Bare Naked Lawyers
Practicing Without LPL Insurance May Leave Attorneys Overexposed
By Scott R. Schaffer and Kyle P. Barrett, Wilson Elser LLP
Many attorneys today are “going bare” and practicing without lawyers’ professional liability (LPL) insurance. Our discussion covers the historical context of LPL insurance, the benefits it provides and the significant risks that attorneys face when they don’t have it.
A Brief History of LPL Insurance
LPL insurance is a relatively young product, initiated by underwriters at Lloyd's of London in the 1940s. By the 1960s, several U.S. property and casualty insurers began writing LPL policies on an “occurrence” basis as opposed to the “claims-made” coverage being offered through Lloyd’s. In 1969, The Wall Street Journal estimated that 95% of practicing lawyers maintained LPL insurance. The 1970s ushered in an era of increased litigation, resulting in a substantial increase in the number of legal malpractice suits. This litigation “crisis” caused many LPL insurers to abandon the market, making it difficult for lawyers to find affordable coverage. However, by the end of the 1970s, several specialty insurers entered the market offering LPL coverage on a claims-made basis, which remains the prevalent form of LPL coverage today.
The Benefits of LPL Insurance
While Oregon is the only state that requires its attorneys to carry LPL insurance, purchasing LPL insurance is a prudent decision for private practice attorneys in all jurisdictions. The primary benefit is self-evident, but bears repeating: LPL insurance protects against the financial risks of legal malpractice claims, to which even the most thorough and cautious attorneys are susceptible, as any mistake, even an administrative or clerical error, may result in a claim. Even in the absence of an error, a disgruntled client that receives an adverse result could still file a groundless claim. In fact, malpractice claims appear to be an inevitable occupational hazard, as attorneys starting out today are statistically likely to face one to three malpractice claims during their careers.
Further, a 2017 Ames & Gough survey of nine leading LPL insurers reported that while new malpractice claims against law firms stabilized in 2016, the number was still above pre-2007 to 2009 recession levels. A malpractice claim, groundless or not, can cost tens of thousands of dollars or more in defense costs, exposing a lawyer or small firm to financial strain. Having adequate LPL coverage reduces the time and money attorneys must expend to defend these claims, which provides peace of mind and allows them to continue with the practice of law for other clients. In addition to traditional malpractice defense and indemnity coverage, many LPL policies available today provide supplemental coverage for subpoena assistance, disciplinary proceedings and privacy breach matters.
Although malpractice claims are common in all firms, the risk is increased for attorneys in smaller firms, who are more inclined to handle matters outside their areas of expertise. Thus, LPL insurance is a critical purchase for firms that employ fewer than 20 attorneys and solo practitioners, which account for approximately 75% of the lawyers in private practice. Fortunately, in today’s market, small firms can secure LPL coverage for relatively low premiums. For example, experienced attorneys in most parts of the United States can generally purchase basic LPL coverage for approximately $3,000 or less annually.
The Risks of Going Bare
Despite high claim frequency and the relative affordability of LPL insurance, many lawyers are uninsured. There are no national statistics for the percentage of uninsured private practitioners, but the piecemeal data available suggests that it is significant. For example, a 2001 California state bar survey found that 18% of private practitioners were uninsured, and a 2005 Texas survey found that 36% of private practitioners and 63% of solo practitioners were uninsured.
Attorneys give various reasons for going bare. Some small firms have thin operating margins, and even a fairly low premium for LPL coverage can be seen as a considerable expense. Some attorneys believe their risk management practices insulate them from claims, or that they do not practice in “high risk” areas. There also appears to be a somewhat counterintuitive belief among some attorneys that going bare is a sound preventative measure because aggrieved clients and their malpractice lawyers will have less incentive to pursue them.
Regardless of the reasons why attorneys choose to go bare, the impact can be severe on attorneys and their clients. Just one malpractice claim settlement or judgment can put an attorney’s nonexempt personal assets at risk. Further, should the attorney go bankrupt, his or her client may have no means of recovery. In an effort to protect the public, 24 states require attorneys to make disclosures concerning LPL insurance to their state bars and/or to their clients. Although data is limited, it appears that an attorney’s ability to retain clients could be negatively impacted if required to disclose uninsured status. In a 2009 State Bar of Texas survey of 500 Texas residents, 48.6% of respondents said their decision whether to hire an attorney would be affected if the attorney does not carry LPL insurance. Going bare also may have a lingering impact on attorneys even if they attempt to regain coverage, as most insurers will be reluctant to provide prior-acts coverage for those years in which the attorney went bare. Thus, a newly insured attorney still may be exposed to potential malpractice claims for professional services rendered while uninsured.
Given the lack of recoverable funds, malpractice cases against uninsured lawyers are rarely pursued to judgment. However, the cases that are published may serve as cautionary tales for uninsured attorneys.
In a 1996 Kentucky malpractice case, a client convicted of murder and arson won a $360,000 judgment against his uninsured attorney for negligently failing to retain an expert to offer alternative explanations for the source of the fire. The adverse judgment remained unsatisfied and continued to collect interest for several years. The attorney filed for bankruptcy, left town and was later suspended from the practice of law for misconduct, albeit in an unrelated case. As of 2014, the client was still attempting to recover property from the then 86year-old attorney to satisfy the judgment, which had grown to $590,000.
In a Maryland malpractice case, a client injured in a 2002 car accident retained an attorney to represent her. In 2004, the attorney’s partner dissolved the firm, unbeknownst to the attorney. The attorney later set up his own practice and retained the personal injury client. However, the attorney failed to timely file the client’s suit within the statute of limitations, resulting in a dismissal. The attorney then systematically concealed the error from his client. Upon the client’s discovery of the dismissal, she filed a bar complaint and a malpractice action against the attorney, in which she was awarded a $700,000 judgment, which went unpaid as the attorney was uninsured. In 2009, days after the client was awarded the judgment, the attorney filed for bankruptcy. In 2010, the Maryland Court of Appeals concluded that disbarment was warranted as the attorney’s conduct precluded the client from acquiring recompense for her severe injury.
Some uninsured attorneys may be emboldened by these cases as the attorneys at issue managed to escape the payment of a malpractice judgment. However, it is important to note that the uninsured attorneys did not go unscathed, as their practices and reputations appear to have suffered significant damage. Had those attorneys been insured, it is possible that the malpractice suit, judgment and public disclosure of the same could have been avoided in the first place.
Malpractice claims are a fact of life for attorneys. Despite diligence and caution, all attorneys are capable of mistakes that can result in a grievance or malpractice suit. Nonetheless, some attorneys remain uninsured because they are deterred by the presumed expense of LPL insurance and/or believe that they are not at risk for malpractice claims. This approach is unwise as even one malpractice claim can eliminate any savings on insurance premiums and can have a devastating financial and reputational impact on the attorney. Instead, obtaining LPL insurance remains a best practice as it provides attorneys with an affordable and effective way to protect themselves against the risks of malpractice claims.