Avoiding Accountability: The Rise of Mandatory Legal Malpractice Insurance and Disclosure

We, as lawyers, are a self-regulating profession. With this self-regulation comes accountability, to our clients and the public. Lawyers have a responsibility to ensure that consumers of legal services are financially protected if a mistake is made.

Two states have ensured this protection through mandatory legal malpractice insurance, while twenty-four states require some form of insurance disclosure, either to the client or to some regulatory unit.

But these measures of public protection have been met with resistance by many members of the bar. A panel at the 2018 Fall Legal Malpractice Conference in Las Vegas, Nevada, considered these issues and discussed the motivations and consequences of mandatory malpractice insurance; as well as the arguments for and against it, which states have adopted it or some form of disclosure requirement, and the various proposals being considered by several states.

The Rise of Mandatory Legal Malpractice Insurance

The panel was moderated by Randall Miller, Principle and Chair of the Mandatory Insurance Working Group of the State Bar of California. Miller noted that Oregon was the first state in the U.S. to require its attorneys to maintain professional liability insurance. The program started in 1977 out of mostly necessity. At that time, there was an “insurance crisis” and no available error and omissions insurance for attorneys, Miller said.

Another panelist, Carol Bernick, Chief Executive Officer of the Oregon State Bar Professional Liability Fund, discussed Oregon’s program. Bernick explained that the Oregon State Bar Board of Governors created the Professional Liability Fund (PLF) in 1977 pursuant to statute and with approval of the members, which is a single provider of malpractice insurance for all Oregon lawyers. Bernick explained that with limited exceptions, any lawyer in primary practice in Oregon--approximately 7,200, according to Bernick--must contribute to the PLF, and the cost is $3,300 per year regardless of claim history. In return, the lawyers receive an insurance policy with no deductible and coverage in the amount of $300,000 per claim/aggregate plus an expense allowance.

Oregon was the only state to mandate legal malpractice insurance until last year when the Idaho Supreme Court adopted a similar requirement that went into effect in 2018. Idaho operates on the open market model, meaning unlike Oregon where there is a single entity providing the insurance, the same insurance carriers doing business in that state will continue to write the policies, Miller said. Another panelist, Linda Katz, Principle Analyst for the State Bar of California, explained that as of the beginning of this year, all Idaho attorneys who aren’t in-house counsel are required to submit to the Idaho State Bar proof they maintain the minimum amount of insurance. Katz said the rule passed in Idaho by a slim margin, with just 51% of the members in favor.

Several states are following the lead of Oregon and Idaho and are currently considering mandatory legal malpractice insurance, most notably California and Nevada. There have been many attempts in California to adopt a mandatory insurance requirement similar to that of Oregon, but such efforts have largely failed, Miller said. In fact, California passed legislation in 1977 and 1978, to require mandatory insurance, but Governor Jerry Brown vetoed it, largely because the members of the California bar opposed the idea.

Roughly four decades later, California is at it again. California just recently passed legislation requiring the State Bar Board of Trustees to conduct a study relating to lawyer regulation, including the idea of mandatory insurance or making the disclosure requirements more robust, Miller said. Pursuant to this legislation, a committee was formed that included Miller and Katz, among others. That committee is about half way through the study with results expected next year.

Nevada is also considering mandatory malpractice insurance. Panelist Richard Pocker, the Nevada State Bar President and Administrative Partner at the Nevada law firm Boies Schiller Flexner LLP, discussed his role in working to implement mandatory malpractice insurance in Nevada. The mandatory malpractice discussion in Nevada arose in 2017 after a single prominent plaintiffs’ attorney wrote to the Nevada State Bar and noted that he had been approached by several clients with valid personal injury claims that were lost due to the conduct of uninsured lawyers. Although this letter was met with skepticism, Pocker stated that upon further study they determined that action needed to be taken to protect the public. A task force was formed to study and survey the issues which resulted in a recommendation to amend the bar rule to require attorneys to maintain $250,000 in private insurance coverage. This proposal was submitted in June of 2018 to the Nevada Supreme Court and is still under advisement.

However, because this proposal was met with great opposition by members of the bar, Pocker anticipates the proposed amendment will be denied. If the proposal is denied, Nevada would join the likes of New Jersey, North Carolina and Delaware, three other jurisdictions to have considered but rejected mandatory malpractice insurance.

The Arguments for and Against Mandatory Malpractice Insurance

Those states that have adopted mandatory malpractice insurance have done so to protect the public. Susan Fortney, Professor and Director of the Program for the Advancement of Legal Ethics at Texas A&M University School of Law, emphasized that the law should provide a remedy for those injured by improper lawyer behavior.

Fortney was adamant that lawyers should accept financial responsibility for their misdeeds and shouldn’t be allowed to shift the loss to consumers who have relied on those professionals. The people that are most impacted by the lack of insurance and in the least position to protect themselves, Fortney noted, were the personal service consumers who go to solo practitioners and small firms. The victims of optional insurance are the clients who have no remedy when their lawyer make mistakes. Miller said that while public protection is central, the committee studying the issue in California has struggled to find evidence of whether the uninsured lawyers are committing malpractice. “We all know it happens, but we are looking for proof,” Miller said. But Fortney suggested that the effects of uninsured lawyers are real, noting that while many disclaim any evidence, she believed that there were more than $10 million a year in damages associated with uninsured lawyers, citing scholarly sources.

Public protection isn’t the only argument for mandatory malpractice insurance. The panelists also discussed how requiring mandatory insurance will prevent damage to the legal profession because when uninsured lawyers aren’t held accountable for what they do, the standing of the profession is diminished. Miller called this “lawyer accountability” and asked the panel whether lawyers are morally obligated to take the “honorable path.” The panelists agreed that this obligation exists and could be satisfied through mandatory insurance. Fortney noted that mandatory insurance will lead to greater lawyer competence because more lawyers will be trained on risk management. Those for mandatory insurance have also argued that responsible lawyers who maintain insurance shouldn’t have to bear a disproportionate amount of responsibility in the event that they are joint defendants in a lawsuit simply because the plaintiff views them as the source of recovery.

Not surprisingly, the efforts to impose mandatory malpractice insurance have been met with lawyer resistance. Pocker discussed this opposition at length as it related to Nevada’s effort to implement mandatory malpractice insurance, noting that the majority of attorneys responding were “overwhelmingly opposed to the idea.” Those opposing mandatory malpractice insurance argue that it is cost prohibitive and that if they couldn’t afford it, or if they were for some reason denied coverage under an open market model, then the private insurance market and not the bar would determine who could practice law. Those opposing the idea argue that if insurance was mandatory, the number of claims would increase.

As to the expense argument, Fortney discussed a study out of New Mexico where more than 40% of lawyers who indicated they were uninsured because of cost also indicated that they had never actually applied for insurance. “They didn’t know what the cost was, but they were willing to say that cost is the reason they don’t have insurance,” Fortney said. Fortney acknowledged what she called the “elephant in the room” argument that high-risk attorneys may not be able to obtain insurance in the open market but indicated that this problem could be solved with a shared risk pool like the model implemented in Oregon. Fortney also noted that after the mandatory insurance rule went into effect in Idaho, no lawyer who sought insurance in the public market was turned down. An audience member commented that in his 28 years of writing insurance for lawyers, not one of his clients were ever denied coverage by an insurance carrier.

The panelists acknowledged that mandatory insurance may increase the frequency of claims but questioned whether this increase would be a bad thing. In discussing Oregon’s model, Bernick attributed the higher frequency of claims to several factors, including liberal claim assignment, and claims being filed that were mistaken for bar complaints. Fortney, on the other hand, said she was not “particularly persuaded” that the frequency of claims would go up if there was mandatory malpractice insurance. Regardless, even if the number of claims increased, the rise could be attributed to clients filing legitimate claims knowing that there is a recovery, Fortney said. The panelists seemed to agree that despite this lawyer resistance, the public is deserving of protection through mandatory malpractice insurance.

The Middle Ground

As an alternative to mandatory insurance, 24 states have taken a middle ground approach that requires lawyers to disclose either directly to the client (direct disclosure) or to some regulatory unit (indirect disclosure) whether they maintain professional liability insurance. The panelists generally discussed these disclosure requirements, which vary from state to state. For instance, in California, if an attorney does not have insurance, they must disclose this fact to the client at the time of engagement. Another example provided by the panel was South Dakota, where if a lawyer does not maintain professional liability insurance, this fact must be disclosed to the client on letterhead in every communication with the client. Those states which require indirect disclosure usually require the lawyer to disclose to the state bar on their annual registration whether they maintain professional liability insurance. Some of these states make this information available to the public while others don’t. Five states, including Arkansas, Connecticut, Florida, Kentucky and Texas, have decided not to adopt a rule on insurance disclosure and one state, North Carolina, withdrew its rule completely.

The panelists noted that the need for mandatory insurance disclosure is to clarify the misconception that lawyers, as professionals, are required to maintain liability insurance. But Pocker noted that it is difficult to generalize what the public thinks. Pocker discussed a focus group that he conducted wherein he polled educated members of the public on whether they would ask an attorney if they had insurance prior to hiring them. Pocker noted that the responses were “unusual.” While some indicated that they assumed all lawyers were insured, others indicated that they would be afraid to ask about insurance because it may give the lawyer the impression that they were going to sue them. Others said they did not want to ask because if the attorney said yes, they would lose confidence in the lawyer and believe that the attorney lacked competence. Pocker emphasized, however, that if insurance is mandated, no one would pass judgment one way or the other. Instead, the public perception would be achieved.

Finally, the panelists noted that mandatory disclosure was largely enacted to protect consumers and future clients. Those states which require direct disclosure argue that a client has a right to be fully informed about all material facts concerning the representation, which of course flows from those rules of professional conduct requiring attorneys to be completely candid with their clients. Not surprisingly, the panelists noted that in the states in which disclosure is mandatory, the number of lawyers who maintain malpractice insurance has increased. In other words, more clients are protected if their lawyers make a mistake. At the end of the day, the message of the panel was clear: despite lawyer resistance, mandatory insurance and disclosure rules are necessary to protect the public and provide accountability. As lawyers, can we really argue that this is a bad thing?