to the fore.

The lawyer and his law firm put in their application with their insurance carrier for coverage on January 12, 2015, resulting in a claims-made policy period commencing on February 28, 2015.  The insurance company fills us in on the fact that they have now learned that a woman – who may or may not be Jane Doe, the insurance company will not say definitively — had filed a bar complaint against the lawyer and that, in connection with that, back on March 25, 2014 the lawyer pursued a court ordered domestic violence restraining order against the woman.  The declaratory judgment action suit details 8 aspects of what was in the lawyer’s request for the restraining order that appear to indicate knowledge of a potential claim by someone that should have been disclosed in the insurance application, but was not.

  • The lawyer had a “dating relationship” with a woman described as an “ex-girlfriend” but the lawyer had “broken it off three times.”
  • The lawyer alleged the woman “had previously attempted to extort me.”
  • The woman had filed a bar complaint on March 20, 2014 that indicated she had quit being lawyer’s client because she “no longer felt [lawyer] was negotiating the best deals for me.”
  • The woman had demanded $40,000 and an apology from the lawyer and, in an email to her before the bar complaint, the lawyer agreed to pay $30,000 and make a written apology.  But then the woman said lawyer must go on a trip with her for 10 days or she would “go to the bar on me.”
  • The lawyer says the woman then made demands for sex.  And the lawyer had his lawyer send a “cease and desist letter.”
  • The woman then sent mass e-mails to other lawyers at lawyer’s firm with “false and malicious statements intended to hurt me professionally and personally, and damage my relationship with my colleagues, and in the entertainment community generally.”
  • According to the lawyer, the woman also said “we would be at war.”

In light of those accusations, made by the lawyer himself in court filing seeking a restraining order, and the fact that he was seeking to have a court bar the woman from coming within 100 yards of him, his home, and his workplace, the insurance carrier makes the point that, regardless of whether this woman happens to be “Jane Doe” or a different woman that the lawyer failed to disclose the existence of these circumstances, and the carrier seeks rescission of the insurance contract on the basis of the failure to disclose.  Of course, if the two women are really just one woman, then the insurance company’s argument seems significantly stronger.  The “Jane Doe” lawsuit filed against the lawyer started on April 10, 2015,

Yet, if the two women are really just one woman, then the flavor of the underlying lawsuit changes a good bit.  If the woman who filed the bar complaint is the same woman who has made the “sex slave” claims, then there is now a plausible basis for significant questions about the suit.  This second side of the story would merit watching — for while there would still be underlying ethical concerns for the lawyer in terms of having admitted had a sexual relationship with a client, this alternate version of events makes him seem a lot more sympathetic than the picture painted in the lawsuit — but the second side of the story may not play out publicly any time soon because … wait for it … lawyers for the firm (as explained in the Law360 article) indicate a belief that there is an arbitration provision in the underlying insurance contract and that the coverage dispute should be arbitrated.

Another wrinkle from that malpractice insurance coverage opinion

Earlier this week, I wrote about the scariness that can come with understanding another way that lawyers’ fates are tied together when they practice law in the same firm: one lawyer failing to disclose a known problem on a malpractice renewal application could lead to loss of coverage for all of the other lawyers in the firm.

Another interesting aspect of the Illinois State Bar Ass’n Mutual Ins. Co. opinion is how it sheds light on the potential futility of enacting an ethics rule (or other court rule) requiring lawyers to disclose whether they have malpractice insurance.  According to the chart maintained by the ABA, 7 states mandate lawyers make a disclosure directly to the client regarding whether they have malpractice insurance.  If such a requirement is ever to be imposed, that certainly seems like the preferred option, even if it overlooks that lawyers already are required by RPC 1.4 to communicate important information to clients regarding their matters and a number of different ethics rules (RPC 7.1, RPC 8.4(c)) would be violated by a lawyer not truthfully answering a question from a client or prospective client about whether the lawyer has coverage.  The ABA chart reflects, however, another 17 states mandate that lawyers disclose whether they have coverage or not on their annual registration statement (and most of those states also require the information from the annual registration statement be made available to the public).

Illinois is one of the 17 states requiring disclosure on an annual registration statement and that makes the information available for review on a public website.  Among the concerns expressed by the dissent over permitting ISBA Mutual to rescind the Tuzzolino & Terpinas firm’s policy is that not only would the “innocent” lawyer in this situation have been acting in reliance upon the idea that he had coverage and disclosed the existence of such coverage to comply with his obligations under the rules, but the clients of his law firm could have relied upon the regulatory regime in place — and the fact that the public information would indicate he had coverage — to mean that they were dealing with a lawyer with malpractice insurance.   After the rescission of the policy based on one lawyers’ lack of disclosure, however, the clients were not dealing with lawyers who had coverage after all.

Tennessee has not, to date, ever gotten very far down a path toward serious consideration of adopting such a disclosure requirement.  Telling consumers that they can go look on a state supreme court website to know if the lawyer they are dealing with has insurance coverage provides information only about a fixed point in time, of course.  There are a number of principled grounds for opposition to such efforts.   One is that since most malpractice policies are “claims-made” policies rather than occurrence policies making the existence of a policy less important for a client then knowledge of whether a notice of claim was timely provided.  Another involves the various ethics rules a lawyer would violate if a client, who cared about the topic enough to ask, was lied to by the lawyer.  It seems to me that the ISBA Mut. Ins. Co. case demonstrates another example of a way in which rules that require disclosure of coverage on an annual registration statement and publication of that information publicly could, despite the best of intentions, end up misleading consumers of legal services.

An unsettling insurance decision if you practice in a law firm of any size.

The month of April 2015 brought a declaration from a legal consultant that he anticipates seeing a 10,000 lawyer law firm within five years.  Trying to determine if there would ever be a law firm so big that from a conflicts perspective its operation was fundamentally unworkable might be an interesting intellectual exercise to undertake, but that’s not happening today.

Instead, I’m interested in a much more immediate, and scary, intellectual exercise: mulling the ramifications of a troubling insurance coverage opinion out of Illinois earlier this year holding that the failure of one lawyer of the firm to disclose a known client problem on a malpractice insurance renewal application meant that none of the lawyers of the firm had coverage.  Instead, the insurer was entitled to rescind the firm’s policy in its entirety.

The majority opinion in Illinois State Bar Ass’n Mut. Ins. Co. v. Law Office of Tuzzolino & Terpinas reads like a relatively straightforward application of insurance principles, including limits on how far protections for “innocent insureds” can go (not to questions of whether the actual formation of the contract should be undone) and basic contract principles that serve to justify rescission.  In as much as the decision is driven by one of the “partners” of the firm — Tuzzolino (who by the time of the decision had been disbarred) — failing to disclose a known dispute with a client that was likely to lead to a claim being made, a claim that was of large enough size that the insurer’s position that, had it been disclosed, the firm’s coverage would not have been renewed seems plausible, then, as unpleasant as the outcome may be for the innocent lawyer, Terpinas, and the client who won’t likely be recovering on his judgment against the firm, it doesn’t stand out as meriting much thought if you practice law outside of Illinois.

Reading the dissent, however, provides an unsettling glimpse into just how alarming the repercussions of this straightforward application of insurance law principles really are.  As the dissent speculates, the logic and rationale used by the majority, and the result in the case, would mean that lack of disclosure by one lawyer in a firm of 100 (or 10,000 for that matter) lawyers would obliterate coverage for all of them.  Lawyers who practice together in firms are likely more or less attuned to the many ways that their professional fates are tied inextricably with their colleagues, but the possibility that a decision by one of your colleagues to sit on knowledge about a mistake, or knowledge of a  seriously unhappy client who is set on doing something about their unhappiness, could result in rescission of your entire law firm’s malpractice coverage is not likely something you’ve spent much time thinking over.

The only slightly helpful thought for larger firms — and in turn for the “innocent” lawyers practicing in those firms — is that perhaps the end result would be different for a firm of much larger size than Tuzzolino & Terpinas even under the majority view.  As the size of the firm increases, one would expect the likelihood that the lack of disclosure of one claim could justify rescission of the policy altogether would decrease.  A more realistic (or maybe just an optimistic) analysis — in terms of what would constitute the status quo ante for a much larger firm with one undisclosed claim — is that, if the existence of the potential claim had been disclosed, the insurer would still have renewed the firm and provided coverage but just at a higher cost to the firm in terms of premium, deductible, or self-insured retention (or perhaps as to all three).