Lawyer, Know Your Safety Net: a Malpractice Insurance Primer for New and Experience Lawyers
| Publication year | 2013 |
| Pages | 23 |
Lauren Schultz and Michael Hunter Schwartz.
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I. Introduction
Any reasonably competent lawyer knows how to file claims, construct arguments, and represent clients, but few lawyers have been trained to or have even thought extensively about how to protect themselves from client claims against them. As detailed below, claims against lawyers for malpractice happen all the time and are steadily increasing. Even a single claim can cause the loss of one’s savings or job, a suspension from practice, or a disbarment. Years of education and a carefully-constructed professional reputation can disappear faster than kibble served to a hungry dog. In fact, clients (and even non-clients) may bring malpractice claims whether the lawyer made a mistake or not. Consequently, while careful practice habits may decrease the likelihood of malpractice claims, it is not wise to rely on care alone. Nearly all, if not all, large firms and the majority of small firms and solo practitioners, choose to purchase malpractice insurance.[1]
While Oregon is the only state that requires lawyers to purchase malpractice insurance, many states require lawyers to disclose, either to their clients or to the state bar, whether they carry malpractice insurance.[2]
Given all those factors, it is surprising how little most lawyers know about the coverage a malpractice insurance policy provides. Most lawyers just assume that their firms or insurance agents will choose the right policies for them. Because the stakes are so high, the logical choice is for lawyers to be proactive and well-informed on insurance policies.
This article offers a short manual on malpractice insurance. It provides a brief description of what constitutes legal malpractice and describes the lawyer errors that most frequently result in malpractice claims; explains the common terms, exclusions, and conditions in malpractice policies; summarizes the process by which insurers set premium rates; and concludes by suggesting some ideas to help lawyers reduce their malpractice premiums, avoid malpractice, and minimize claims if they are sued by clients.
II. What Constitutes Legal Malpractice
When an individual asserts that her lawyer has caused harm by committing professional misconduct, the claim is known as legal malpractice.[3] Clients file a variety of causes of action for malpractice, including claims for intentional misconduct or breach of contract, but the most common claims allege breach of fiduciary duty or negligence.[4]
A fiduciary, as lawyers know, is an individual in a position of trust; lawyers owe their clients a number of professional duties, including a duty to place clients’ interests above their own.[5] The fiduciary duties that a lawyer owes to her client include: avoiding conflicts of interest, representing the client in good faith, informing the client adequately, safeguarding the client’s confidential information and property, and abiding by the client’s instructions.[6] If a lawyer violates one of those duties, the client may successfully bring a claim of malpractice based on a breach of fiduciary duty.
A lawyer is negligent when she fails to exercise the proper professional knowledge, care, or skill that is sufficient and appropriate for the particular matter at hand.[7] Failure to exercise proper professional care is different from a lawyer making a mere error in judgment; mere errors in judgment alone will not suffice to sustain a successful malpractice claim.[8] The Kansas Supreme Court has held that it is a lawyer’s duty to provide his client with an informed judgment.[9] Thus, a lawyer is not negligent if he makes an error that he believed in good faith was informed and in the best interest of the client.[10] However, the Court found that if the error could have been avoided through ordinary research, the lawyer cannot “avoid legal malpractice liability by claiming the error was one of judgment.”[11]
Other examples of a lawyer’s professional malpractice include; failing to prepare or file the proper legal documents, failing to act diligently, stating the law or facts incorrectly, missing deadlines, failing to inform a client of the statute of limitations, or failing to properly advise the client.[12] The conduct must have caused the client some type of harm in the matter for which the client originally hired the lawyer.[13] Additionally, the client must show that the harm would not have occurred but for the lawyer’s professional misconduct.[14] Possible remedies for the plaintiff in a malpractice suit include damages, an injunction, altering or canceling legal documents, and returning the plaintiff’s property.[15]
Occasionally, clients will bring a malpractice claim under breach of contract rather than a tort action. Usually, this choice stems from the fact that, in many states, the statute of limitations for breach of contract claims is three years whereas the statute of limitations for tort actions is only two.[16] Although some jurisdictions are divided on whether a malpractice claim falls under tort or contract, Kansas is not. In Kansas, unless a claim involves a specific contractual provision, malpractice claims are tort actions.[17]
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Thus, state bars assert that malpractice law increases the quality of the legal profession by forcing lawyers to be precise and meticulous.[18] On average, 6 percent of all practicing lawyers will have a malpractice claim brought against them.[19] For the past several decades, there has been increasing growth in the number of legal malpractice claims and lawsuits.[20] During the 1980s, the reported number of legal malpractice lawsuits tripled from the previous decade, and the 1990s saw a 155 percent increase from the 1980s figures.[21] The majority of malpractice claims arise out of lawyers’ handling of personal injury or real estate matters.[22] Other areas of law that are high risk for malpractice claims include intellectual property, patent, and securities law.[23]
Explanations for the growth in malpractice claims include an increase in litigation, lawyers becoming more willing to bring claims against other lawyers, an increase in third party claims, clients wanting cheaper legal fees, and the current economic malaise.[24] Many insurance carriers blame the poor economy for the increase under the theory that, when there are fewer jobs and people have less money; clients desperate for money are more likely to sue.[25]
Although the types of claims that are brought in malpractice suits vary, the majority of the claims allege “simple, straightforward mistakes.”[26] The most common reasons for malpractice claims include acts such as: missing deadlines, failing to settle, lacking knowledge of law, failing to prepare, failing to manage expectations, and failing to communicate properly.[27]
The Missouri Department of Insurance publishes a Legal Malpractice Insurance Report every ten years that provides statistical data on legal malpractice claims. The 2010 Report showed that 242 legal malpractice claims were closed in 2010, with the average payout being $120, 014.[28] The areas of law practiced by the lawyers most often sued for malpractice were bodily injury and property damage, collection and bankruptcy, estates and trusts, family law and real estate.[29] “The most common types of [lawyer] errors included failure to make deadlines, a planning or strategy error, an inadequate investigation, and inadequate knowledge or application of the law.”[30] The following two charts show the distribution of claims by area of law and type of lawyer wrongdoing from 2001 to 2010:
2001-2010 Percentage of Closed Claims by Area of Law[31]
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2001-2010 Percentage of All Closed Claims by Type of Error[32]
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III. Malpractice Insurance Basics
To protect themselves from costly claims, solo practitioners and firms buy legal malpractice insurance. Those insurance policies address acts, errors or omissions that a lawyer makes in the scope of the professional services she offers[33] Legal malpractice insurance is different from general liability insurance in that it does not cover events such as property damage or physical injuries to clients who are harmed while visiting the lawyer’s place of business.[34] Legal malpractice insurance only covers problems that arise from rendering or failing to render professional legal services.[35]
Even if a lawyer works for a large firm and has a large amount of coverage under the firm’s malpractice insurance policy, that policy does not provide blanket protection. Generally, policies do not cover a wide variety of acts, such as: fraudulent, malicious, dishonest, or criminal acts; do not insure certain types of remedies, such as: orders of restitution of legal fees, fines, penalties, or orders to pay punitive damages; and do not cover particular categories of disputes, such as: disputes involving the conduct of lawyers who both represent and are part owners of businesses or intra-firm disputes.[36]
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Legal malpractice policies, instead, “provide coverage for claims that arise from ‘wrongful acts’ committed in the rendering of legal services ... in your capacity as a lawyer and generally provide both indemnification coverage and claims expense coverage, subject to specified deductibles and endorsements.”[37] Because most policies are drafted by insurers and attorneys have little ability to negotiate terms, malpractice insurance policies are considered adhesion c ontracts; consequently, in coverage disputes, courts tend to resolve ambiguities in favor of the non-drafting party, the lawyer.[38]
IV. Terms, Conditions, and Exclusions
A malpractice insurance policy usually consists of the following sections: Definitions, Coverage Agreements...
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