What is professional liability insurance and who needs it?

 Who and what do professional liability policies cover?

  • A professional liability policy covers a business or a professional person against "claims for loss due to wrong advice or failure to do what should have been done."
  • Professional liability insurance was developed to meet the increasing insurance demands on professionals of all disciplines. Professional liability insurance is sometimes difficult to obtain in a severely restricted market place.

  • In today's complex world, we often need the advice or help of "professionals." Professionals have, by definition, special skills and knowledge about their fields. They are expected to deliver a higher standard of care and expertise. When professionals fail to meet these expectations, they are sued and held legally liable to injured parties. Professionals require specialized insurance coverage known as professional liability insurance.
  • Professional liability insurance, also known as errors and omissions insurance, provides coverage for the defense and indemnification for errors and omissions in the rendering of professional services. Standard liability contracts do not provide this coverage. Each professional liability contract is unique to a particular insurance carrier and designed for a particular type of professional risk.

Why is it valuable to maintain professional liability coverage?

  • With the high cost and serious consequences of a professional liability lawsuit, comprehensive protection is especially important to all serious professionals today.
  • Unfortunately, many professional firms have in the past simply gone without professional liability insurance. Today, however, they may have to acquire it simply to stay in business. A firm attempting to compete for new business does not want to tell potential clients that it does not have professional liability insurance coverage. At best, they may be placed at a disadvantage. At worse, they will lose the business.

  • Of course, not all firms or individuals have chosen to go uninsured for the same reasons. Very often, however, this decision has been reduced to an economic one. In order to compete, all professionals will have to consider professional liability coverage more seriously.

  • If a business provides a consulting service, fee for service, or any form of professional opinion, professional liability insurance is essential. Professional liability claims normally allege a financial loss because of an error in the work or opinion of a professional person. Such losses are not covered by a general liability policy, which typically covers only bodily injury and property damage losses.

  • The most important asset a professional has is his reputation. Professional liability insurance can protect that reputation as well as contain costs.

What kind of professional liability programs are available?

  • Although professional liability programs for the more common professions have been offered for many years, newer programs are available today for more unique exposures. They are available and recommended to cover professions to include: lawyers, accountants, appraisers, architects, broadcasters, engineers and other designers, medical doctors, hospitals and clinics, real estate agents and brokers, insurance agents and brokers, directors and officers, dentists, geologists, personal Trainers and psychologists.
  • This list goes on. Anyone engaged in a profession is subject to certain professional exposures and is a good candidate for professional liability insurance.

What protections are typically featured with professional liability insurance?

  • Legal defense cost, no matter what the allegations.
  • Coverage extending to W2 employees and 1099 subcontractors.

  • Optional coverage for allegations of copyright infringement and intellectual property infringement. Intellectual property infringement coverage protects the insured against claims alleging patent or copyright infringement. Software, systems, or processes are some of the most commonly known types of intellectual properties.

  • Personal injury. Personal injury protects the insured against claims of libel, slander, and invasion of privacy.

  • Advertising injury. Advertising injury protects the insured against claims of libel or slander, misappropriation of advertising ideas or style of doing business, and infringement of advertising copyright, title, or slogan.

  • Professional liability insurance pays for any resulting judgments against the insured, including court costs up to the coverage limits.

What are the risks involved in offering professional services?

  • Consider the unlimited financial risk professionals face with each engagement for their professional services. In today's lawsuit happy society, a professional liability claim can expose one to legal fees and settlement costs much greater than the combined limits of existing insurance coverage, firm assets, and personal net worth. From a purely economic perspective, it does not make sense to offer professional services at prevailing fee levels if the professional faces unlimited risk.

  • A person would not participate in an investment with a potential to earn a small, largely fixed return that exposed him to a risk of losing all business and personal assets. He would probably conclude that the potential for gain did not justify the risk of loss. This analogy is not far from the reality of today's professional service environment. A fee and a profit margin are a fraction of potential risk, should things go wrong.
  • Businesses and professionals have struggled with an imbalance between risk and reward. Fortunately, a solution has developed: establishing a maximum dollar limit on the total liability which bears some relationship to the profit earned from the undertaking, hence, professional liability insurance.
  • In recent years, professionals have become prime examples of a business where the "risk versus reward" equation is out of balance. Modest fees, often negotiated in a competitive environment, have squeezed profits. At the same time, the professional's liability risk has exploded. In simple economic terms, the professional's liability problems are a result of too much risk for too little reward.
  •  From a practical viewpoint, professional liability insurance can help to counter this imbalance.
  • In the United States, court awards have risen sharply in recent years. Increasingly, people are showing a willingness to turn to the Courts when they believe that goods or services they receive are substandard. The unfortunate fact is, even if one is not at fault, defending oneself in court is a costly business. It is a threat to financial security.
  • Most liability policies do not respond to suits involving professional services. Nor do they cover any legal disputes involving pure financial losses. Professional liability insurance complements Commercial General Liability coverage. It fills in dangerous gaps.
  • Lawsuits can affect any profession. A simple error or omission can result in exorbitant claims over defective design, improper appraisal, improper treatment, inaccurate advice, inaccurate information provided, and even typographical errors.

So, who really needs professional liability insurance? And, when will coverage actually apply?

  • For professionals or experts in a chosen field.
  • When the work done is skilled and specialized.

  • When the professional duties involve providing advice or services.

  • Personal injury. Personal injury protects the insured against claims of libel, slander, and invasion of privacy.
  • When customers or clients expect high degree of service.

  • When the profession demands a high degree of moral principles and standards.

  • Anyone involved in the areas listed above may be vulnerable to lawsuits, and most business insurance policies do not offer coverage for this.

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

Cost Drivers for Attorneys Errors and Omissions Insurance

What drives the cost in determining the rates you will be charged?

  • The limit of liability selected.
  • Your area of legal specialty. You can expect to pay more for coverage if you practice, for example, in high-risk areas such as securities, banking and real estate. You may even have to pay an extra premium to obtain the specific coverage you need.
  • Your personal claims history. This includes all attorneys in the firm.
  • The state of the insurance market. In "soft" markets, rates are lower and coverage is more available than in "hard" markets, when renewal of an existing policy may be more difficult to obtain or prohibitively expensive.
  • Your geographic area and the litigation atmosphere in your locale. The claim experience of your risk pool (i.e., other lawyers in your geographic area). Be aware that you may experience problems, in that you may be classified in a higher or lower risk group than you actually are.
  • For example, if you practice in a rural area, you may nevertheless be limped together with lawyers in urban areas of your state, placing you in a higher risk group. Try to find out into which risk pool you fall and, if you fall within a higher risk group than you should, do what you can to be placed in a lower risk group.
  • Firm size. Some companies offer premium reductions for firms with more attorneys.
  • Law office management. Some Companies may allow premium credits if the law firm has instituted malpractice prevention controls, such as an effective docket control system.

A sample of the criteria that an insurance company may use to underwrite a policy

  • Number of claims or incidents per lawyer per year. (Note: Claims need not result in lawsuits to be considered relevant by an underwriter.)
  • Anticipated expense of these claims (both indemnity and legal defense) relative to the anticipated premium from the insured.
  • Nature or quality of the claim, e.g., meritorious or not, frivolous, ordinary negligence, gross negligence, or criminal conduct.
  • Lawyer’s degree of fault, e.g., clear malpractice, statute of limitations, or vicarious liability (a lawyer who has left the firm).
  • Rejection or refusal to renew by any other carrier. (Underwriters will regard with suspicion a lawyer who is leaving a less expensive carrier.)
  • State bar disciplinary proceedings against the lawyer.
  • Lawyer’s predisposition to suing clients for fees.
  • Significant increase in limits or decrease in deductible requested.
  • Nature of practice, e.g., does the lawyer participate in client investments? Does the lawyer carry on other businesses or professions?
  • Attitude and cooperation of the lawyer in resolving claims and providing necessary information to evaluate insurability; attitude with client; has the lawyer demanded coverage of an insurance company on doubtful claims?
  • Rating with Martindale-Hubbell and membership status with state and national bar associations.
  • Practice for financial institutions while also serving on the board of directors and/ or maintaining a financial interest in the institution.

Sample "red flags" that makes getting insurance difficult:

  • Two or more claims within the past year.
  • Three or more claims within the past ten years (depending upon size or firm).
  • Major claim.
  • Pattern of claims.
  • Uninsured for the immediate preceding five years.
  • Non-payment of deductible.
  • Non-cooperation of insured.
  • Any bar disciplinary proceeding.
  • Existing business relationship with a client.
  • Maintenance of other professional licenses.

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

Understanding Your Insurance Coverage

What are the elements of your insurance contract?

The Application.

The Declaration Sheet.

The Insurance Policy, composed of:

  • Definitions
  • Coverage Agreements.
  • Exclusions.
  • Defense and Settlement Provisions.
  • Limits of Liability.
  • Conditions.


Only those elements contained in the insurance policy itself make up the insurance "contract." The application must, in some way, be attached to the policy before it is considered an official part of the policy. However, many companies today expressly state that the application will be included as part of the insurance contract.

Insurance contracts are usually contracts of "adhesion." In other words, because the insurance company dictates the terms of the contract, in a dispute regarding coverage you, the insured, will be looked upon more favorably than the insurance company.

The wording in the insurance policy itself is intended to provide protection for the insurance company and to eliminate loopholes in coverage. This does not necessarily mean that coverage disputes will be adjudicated in favor of the insurance company. Policy wording is open to interpretation by the courts.

The Application.

In the application, you provide information about yourself and your practice. It is extremely important to complete all of the application; don’t leave anything blank. Be truthful. The application often becomes part of the policy; if you withhold relevant information, the company may have grounds for voiding your policy. If you encounter a broker who advises you to withhold information, get another broker.

If you have "high-risk" activities or claims and fear that these may preclude coverage, do not succumb to the temptation to avoid giving the underwriter complete information. The more information you give the underwriter, the better he or she can evaluate the risk and charge you a fair price. Cast your explanation in terms that show the underwriter why he or she should not be afraid to insure you. In other words, help the underwriter find a way to provide coverage, not decline it.

Disclose all past claims and explain any extenuating circumstances, mitigating factors, and remedies taken. Demonstrate to the underwriter an awareness of the problem and describe fully all steps you have taken to solve it. The rule of thumb should be "the more, the better."

The Declaration Sheet.

The declaration sheet outlines the terms of coverage, specifies the beginning and end of the policy period, states your limits of liability on a per claim and aggregate annual basis, and specifies your deductible (either per claim or annual). The "Named Insured," which is identified on the Declaration Sheet, will be further defined in the insurance policy itself.

If the policy includes coverage for "prior acts" (that is, coverage for acts that occurred prior to the policy period), the date on which the prior acts coverage is effective (the "retroactive date") will also be stated on the Declaration Sheet. If not, look for an attached endorsement that will provide the policy’s specific retroactive date.

The Insurance Policy, composed of:

  • Definitions
  • Coverage Agreements.
  • Exclusions.
  • Defense and Settlement Provisions.
  • Limits of Liability.
  • Conditions.


The definitions describe for who coverage is provided. Terms to look for include:

  • Named Insured. The "Named Insured" is usually defined as the partnership, Professional Corporation or individual names on the Declaration sheet. Other lawyers covered by the policy are usually listed as "additional Insures," or simply "Insures." Make sure that you have coverage for everyone who should be covered and for acts on behalf of the firm (Named Insured) or without such a limitation.
  • Predecessor Firms. If the term "predecessor firms" is included in the definitions, coverage applies to any predecessors of the existing firm.
  • Former lawyers, partners, and shareholders.
  • Current lawyers, partners, and shareholders.
  • Future lawyers, partners, and shareholders.
  • Attorneys serving in an "Of Counsel" capacity.
  • Heirs, executors, administrators, legal representatives, and assigns of the insured.

Coverage Agreements

Services, activities or actions that may be covered include:

  • professional services as an attorney;
  • services as a notary public;
  • services as a title agent (sometimes by a special endorsement to the policy);
  • an attorney or non-attorney who causes personal injury;
  • an attorney acting as trustee or executor; and
  • pre-or post-judgment interest, appeal bonds, and related costs.

In addition, the policy may specify the following coverage:

  • All prior acts of the firm and all members of the firm, including employees, when the insured, prior to the policy period, had not notified any previous insurer of any act and the insured had no reason to believe a breach of professional duty had occurred;
  • Claims made and reported no later than 60 days after the policy terminated;
  • Claims first made after the expiration of the policy, providing that the insured; had reasonable knowledge that a wrongful act occurred and a claim might be made and reported the suspected wrongful act to the insurer during the policy period;
  • An optional extended reporting period (additional coverage for claims reported after the expiration of the policy for errors committed within the policy period), usually purchased within 30 days of the policys expiration for a specific time period and for an additional premium; and
  • An optional retired or non-practicing attorneys extended reporting period


Whereas the coverage agreements provide coverage, the exclusions take it away. If an activity is in the exclusions section of the policy, you do not have coverage for that activity, no matter what the other sections of the policy state. It is up to the company if a defense (with no obligation to pay on behalf of) will be provided.  Each company's policy differs, so it is extremely important to examine exclusions carefully.  Listed below are exclusions sometimes found in professional liability insurance policies:

  • dishonest acts
  • fraudulent acts
  • criminal acts
  • malicious acts
  • vicarious liability (liability acquired by law or by contract for the acts, errors or omissions of others)
  • claims made by or against a business enterprise owned or controlled by an insured (refers to claims by or against the business itself)
  • claims arising out of or in connection with a business enterprise owned or controlled by an insured (refers to third-party claims)
  • an attorneys activities as an officer, director, etc., of a business not owned or controlled by the insured
  • services as a fiduciary under the Employee "Retirement Income Security Act of 1974 (ERISA)
  • RICO (Racketeer Influenced and Corrupt Organization Act) claims
  • activities as an elected public official
  • workers compensation claims
  • advertisers liability
  • loss sustained as a beneficiary or distribute of a trust or estate
  • bodily injury or property damage
  • real estate claims
  • claims by regulatory agencies
  • notarization of a signature without the physical appearance of the signatory
  • claims involving an insured versus another insured
  • discrimination
  • sexual harassment
  • prior acts (acts committed before the policy period) where the insured had knowledge of or should have foreseen the claim
  • investment advice
  • securities
  • punitive damages
  • fines, statutory penalties and sanctions
  • business enterprises liable for contamination or pollution of the environment (often contained in an "Endorsement" to the policy)
  • loss related to nuclear reaction, radiation or contamination (often contained in an "Nuclear Energy Exclusion" to the policy).

Defense and Settlement Provisions

Issues covered in this section of the policy include:

  • whether the insurer has the right to select defense counsel in the event of a claim. The policy language may explicitly state the right of the insurer to select defense counsel (for example, "Selection of defense counsel will be at the prerogative of the Company"). Alternatively, the right to select defense counsel may be implied in the right to defend a claim (for example, "The Company shall have the right and duty to defend any claim");
  • whether the insured has a right to select defense counsel (the opposite of the situation above).  In this case, however, the insurer may have the right to approve the choice of defense counsel in advance or the right to require the insured to revoke the selection;
  • whether the insured's consent is required to settle a claim. If the insured's consent is required, policies often place a limit on what the insurer will pay if the insured refuses to settle.

Limits of Liability

In this section of the policy you will find the following:

  • The specific limit of liability of each claim.
  • The aggregate liability on a firm basis (the total limit of liability for all claims).
  • The per claim deductible (that is, the deductible applies to each of every claim separately) or the aggregate deductible (the total deductible to be paid in a single year). If is possible for a policy to include both types of deductible, when there is a per claim deductible and a ceiling on the total deductible to be paid in a single year. Deductible may also be available for “damages only” which means you pay your deductible only in the event of a settlement (loss) or judgment this type of deductible, also known as a “loss only deductible” may be purchased on a per claim or annual aggregate basis.
  • Whether claim expenses (defense costs and other expenses) are included in the limits of liability. Keep in mind that claim expenses are not often included within the limits of liability. The means that the cost of defending a claim, even if the claim is eventually dropped, reduces your limits of liability, effectively shrinking the amount of coverage you actually have.
  • Whether the policy provides a "claim expense allowance." This provision, which is still rare, provides an allowance (e.g. $50,000) for claim expenses, in excess of the deductible, and aggregate for all claims. Using this example, this means that after paying the deductible, you would be allowed $50,000 in claim expenses before your limits of liability are drawn down to pay for claim expenses.
  • Whether two or more claims arising out of a single act or series of acts are considered a single claim. If they are considered a single claim, the policy may state that the policy year in which the first act is reported is considered the claim reporting date.


The section of the policy may include:

  • a requirement that the insured provide timely notice to the insurer of all claims and potential claims;
  • a requirement that the insured assist and cooperate with the insurer (including examination and interrogation by a representative of the insurer, attendance at hearings, depositions and trials, assistance in effecting settlement, securing and giving evidence, and obtaining the attendance of witnesses);
  • a provision that, in the event the insurer makes a payment under the policy, the insurer is entitled to any rights the insured has to recover what was paid (subrogation);
  • provision of coverage in excess of other available insurance. Since all insurers claim that their coverage is in excess of other coverage, defacto "sharing" arrangements exist by which each company takes a pro rata portion of the coverage when policies overlap;
  • provisions regarding the arbitration of claims. Arbitration may be required or permitted, or it may be prohibited without the insurer's consent;
  • at least a 30-day notice of cancellation of the policy by insurer.


Endorsements change coverage in some way on a firm-by-firm basis. Insurers use endorsements to change coverage on a selected basis, without changing the policy for everyone. Endorsements can either add coverage (e.g. to include coverage for work as a title agent), change coverage (e.g., to place defense costs within the limits of liability), or limit coverage (e.g., to exclude a specific lawyer from a firm's coverage or to exclude claims resulting from nuclear reaction, radiation or contamination). Typical endorsements exclude coverage for business enterprises liable for contamination or pollution of the environment and for loss due to nuclear reaction, radiation or contamination.

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

Law Firm Loss Prevention Systems and Procedures

Paul M Ablan, JD, CPCU, ARM Managing Director Global Professional Indemnity St Paul International

Law Firm Loss Prevention Systems and Procedures

A. Docket & Calendar Control

B. Mail Handling

C. Conflict of Interest Avoidance

D. Serving as Corporate Director/Officer

E. File Opening Procedure

F. Fees & Billing Practices

G. Work Product Control/Peer Review

H. Client Selection


A. Docket and Calendar Control

Docket and calendar control was one of the first risk management issues identified by the insurance industry. Today, some form of calendaring system is standard fare for law firms of all sizes. The insurance industry’s emphasis on adequate docket and calendar controls is the result of claims experience directly related to missed deadlines by practicing lawyers. Recent American Bar Association statistics indicate that more than 26% of all claims made against lawyers are administrative in nature. Of the administrative errors, 19% are directly related to calendaring mistakes; 11% are the result of the failure to make a docket control or calendaring entry; 4% are due to a subsequent failure to file and 4% are the result of a failure to react to a deadline once entered. St Paul experience tracks with the national figures; 22% of our lawyers claims are the result of calendaring errors with 5% specifically attributable to a failure to make a calendar entry. Missed dates and other administrative errors associated with docket and calendar control remain a significant cause of loss. Although a comprehensive docket and calendar system will not completely eliminate these losses, it will significantly reduce a law firm’s exposure.

There are a variety of docket and calendar systems available and the following descriptions are generic. However, practically all systems fall somewhere within these general descriptions.

1. Computerized Systems

Software companies are marketing literally dozens of automated docket and calendaring systems. The systems are typically centralized with data entry performed by a designated staff member. Commonly, docket or calendar sheets are filled out by the lawyers or their staff and submitted to the docket entry clerk. The central system is then able to issue a series of reminders to lawyers and staff as the important dates approach.

2. Perpetual Calendar Systems

A perpetual calendar system is basically a series of index cards filed by day, month and year with a cross-reference capability (e.g. color codes) for items with the greatest priority. In this system, the lawyer or designated staff member records pertinent dates and time frames on individual cards which are then filed according to date with the additional reminder cards filed prior to the ultimate due date.

3. Dual Calendar Systems

This system is simply two calendars or diary books to record future actions. Typically, one calendar is kept by the lawyer and another by an assistant. Problems inherent in this format include capacity and lack of reliability.

4. Single Calendar Systems

This system is extremely vulnerable to error and is an unacceptable format from an insurance perspective. Even sole practitioners should use a system where they are required to make more than one entry in recognition of an upcoming event.


1. Your firm’s docket and calendar system should be at least a dual entry system.

2. Your system should include both litigation and non-litigation items.

3. Firm policy and guidelines on docket and calendar control should be in writing and made available to all of the firm’s employees.

4. Centralized docket systems should be controlled by more than one person and have adequate backup in the event of computer failure. Your firm’s system should record more than final due dates.

5. Docket and calendar reminders should be sent to at least two persons, e.g., a lawyer and his/her assistant.

B. Mail Handling

           As mundane as the subject of mail handling is, a surprising number of law firms have no policy or procedure whatever for the routine distribution, opening, date stamping and delivery of mail. Since the majority of time deadlines faced by a lawyer are contained within documents sent through the mail, a few brief recommendations are in order.


1. Your law firm should adopt a policy requiring mail to be sorted and delivered within a specified time period after its arrival.

2. The mail should be opened and date stamped prior to delivery to the individual lawyers.

3. When necessary, docket and calendar entries should be performed prior to delivery of the mail to the individual lawyers.

4. Your law firm should adopt written policies and guidelines on mail handling.

 C. Conflict of Interest Avoidance

A law firm must be sensitive to potential conflict situations. The Model Rules and the Model Code spell out tests determining whether an impermissible multiple representation exists. In addition, an increasingly large number of legal periodicals address current lawyer conflict scenarios. Law firms should, therefore, be familiar with not only the provisions of the Model Rules and Model Code, they should also stay abreast of recent case law which interprets the precepts set forth in the Model Rules and Model Code.

The conflict of interest issue is one of increasing complexity and concern. The information that follows is intended merely to highlight practical steps a law firm can take to help address this potential malpractice area.

Assuming some degree of sensitivity and education, law firms must have a system in place to assist lawyers in determining whether a conflict exists. Essentially, conflict avoidance systems fit into three broad categories:

1. Oral/Memory – This is typically the least reliable conflict avoidance control. It refers to a process wherein firm members rely on individual recall or memory of other firm members to assess conflict potential.

2. Single Index System – A single index system refers to file cards describing either client, subject matter or both with no built in capability to cross-reference within the system or between multiple law firm locations.

3. Multiple Index System – As the name suggests, this system provides users with the capability of cross-referencing clients based on various menu items. Multiple index systems may or may not be computerized.

 Obviously, even the most sophisticated conflict avoidance system is only as good as the information that has been entered into it. Without strong law firm commitment to the development and maintenance of such a system, its benefits will be only marginal.


1. Your law firm should have an established program for continuing education related to conflict of interest matters.

2. Your firm should have a conflict avoidance system in place and should have written policies and guidelines concerning its use.

3. Firm members should not be permitted to enter into business transactions with clients without approval from firm management.

D. Serving as Corporate Director or Officer

(Source: Smith, Jeffrey M. and Mallen, Ronald E., Preventing Legal Malpractice, 1989, West Publishing, pp. 242-253.)

Lawyers have historically accepted the role of director or officer for a variety of reasons:

• Their presence adds a unique dimension to the composition of the board.

• They believe that their presence on the board will enhance their ability to serve the client.

• Board members will more readily accept legal advice if a member of the firm is also a director.

• They believe that serving as an officer or director is necessary to obtain or retain the corporation as a client.

 Underlying all of these reasons is a simple belief that if a board position is not accepted, it will be filled by a member of another firm with the corresponding risk that a corporate client will be lost. However, with the increasing tendency of corporations and shareholders to file claims against board members, law firms must understand the malpractice exposure associated with assuming these corporate roles.

Consider that:

• A lawyer/director has an increased chance of being sued under the Racketeer Influenced and Corrupt Organizations Act (RICO). To violate RICO, a defendant must conduct or participate in the affairs of an enterprise through a pattern of racketeering. Although directors may delegate the task of overseeing the day to day operations of the corporation to others, they are still required to supervise and oversee the actions of their subordinates and, accordingly, conduct the affairs of a corporation. If the lawyer is not a director, it is far more difficult to prove that he or she participated in the conduct of the corporation.

• In tender offers, directors are increasingly exposed to shareholder suits because of possible accusations that their opposition to a change in control was motivated by self-interest. In addition, a lawyer/director may have an increased exposure because of the perceived conflict of advising the corporation regarding its options while serving on the board. That conflict, whether perceived or real, compromises potential defenses.

• Directors are also frequently called as witnesses in corporate litigation, even when they are not actually participants. This may lead to the disqualification of the lawyer as well as the firm with a general prohibition of a lawyer also acting as a witness. Disqualification, whether for this reason or another, results in a loss of revenue for the firm and the terrible inconvenience of retaining outside counsel. It also means that the outside firm will have to become more familiar itself with the case and the corporate client, a result which the lawyer hoped to avoid to begin with. It also serves as an incentive for naming the lawyer/director in the suit so plaintiff’s counsel can oppose a less qualified law firm.

• Increasingly, directors and officers liability insurance policies provide coverage only if an insured is acting solely in his/her capacity as a director or officer.


1. Do not accept officer or director positions, particularly if the corporation is a client of the law firm.

2. Serve as outside counsel to the corporation.

3. If the dual role of lawyer/director cannot be avoided, consider the following recommendations:

a. If significant corporate activity clearly involves conduct by a lawyer both as director and lawyer, participation should be limited to one role. This decision should be reduced to writing and, where possible, approved by a board or committee.

b. Where the lawyer/director performs both roles on an ongoing basis, there should be, to the extent possible, a clear delineation of roles. Steps that might be taken include:

i. Separate files for each role should be maintained.

ii. Separate stationary should be used. Law firm bills should be sent directly to the corporation and payment made to the law firm accounting department.

iii. Firms should never share in directors’ fees.

iv. The lawyer should abstain from board votes which will directly or indirectly affect the firm.

v. The lawyer/director should be aware that conversations involving both capacities may threaten the lawyer/client privilege.

c. Your law firm should have written policies and guidelines concerning the ability of firm members to serve a directors or officers of corporations.

E. File Opening Procedure

The file opening procedures not only signal the beginning of the lawyer/client relationship, it is also the point at which most of the firm’s loss prevention techniques are coordinated. Without dictating a specific form or process, we believe that your firm’s file opening procedure should include the following:


1. A client or case acceptance designation.

2. A conflict of interest check.

3. An initial docket or calendar entry as needed.

4. A fee approval (retainer agreement, engagement letter) designation.

5. Your firm’s policy and guidelines on file opening should be in writing and made available to all firm employees.

 F. Fees and Billing Practices


1. Use engagement letters or retainer agreements for all new clients and for new matters for existing clients.

a. Confirm existence of lawyer – client relationship.

b. Confirm and outline the agreed upon course of action.

c. Confirm and outline fee arrangement.

d. Identify those issues or obligations for which the lawyer will not be responsible.

2. Use non-engagement letters for all representation which has been declined by the law firm.

3. Bill on a frequent, consistent basis.

4. Use disengagement letters upon termination of representation.

a. Confirm completion of work.

b. Indicate termination of representation.

c. Direct client to follow-up on matters not completed.

5. Consider adopting a law firm policy against suing clients for unpaid legal fees.

6. Your firm’s policy and guidelines on billing should be in writing and made available to all firm employees.

G. Work Product Control/Peer Review

(Source: American Bar Association Standing Committee on Lawyers’ Professional Liability, Partner Peer Review: An Idea Whose Time has Come, Seminar Given April 19-20, 1990.)

Law firms throughout the country have, traditionally, utilized some method of associate review for monitoring the quantity and quality of work performed by junior members of the firm. Unlike a number of other professions, however, lawyers have not yet fully embraced the idea of peer review.

Doctors and accountants, for example, have developed fairly extensive peer review programs. In the case of the medical profession, quality peer review is considered significant enough in some states to merit legislative support granting varying degrees of immunity for doctors involved in the process. The legal profession on the other hand, has made a number of “false starts” in its effort to develop some form of a model peer review system. As early as 1980, the American Law Institute – American Bar Association (ALI-ABA) developed a model peer review system intended to serve as a guide for law firms choosing to pursue that form of self regulation. That initial effort was not, unfortunately, received with a great deal of enthusiasm within the legal community. Some of the skepticism was well founded and highlighted concerns by lawyers regarding whether anybody or any group was capable of regulating the substantive manner in which an individual lawyer practiced his or her craft.

The skepticism that greeted the initial ALI-ABA model has diminished. Members of the Bar now recognize the need for some form of self-assessment and this form of risk management is also being promoted within the insurance industry. The information that follows attempts to explain the various methods of conducting peer review programs within the legal community. These are not intended to serve as “all encompassing” examples of peer review, but will provide some practical working models for developing such systems on a voluntary basis in law firms. Please note that while the emphasis of the article is on partner peer review, that phrase should not be interpreted as meaning that only partners can adequately review other partners. The material that follows highlights the fact that lawyers at any level within a firm can be reviewed in a variety of ways.

At the outset, it is important to note that there are a wide variety of peer review programs. These programs range from relatively simple “lawyer to lawyer” assistance to formal referral programs developed with a particular firm.

The definitions below will briefly describe some of the peer review programs within the legal profession. Following these brief descriptions, the article will focus on four different approaches to practice peer review that we believe are practical in their approach and provide a real opportunity for firms interested in managing the technical aspects of their practice. Please note that for purposes of this document, “peer review” and “practice peer review” are synonymous. It should be recognized, however, that peer review or practice peer review (here referring to some form of formal partner evaluation) is just one method of providing assistance to lawyers by other lawyers.

• Lawyer To Lawyer Individual Help: Individual help programs have developed mostly in the areas of substance abuse intervention and counseling. Most of the states currently have programs that offer advice to a lawyer whose problems are personal and/or may be related to alcohol or drug abuse.

• Informal Referral Peer Review: This refers to the fact that lawyers who have been sued for malpractice may be pressured to obtain help by their insurer if the cause of the claim seems remediable. The Oregon fund provides such feedback in specific cases. Informal help for lawyers has also been provided on a limited basis through Peer Assistance Committees adopted in nine pilot federal districts.

• Formal Referral Peer Review: Formal peer review models have, for the most part, failed to gain recognition or acceptance by the bar. Under this system, federal judges are encouraged to refer lawyers suspected of non-performance to a peer review committee. Judges have been, thus far, reluctant to make referrals under this pilot project and have preferred other, more formal types of sanctions which are designed to prevent frivolous lawsuits or abuse of discovery, including Rule 11 sanctions.

• Lawyer’s Standard Boards: These boards are the ethical arms of the state judicial systems and are the more well known methods of providing lawyer discipline. Individual state boards are created and empowered to discipline lawyers for negligent or unethical behavior in the course of their practice. Typically, referrals to the boards are brought by disgruntled clients or third party observers.

• Disciplinary Peer Review: Conceptually, this is similar to a peer review committee for a particular firm, only the idea is extended to all lawyers within a particular state. A group of lawyers are chosen to serve as a peer review committee and all disciplinary proceedings within that jurisdiction are referred to the committee for action.


1. All law firm members should have access to individual help programs in the area of substance abuse intervention and counseling.

2. Law firms with five or more members should have a formal peer review program for all member lawyers that is utilized on a regularly scheduled basis.

H. Client Selection

Over the past few years, insurance companies have begun to view the law firm’s process of client selection as a key risk management opportunity. Given the effects of rising and falling economic cycles, many now engage in alternative business opportunities, some of which fall outside established areas of expertise. As these firms struggle to maintain their revenues, new engagements are often accepted without the requisite regard for the increased exposure represented by those engagements.

Today, good law practice management must include a careful review of all prospective clients as well as new matters for existing clients. With clients more willing than ever to bring suit against lawyers, new business should be carefully scrutinized. Consider the following questions:

• Does the prospective client insist upon proceeding on principle alone and without regard to the expected costs?

• Does the prospective client have unrealistic expectations, either about what is to be accomplished or the time it will take?

• Does the prospective client appear to be price shopping, or is he/she changing attorneys in the middle of a proceeding?

• Does the prospective client insist upon doing part of the work, because he or she “knows the law”?

• Are there unreasonable time constraints because the prospective client has waited until the last minute to consult a lawyer?

• Will the prospective client’s problem demand too much of the firm’s time and resources?

• Does the prospective client appear to be using the law firm’s name and reputation to lend credibility to an otherwise questionable venture?


1. Your law firm should establish a committee for the acceptance of both new clients and new engagements for existing clients.

2. Your law firm should have written procedures and guidelines for client acceptance including:

• The acceptance of contingency fee cases.

• The acceptance of new clients by associates.

• The acceptance of engagements outside of the firm’s established areas of expertise.

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

So You Might Have a Malpractice Claim

What to Do if You Have a Situation That Might Result in a Malpractice Claim.

If you encounter a situation that you believe might result in a malpractice claim (e.g., you become aware of an error you have made or important client documents are lost), you first need to assess the probable damage done. Begin by asking yourself these questions:

1. Could this incident cause my client harm?

2. If it were not for this incident, would my client’s case be successful?

3. Can the situation be fixed (e.g., can lost documents be replaced, can a deadline be extended)?

Answer this question carefully. Often, insurance companies are experts in “righting malpractice wrongs” and can repair a seemingly impossible situation. Keep in mind the following important points:

1. Under the Model Rules of Professional Conduct (Rule 1.4, Communication), a lawyer has an ethical obligation to keep a client informed about the status of a matter to the extent necessary to permit the client to make informed decisions. A lawyer may not withhold information to serve the lawyer’s own interest or convenience. This duty extends to informing the client of any errors committed by the attorney that may result in harm to the client’s interest. Failure to disclose errors may result in disciplinary proceedings and a possible loss of the attorney’s license.

Failure to inform a client about an error may not in itself exacerbate a malpractice situation. The omission and, by extension, the basis for malpractice exist whether or not the attorney reports the omission to the client. Failure to inform the client of an error may not, therefore, cause a new malpractice situation to exist.

In most cases, however, attempts by an attorney to “fix” an error are not successful, and the client ultimately finds out about the attorney’s error anyway, setting the stage for a malpractice claim. If the attorney is found liable for malpractice, the ultimate monetary judgment awarded may be influenced indirectly by the attorney’s failure to disclose information to the client.

In addition, the statute of limitations for the malpractice claim may be “tolled” (suspended or stopped temporarily from running) if the client is not notified of a mistake or error discovered by the attorney.

The bottom line is that it is in the attorney’s and the client’s best interest to disclose any errors to the client as soon as possible.

2. All insurance policies include language requiring the insured to give prompt notice to the insurance company of a malpractice claim or suit. This requirement enables the insurer to defend the claim or, when possible, to mitigate or avoid a loss.

In addition, some policies also require the insured to report potential claim situations to the insurer as soon as the attorney becomes aware of such situations. Such language usually requires the insured to notify the insurer when he or she “becomes aware of any act, error or omission which could reasonably be expected to be the basis of a claim or suite covered by this policy....” Read your insurance policy closely. (The language will usually be contained in a section called “Claims” or “Notice of Claim or Suit.”) Failure to report promptly incidents or claims to your insurer could jeopardize your coverage. Once a problem has been reported to the insurer, the insured may have an obligation to keep the insurer up-to-date on any progress made to solve the problem. The insured may thus find himself or herself in a ‘Catch-22" situation. If the attorney does not report the problem, he or she may not have coverage; if the attorney reports the problem, he or she may have an ongoing responsibility to keep the insurer informed about the situation.

3. Some state bars sponsor confidential, toll-free WATS lines for attorneys to call with questions concerning ethics and malpractice issues. These WATS lines offer the opportunity to discuss with an expert your duty in the situations described above. Find out if your bar sponsors such a program, and don’t hesitate to take advantage of this service.

In addition to situations where the attorney discovers a mistake, there may be situations where a client expresses serious complaints about the attorney’s services. When should you report these to your insurer? Whether or not you believe the complaint to be justified, you should probably report such complaints to your insurer if you think there is even the slightest chance that the complaint might turn into a malpractice claim. The insurer may be able to offer you advice on remedying the situation, enabling you to avoid the prospect of having a claim filed against you.

This is especially critical when switching insurers. Your former insurer will require that all claims and any circumstances be reported before coverage expires. Your new insurer will not cover any claim/circumstances of which you had knowledge prior to the effective date. Failure to report a “claim or circumstance” could very well create a gap in coverage.

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

Help Prevent Gaps In Your Insurance Coverage

What should you do to prevent gaps in your insurance coverage?

Gaps can typically occur in one of two ways:

- You have no "prior acts" coverage for acts committed prior to the effective or retroactive date of your current policy or

- You have no "tail" coverage for acts committed during your current coverage but reported after the policy expiration date:

Some pointers to consider in either case:

1. Keep in mind that you generally have only 30 days after the expiration of a policy to purchase "tail" coverage (formally referred to as an "extended reporting period" or " extended reporting endorsement"). Therefore, you need to examine all of your options quickly.

2. Who is the insurance carrier at your previous firm? Call the carrier and ask whether you can purchase tail coverage on your own.

3. Who is the carrier at your new firm? If the firm is not purchasing prior acts coverage on your behalf, ask the firm if you can pay an extra premium to obtain prior acts coverage.

4. Even if you think that the risk of a claim from work done at your old firm is low, you need to consider that, with any claim, the cost of defending against such a claim could be high. If it therefore important to consider carefully the need to either tail or prior acts coverage.

5. If you are leaving a firm: Just because your previous firm has assured you that it will maintain its malpractice coverage, don't assume that this means that you will continue to have coverage. The firm will have coverage for your errors, but you may have individual coverage.

6. If you are changing from private to corporate or non-practicing status, leaving to have a child, going into teaching, or switching to a non-legal career: keep in mind that you still need to purchase "tail" coverage for past errors that may be discovered in the future. You may think that you are covered, but don't assume it. The only way to make sure is to find out.

AN IMPORTANT NOTE: If you are an attorney or law firm that is considering hiring another attorney, you should find out whether you will be assuming liability for the acts of that attorney prior to joining your practice ("prior acts") and, if so, what impact it will have on your insurance coverage.

California Lawyer Professional Liability Insurance / Errors Omissions Specialist

California Lawyer Professional Liability Insurance / Errors Omissions Specialist