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Legal Malpractice: Insurance Disclosure Rules on the Rise

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Even in the world of professionals, mistakes happen. And mistakes create liability and may eventually lead to malpractice lawsuits.

Professional liability arises when a licensed person, in the practice of his or her profession, harms someone as a result of something that was not done or was done improperly. Professional liability can occur with any type of professional from doctors to lawyers to insurance agents.

Legal malpractice can occur when a lawyer acts in a thoughtless, inattentive or inadvertent manner when providing legal representation. Negligence is the failure to use such care as a reasonably prudent and careful person would use under similar circumstances. In order for plaintiffs to prevail in a legal malpractice action they must prove certain elements, such as negligence, in the legal representation.

For example, if a lawyer fails to file a client’s lawsuit within the time period allowable by law, the attorney may be charged with negligence and be subject to professional liability.Professional liability insurance protects an attorney by providing defense costs and possibly covering awarded damages in malpractice lawsuits.Unlike other broad types of insurance coverage, professional liability policies usually only cover claims arising out of failure to provide services, or providing them improperly, to others.

Oregon is currently the only state to require every attorney to carry professional liability insurance; however, other states are becoming more stringent with regard to professional liability insurance requirements.

California recently became the 25th state to adopt some form of a mandatory malpractice insurance disclosure rule for attorneys, when on Aug. 26, 2009 they enacted a law requiring attorneys to disclose to clients if they do not carry professional liability coverage.

Gaining Popularity

Insurance disclosure rules for lawyers have become increasingly popular among states over the past decade. In April 2004, the public interest group Help Abolish Legal Tyranny (HALT), asked the American Bar Association (ABA) to revise its model rules of professional conduct to require lawyers to inform clients whether they carry professional insurance.

The ABA did adopt a model rule requiring attorneys to disclose to their jurisdiction’s highest court whether they carry such insurance. The ABA claims the purpose of the rule is to help a potential client make an informed decision about retaining specific attorneys.

Only seven states currently have rules where attorneys must provide direct written notice of professional liability insurance to their clients. Another 18 states have rules mandating attorneys disclose the information on their annual bar registration.

Insurance disclosure requirements are currently under consideration in New York, Utah, Vermont and Texas. For the second time in three years, Texas has addressed the insurance disclosure issue—the State Bar of Texas rejected a proposed disclosure in 2008. On January 29 of this year, they recommended to the Supreme Court of Texas that attorneys not be required to disclose whether or not they carry professional liability insurance unless a client or prospective client asks for the information. Due to the growing trend of disclosure rules, it is not hard to believe that, like Texas, the rest of the aforementioned states will find a way to adopt some form of the rules soon.

Numerous polls have indicated the public favors disclosure rules, but a majority of lawyers oppose the rules. With most new states however, there are pros and cons to mandatory malpractice insurance disclosure rules. The main advantage to disclosure rules is based on consumer protection principles. An informed client can make a better decision about choosing an attorney if they have more information.

Adopting such rules will also increase the number of insured attorneys. The percentage of insured lawyers increased in every state when a new disclosure rule was enacted. Uninsured lawyers have an incentive to buy insurance so they do not have to disclose a lack of coverage to their prospective clients.

Increasing the number of insured lawyers also protects the public in other ways. Malpractice attorneys usually do not sue attorneys who do not have malpractice insurance coverage as there are no funds to pay for an award. That effectively leaves a client with no practical remedy to malpractice. Some lawyers, mostly solo practices or small firms, purposely do not carry insurance to avoid being sued and they consider their practices low risk. For large firms, malpractice insurance coverage is a necessity.

Is Disclosure Always Good?

There are some disadvantages to mandatory disclosure rules. The main concern among attorneys is having disclosure rules create an assumption that any settlement or damage award will come from said attorney’s malpractice insurer. Disclosure rules typically only require an attorney to inform a client if they have insurance and do not require an explanation of the coverage. The client could be misled regarding what is covered, effectively increasing the client’s awareness of the potential for a malpractice award which in turn can lead to an increase in malpractice filings.

Since the disclosure rules ultimately cause more attorneys to carry insurance, the costs would likely be passed on to clients.

Malpractice claims usually increase as the economy decreases. In today’s economic slump, many attorneys fear this will cause a significant increase in legal malpractice lawsuits.

Malpractice is a predominant concern for the legal profession. Mandatory disclosure of malpractice insurance is a growing trend in America. Disclosure comes with both benefits and drawbacks. If the day comes when you are seeking legal representation, ask yourself how you would respond to a letter which says the following: “Dear Agent: Please retain me as your attorney, however, I must first inform you that I do not carry malpractice insurance.”

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