Disclosing malpractice coverage

Clients have a right to know attorneys’ insurance status

By James E. Towery

Towery

Is it relevant information for a prospective client that a lawyer lacks malpractice insurance? In 17 states, the answer is yes. Based upon a recent recommendation and report of the State Bar of California Insurance Disclosure Task Force, the answer in California should also be yes. The task force proposals are currently out for public comment until Sept. 15. If the State Bar Board of Governors approves the recommendations, and if the California Supreme Court adopts the proposed rules, California lawyers in private practice who lack malpractice insurance will be required to disclose that fact in writing to current and prospective clients.

Why is this disclosure needed? Because a client has the right to know the insurance status of his or her attorney. That knowledge places the client in a better position to make an informed decision about which counsel to retain. And the problem of uninsured lawyers is pervasive. Although hard data is lacking, the best estimates are that approximately 20 percent of California lawyers in private practice do not have malpractice insurance. Other states have found the percentage much higher among solo practitioners, with uninsured rates of 40 percent.

California previously required attorneys to disclose the absence of insurance in their written fee contracts, but that requirement in Business & Professions Code §§6147 and 6148 sunsetted at the end of 1999. Since then, there has been no disclosure requirement in California. In 2005, then-State Bar President John Van de Kamp appointed the Insurance Disclosure Task Force, which consists of 12 individuals and is broadly representative, including participants from local bar associations, specialty and minority bars, solo and small firm practitioners and legislative staff.

The task force recently released its recommendations, including the following:

• Uninsured lawyers in private practice must disclose the absence of insurance in writing to their clients. Insured lawyers will have no disclosure obligations to clients.
• All lawyers in private practice must disclose annually to the State Bar whether they have insurance, and information will be publicly available so prospective clients can ascertain whether an individual lawyer is uninsured.
• Lawyers working exclusively for government agencies or as in-house counsel are exempted from any disclosure requirements.

The ABA adopted a Model Insurance Disclosure Rule in 2004. A total of 17 states currently require disclosure: 12 states require disclosure to the regulatory agency, and five states require direct disclosure to the client. The task force recommendations are unique in requiring both types of disclosure. The task force adopted this approach based on the belief that disclosure to the bar, standing alone, was inadequate to protect the public, because many prospective clients would not have the resources or knowledge to go online and learn this information before retaining a lawyer.

There are two primary criticisms that have been voiced to the insurance disclosure proposals. First, some argue that malpractice insurance is too complicated for the public to understand. Under this view, because malpractice insurance has complexities such as wasting limits policies, or limits on coverage, a prospective client may have a false sense of assurance about the presence of insurance. The task force recognized these points by including a recommendation for a broad public education program about malpractice insurance. However, the task force found that these insurance issues do not overcome the need for disclosure that an attorney lacks coverage. Consumers will be better protected with the recommended disclosure than with none at all.

The second critique is that malpractice insurance is often expensive and burdensome, particularly for solo practitioners, and is not universally available to all lawyers. The task force was sympathetic to this concern, but again did not believe that the concern outweighed a client’s right to know if the attorney lacks coverage. Reasonable people can differ about whether the cost of insurance is overly burdensome. The critical point is that the task force proposals do not require California lawyers to purchase insurance (unlike automobile drivers), but rather only to inform clients if the lawyer does not have insurance. This proposal does not address mandatory malpractice insurance.

In the final analysis, this debate turns on whether you believe a client has the right to know if his or her attorney does not have malpractice coverage. There is a national trend that says a client has that right. If you ask clients their opinion, you will likely discover that most clients assume all attorneys in private practice have insurance (and clients can be devastated when they later discover that their lawyer is uninsured). If you don’t believe that, ask your own clients.

A final point. I have long believed that the Golden Rule is the best way to approach any issue of an attorney’s obligations to his or her clients. If you were the client, would you want to know if your lawyer were uninsured? Of course you would.

• James E. Towery is the chair of the State Bar Task Force on Insurance Disclosure. He is a shareholder in the San Jose firm of Hoge, Fenton, Jones & Appel Inc. and a past president of the State Bar of California and the Santa Clara County Bar Association.