Professional liability insurers as regulators of law practice

Fordham Law Review

Volumn 65, Issue 1, 1996, Pages 209-231

  Davis, Anthony E ^a,b  

^a BROOKLYN LAW SCHOOL   (United States)

^b YESHIVA UNIVERSITY   (United States)

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EID: 0030364146     PISSN: 0015704X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (38)

1. At this juncture, one further preliminary matter must be expressed. I wish to acknowledge the assistance of a number of the leading domestic commercial professional liability insurers and insurance brokers for providing me with both past and current policy language, and in several instances also for engaging in extensive discussions about their perceptions of themselves as regulators of their insureds. In recognition of their proprietary rights in the context of an industry which is highly competitive, however, and where even comparison charts of various policy provisions prepared by brokers are products perceived as having significant commercial value, I have agreed to use their policy provisions and refer to all conversations with them anonymously. Rather than referring to some with, and others without, attribution, I have decided further that it would be preferable to treat all such references anonymously. I trust that those who know me will attest to those who do not that this rule of anonymity of source should be taken as confirming, rather than detracting from, the authenticity of the material. Since this Article is about what are essentially policy issues, rather than a comparison or critique of particular approaches to given problems, I trust that the reader will agree that there is no harm in protecting perceived commercial interests in this way, particularly if the result is to enable a broader and more complete review of the issues.
2. Resolution Adopted by the Oregon State Bar at its November 1977 Bar Convention, effective July 1, 1978 (pursuant to Or. Rev. Stat. § 9.080(2) (1993)).
3. Cal. Corp. Code § 15052 (Deering 1994).
4. Colo. Court Rules, Ch. 22, Rule 265, § 4 (1995).
5. In addition, the Rhode Island Supreme Court has established a similar requirement. See In re Rhode Island Bar Ass'n, 263 A.2d 692 (R.I. 1970) (permitting attorneys organized as a corporation to practice law provided, among other things, that they obtain liability insurance for the protection of clients served by such corporation).
6. Model Rules of Professional Conduct Rule 1.8 (1994) [hereinafter Model Rules] (emphasis added).
7. Model Rules of Professional Conduct Rule 1.8 (1994) [hereinafter Model Rules] (emphasis added).
8. Id.
9. See supra note 1.
10. Charles Silver, Professional Liability Insurance as Insurance and as Lawyer Regulation: Response to Davis, 65 Fordham L. Rev. 233, 234-35 (1996) [hereinafter Silver, Response to Davis].
11. Charles Silver, Professional Liability Insurance as Insurance and as Lawyer Regulation: Response to Davis, 65 Fordham L. Rev. 233, 234-35 (1996) [hereinafter Silver, Response to Davis].
12. Model Rules, supra note 6, Rule 5.1 (b), (c).
13. In addition, other aspects of lateral hire and merger controls among the policy provisions which prohibit or restrict conduct otherwise permitted by the ethics codes are discussed in part II.A, infra.
14. See, e.g., ABA Comm. on Ethics and Professional Responsibility, Formal Op. 94-388 (1994) (discussing the ethical propriety and requirements of networking and affiliating law firms); ABA Comm. on Ethics and Professional Responsibility, Formal Op. 84-351 (1984) (discussing the implications of one law firm listing another law firm on its letter head as an "associated" or "affiliated" firm).
15. See, e.g., ABA Comm. on Ethics and Professional Responsibility, Formal Op. 94-388 (1994) (discussing the ethical propriety and requirements of networking and affiliating law firms); ABA Comm. on Ethics and Professional Responsibility, Formal Op. 84-351 (1984) (discussing the implications of one law firm listing another law firm on its letter head as an "associated" or "affiliated" firm).
16. 907 P.2d 506 (Ariz. 1995), cert. denied, 116 S. Ct. 1877 (1996).
17. Id. at 513-18.
18. See Silver, Reponse to Davis, supra note 9, at 235-37. "Stacking" is the creation of a pyramid of policies against which claims can be made arising out of what is really one incident or occurrence.
19. See infra, part I.A.3.
20. While there are no current reliable statistics, the American Bar Association's extensive survey in 1989 suggested that the number of claims deriving from fee suits, at least at that time, were in the region of 7 percent of all claims. See ABA Standing Committee on Lawyers Professional Liability, Characteristics of Legal Malpractice: A Report of the National Legal Malpractice Data Center 22-23 (1989). Insurers continue to tell me, however, that they see much higher numbers in their experience. Furthermore, many Insurers make the point that while the percentage of all malpractice claims deriving from fee suits may be debatable, almost all fee suits result in counterclaims for malpractice. Accordingly, it is a very effective exclusion from Insurers' perspective in declining risk transfer; similarly, this is an area where the principle of moral hazard, raised by Professor Silver and discussed in part IV, infra, clearly plays a significant role.
21. See, e.g., Rita H. Jensen, Driving Up the Rates: Malpractice Insurers' Bad Patch, Nat'l L.J., Nov. 9, 1992, at 3 (discussing factors that have influenced the rise in insurance rates, including increased severity of claims); see also Sherry R. Sontag, Soured Deals Snag More Professionals: Lawyers, Accountants and Others are Often the Only Deep Pockets, Nat'l L.J., Feb. 4, 1991, at 1 (noting that insurance carriers were increasing rates to meet rising claims exposure).
22. See, e.g., Rita H. Jensen, Driving Up the Rates: Malpractice Insurers' Bad Patch, Nat'l L.J., Nov. 9, 1992, at 3 (discussing factors that have influenced the rise in insurance rates, including increased severity of claims); see also Sherry R. Sontag, Soured Deals Snag More Professionals: Lawyers, Accountants and Others are Often the Only Deep Pockets, Nat'l L.J., Feb. 4, 1991, at 1 (noting that insurance carriers were increasing rates to meet rising claims exposure).
23. Edward A. Adams, Attorneys' Liability Assurance: Insurance Rates for Malpractice Stabilize, Nat'l L.J., Dec. 26, 1994, at A5.
24. When firms are in the distressed category, their claims history is so bad that they cannot, or cannot easily find any coverage, or at least coverage at any but an exorbitant cost.
25. Webster's Third New International Dictionary of the English Language Unabridged 1913 (1986).
26. See supra notes 13-14.
27. Notably, disqualification, and loss of fees, in individual cases is the most significant consequence of a breach of the states' ethics codes conflict of interest provisions in almost every instance. Absent egregious breach of fiduciary duty as a part of the behavior involving a conflict, disciplinary sanctions such as suspension or disbarment are almost unheard of. The same point can be made with respect to fee dispute cases, again the exception being cases involving outright dishonesty or flagrant and repeated misconduct. See, e.g., In re Cooperman, 633 N.E.2d 1069 (N.Y. 1994) (affirming decision to suspend a lawyer for two years, finding that the lawyer acted in bad faith regarding a fee arrangement that clashed with public policy).
28. See Silver, Response to Davis, supra note 9, at 243.
29. For a current summary of the Home Insurance Company's woes, see Amy Feldman, The Home's Economics Threaten O&Y Building, Grain's N.Y. Bus., July 8, 1996, at 4.
30. An interesting article, Professor Levinson discusses the need for increased self-governance within the profession, thus presuming the absence of adequate professional regulation to improve firms' independence, which he defines, in part, as avoiding conflicting representations. See L. Harold Levinson, Independent Law Firms that Practice Law Only: Society's Need, the Legal Profession's Responsibility, 51 Ohio St. L.J. 229 (1990). He does not tell us how to reach that goal, so presumably he would support the Insurers' involvement if it assists in achieving the desired results. A second issue, which he does not address, is the interest which clients have in being represented by lawyers who are indeed covered by adequate professional liability insurance. As I have discussed elsewhere in this Article, that issue is addressed in Oregon as a requirement for all practitioners, and in a small but growing number of states which are attaching such a requirement as a condition for lawyers who wish to take advantage of the new limited liability entity statutes.
31. Limited Liability Partnerships - Will They Limit Malpractice Claims?, Law Firm Risk Management Report (Alexander & Alexander, New York, N.Y.), Feb. 1995, at 1-3.
32. See Silver, Response to Davis, supra note 9, at 236-38.
33. Id.
34. Id. at 238.
35. Id. at 237.
36. Id. at 236-38.
37. See id. at 240-41.
38. See id.