insurance umbrellaOnly one jurisdiction in the nation — Oregon — requires lawyers to carry legal malpractice insurance.  But all the other states have varying requirements about malpractice insurance and disclosing whether or not you carry it.  Knowing the rule in your jurisdiction is vital to staying out of ethics trouble.

Disclosure data

A helpful piece by Prof. Roy Simon, Hofstra University distinguished professor of legal ethics, emeritus, in the Association of American Law Schools Professional Responsibility Section Spring newsletter (subscription required) collects the data and points to the ABA’s comprehensive state-by-state chart.

Ohio, for instance, is one of only seven jurisdictions that require lawyers (with certain exceptions) to inform a client directly if they do not carry a certain level of malpractice insurance.  And Ohio lawyers who fail to communicate that fact to their clients have been reprimanded, and even suspended (at least when the failure to disclose is coupled with other misconduct).  The other states with disclose-to-clients requirements are Alaska, California, New Hampshire, New Mexico, Pennsylvania and South Dakota.

Disclosing on registration forms

Eighteen other jurisdictions require lawyers to disclose on their periodic registration statements whether they carry malpractice insurance.   (See the ABA’s chart for the list.)  This is in line with the ABA’s Model Court Rule on Insurance Disclosure, adopted in 2004.  The concept behind the Model Court Rule is to provide a potential client with the ability to get access to insurance information, according the report of the Standing Committee on Client Protection, which recommended the rule.

At least four states, according to the ABA’s data, are considering a malpractice insurance disclosure rule — Maine, South Carolina, Utah and Vermont.

Is insurance disclosure a good thing?

Naysayers on the subject of mandatory disclosure question need for it, point to a lack of hard data showing that it benefits clients, and assert that requiring lawyers to disclose whether they are insured unfairly stigmatizes those who are not — or even might encourage claims against those who are.

On the other hand, supporters of mandatory disclosure say that clients should understand the risk involved in retaining a lawyer who is not insured; and absent disclosure, most clients likely assume that the lawyer they hired is insured.

But if you are licensed in the near-majority of jurisdictions with some form of insurance disclosure requirement, this debate is somewhat beside the point.  And if your license is in one of the states now considering a disclosure rule, stay tuned.  Failing to comply can get you where you don’t want to be — in trouble.

 

Corporate organizationfile cabinet charts increasingly include slots for departments with names like  “risk management,” “claims handling,” and the like.  When lawyers head or staff such departments, does the attorney-client privilege cover their communications with company management?  Not necessarily, says a new opinion from the Eastern District of Pennsylvania, Casey v. Unitek Global Services, Inc.

Sex discrimination allegations

Casey sued her employer, Unitek, claiming sex discrimination and violation of the equal pay act.  Casey was Vice President of Risk and Safety.  She coordinated the insurance programs for Unitek and its subsidiaries, analyzed risk and managed litigation arising from insurable claims.  Although Casey had graduated from law school in 1993, she never practiced law; and as VP of Risk and Safety, she did not report to the company’s GC.

Casey complained that she was paid less than male colleagues and was sexually harassed.  In January 2013, she e-mailed a complaint detailing the harassment. “Within minutes,” she was terminated.

Unitek filled Casey’s former position with two non-lawyers.

When Casey sued Unitek, the company sought a protective order barring her use of attorney-client communications to prosecute her case, arguing, among other things, that she was the company’s lawyer.  Unitek pointed to Casey’s presence at litigation meetings and her management of litigation.  But the court ruled, notwithstanding these facts, that the threshold factor for attorney-client privilege — an attorney-client relationship — was lacking here.

No attorney-client relationship = no privilege

The court explained that even though her legal training helped Casey in her job, her role did not signify that she was acting as Unitek’s lawyer.  There was no evidence that the company sought Casey’s legal advice on the litigation she oversaw.  The court said that she was more like “an in-house insurance broker and claims adjuster.”

This decision should give companies pause, given the trend toward the departmentalization of various litigation claims functions.  Even if the risk manager is a lawyer, communications with him or her may not be covered by attorney-client privilege, based on the reasoning in this decision.

Sword or shield?

The company’s attempt to prevent Casey from using confidential documents to prove her case also had some unexpected fall-out  — waiver of the attorney-client privilege.

The company sought to file 15 exhibits in its brief under seal, claiming they were privileged.   The court ruled that while the privileged character of some of the exhibits would support Unitek’s position, it could not “ignore the manner in which the documents were used,” and denied the request to seal.

Quoting precedent from the District of Delaware, the court said that “a party should not be permitted to use the privilege to shield information which it has deliberately chosen to use offensively.”  The court said that Unitek had tried to use the privilege on offense, i.e., to shut down the suit by precluding Casey from using any of the documents that would prove her allegations.  That conduct, said the court, waived the company’s right to use the privilege defensively by claiming privilege over some of the same documents and filing them under seal.

The court did not explain whether the waiver extended only to the documents referenced in the request to seal, or would govern future proceedings in the case.

The court’s reasoning on this point would seem to be open to question.  Did the company really use the privilege “on offense,” although it apparently did not seek to use against Casey any of the documents it claimed as privileged?

Caution needed

In all, this decision raises a caution flag for companies:  first, in their expectations about their communications with “risk management” lawyers; and second, regarding the possible consequences of using the privilege “on offense.”

Money and gavelIf you or your firm were ordered to pay a party’s legal fees as a “sanction” for professional misconduct, would your professional liability insurance cover that payment?

In a recent case, the district court for the Northern District of Illinois left a law firm high and dry, holding that the policy exclusion for sanctions meant that the insurer did not have to cover attorneys’ fees that its insured, the law firm, had to pay or repay due to its misconduct.  Edward T. Joyce & Assocs., P.C. v. Professionals Direct Insurance Co. (PACER identification required for access).

Underlying case

In the long and tortuous underlying case, which began in 2002, the Joyce Firm represented more than 100 individuals and entities as plaintiffs under a contingent fee agreement.  After obtaining an arbitration award against the insolvent defendant, the Joyce Firm hired additional co-counsel to help in the second phase of the case by pursuing a claim against the defendant’s insurer.  The firm attempted to modify the original fee agreement in 2007, including adding a provision for an “hourly contingent fee.”  Eventually, the claim against the insolvent defendant’s insurer resulted in an $8.6 million settlement in favor of the plaintiffs.

Plaintiffs, however, disputed the amount and basis of the Joyce Firm’s fees arising from that settlement, and also disputed who was responsible for paying the additional co-counsel’s fees.  Plaintiffs demanded arbitration, seeking, among other things, “equitable disgorgement.”  The arbitrator found several instances of misconduct on the part of the Joyce Firm:

  • it failed to advise the clients to consult independent counsel about  the attempted modification of the fee agreement;
  • it failed to give adequate information about the terms of the new agreement to the many clients;
  • it presented the new agreement on a take-it-or-leave-it basis; and
  • the new agreement was not in writing.

The arbitrator determined that “as a sanction,” the Joyce Firm was responsible for paying 25 percent of the co-counsel’s fees, or about $150,000; because the firm’s actions were “not intentional,” though, the plaintiffs were responsible for the remainder.  The Joyce firm was also ordered as “a sanction” to repay to the plaintiffs more than $405,000 in fees it had previously collected as “contingent hourly fees” under the attempted 2007 modification of the fee agreement.  The trial court confirmed the arbitration award, the court of appeals affirmed, and the state supreme court denied a petition for leave to appeal.

Policy exclusion for “sanctions”

The Joyce Firm was insured under a professional liability policy that excluded from  coverage (among other things) “any claim for fines, sanctions, penalties, punitive damages or any damages resulting from the multiplication of compensatory damages.”  Although the firm’s insurer agreed to reimburse it for defense costs, the insurer denied any further obligation to indemnify the Joyce Firm — particularly against the more than half million dollars the arbitrator awarded to plaintiffs as a “sanction.”

The Joyce Firm’s resulting declaratory judgment action against the insurer  was removed to the District Court for the Northern District of Illinois.  There, the district court granted summary judgment in favor of the insurer.

“Sanction,” not “disgorgement”

The Joyce Firm argued that despite the arbitrator’s use of the term “sanction,” he really intended the damages to be in the nature of disgorgement, as he found that the firm did not intend to violate the law or the rules of ethics.  (Indeed, “disgorgement” would have been in line with the way the plaintiffs characterized the recovery they sought.)

The district court summarily rejected that argument, citing the arbitrator’s “stated imposition of sanctions,” and the state court of appeals’ affirmance of the arbitration award, which “expressly and repeatedly referred to the damages award as a sanction.”   These characterizations were apparently sufficient for the district court; the opinion cites no case authority in support of this prong of its ruling that the insurer had no duty to indemnify the Joyce Firm.

 Take-aways:  (1) words matter; (2) mind your fees and cues

The Joyce Firm appealed to the Seventh Circuit Court of Appeals on October 23, so the final chapter has not yet been written on this case.  But one take-away from the district court’s ruling is that words certainly matter, and that the way in which an arbitrator characterizes an award can have a large impact on insurance coverage issues.  The other take-away concerns the law firm’s attempt to modify its contingent fee agreement.  Model Rule 1.5(b) requires that once agreed to, any change in the basis or rate of the fee must be communicated to the client.  That was apparently not carried out adequately in this case, providing one of the implicit bases for the arbitrator’s award against the firm.

 

 

Failing to check whether the claim against your client might be covered by insurance can get you in hot water — or at least keep you there, preventing a speedy exit from a malpractice suit, as a Florida lawyer recently learned.

In Pharma Supply, Inc. v. Stein (PACER access ID required), the client alleged it retained the lawyer to “defend its interests” in the underlying suit.  At the time, the client had an active insurance policy that would have provided coverage and a defense in the underlying case.  The lawyer, however, allegedly failed to review the client’s insurance policies, and didn’t place the insurer on notice.  Later, the insurer joined the client’s defense, but refused to reimburse the client for fees and expenses paid before then.  The client subsequently sued the lawyer and his firm in federal district court for professional negligence, among other things.

In their motion to dismiss, the lawyer  and his firm contended that they had been retained solely to defend the client in the underlying case, and that failing to inquire into the client’s insurance coverage did not breach a duty to the client.

The court rejected that argument.  It ruled that the former client’s allegation that it had retained the lawyer and his firm to “defend its interests” was enough to survive a motion to dismiss.  A duty to defend the client’s interests could also encompass developing claims against third parties, such as the insurer, that might owe indemnification to the client, the court said.  Indeed, the court said, opinions from some jurisdictions have suggested that

[I]n certain circumstances a litigation attorney may have a duty to inquire into a client’s own insurance coverage as a way to provide for alternative recovery or soften the impact of the litigation.

Cases decided in California, Georgia and Alaska for example, point to such a duty, as does a recent New York Appellate Division case.  (In a different case in 2000, however, the New York Supreme Court held that a lawyer did not have a duty to advise the clients about a “novel and questionable theory pertaining to their  insurance coverage.”)

The defendants in the Pharma Supply case have moved for reconsideration of the court’s ruling denying their motion to dismiss; that motion, converted by the court to a motion for summary judgment, remains pending.

One way to address the issue of client insurance is to raise it in your engagement letter.  Asking the client in writing to inform you if there might be insurance that would cover the claim can help identify and resolve any concerns at the front end of a matter.