August 04, 2008
Mandatory Malpractice Insurance—It’s Time To Call The Question
Past Committee Chair Summarizes the Proposal's History and the Decision Before VSB Council
by Darrel Tillar Mason
Immediate Past Chair
Special Committee on Lawyer Malpractice Insurance
Three years after the Supreme Court of Virginia and the Virginia General Assembly asked the Virginia State Bar to study the question of mandatory malpractice insurance, a proposed rule requiring such insurance has been published for consideration.1 The proposed rule was developed by the VSB Special Committee on Lawyer Malpractice Insurance (LMI Committee) at the direction of the VSB Council. Neither the committee nor the council has taken a position on the merits of the proposed rule. Because a portion of council representation changes each year, new members have not had the advantage of receiving previously submitted reports, and some have requested a comprehensive summary of alternatives to and other models of mandatory insurance that were considered by the committee. Thus the purpose of this article is to review the history of the development of the proposed rule with reference to previous reports and rejected alternatives, summarize the specifics of the proposed rule, review highlights of the reasoning for its provisions, and provide an analysis of the arguments for and against the current proposal in anticipation of a vote on the issue at the October 17, 2008, council meeting.
History of the Development of the Proposal
An initial committee report from the Client Protection Subcommittee of the LMI Committee was presented to the VSB Executive Committee in August 2005. It focused on malpractice insurance disclosure, uninsured and underinsured lawyer malpractice claims fund options, mandatory malpractice insurance programs, and malpractice insurance education efforts.2 A full report presented to the VSB Council in June 2006 provided information on the current status of required malpractice coverage in Virginia, data on lawyer financial responsibility as self-reported to the bar, current status of malpractice coverage levels in Virginia, data on recent claims experience in Virginia and nationally, and a description of four models designed to protect the public against lawyers who commit malpractice.3 No action was taken by the council at that time.
A year later, a proposed rule change was presented to the council (after publication in the March 2007 Virginia Lawyer Register4) to strengthen the current financial responsibility rule. The impact of this proposed change was to require lawyers who certify on their annual dues statement that they have malpractice insurance to submit documentation of that coverage to the bar. The proposal was withdrawn when the council indicated a desire to debate at its October 2007 meeting the threshold question of whether to direct the LMI Committee to develop a specific proposal for mandatory malpractice insurance.5 An updated report on the mandatory malpractice issue, with new data on the possible correspondence between of disciplinary action and lack of malpractice insurance coverage, was submitted to the council for consideration.6 After hearing two committee members debate the merits of moving forward with a specific proposal at the October 2007 meeting, the council directed that a proposal be developed.7 In February 2008, VSB Executive Director Karen A. Gould publicized the need for member comment on the question of mandatory malpractice insurance in anticipation of the upcoming debate and council vote on the proposal.8
In March 2008, the LMI committee completed a draft of a specific mandatory malpractice insurance proposal and submitted it to the council with the expectation that the proposed rule change would be published in the March Virginia Lawyer Register and voted on in June 2008. At this meeting, the council raised a concern about the impact of the proposed rule on pro bono involvement by uninsured lawyers. The council therefore directed that official publication of the proposed rule be delayed until an overview of the proposed rule could be published, 9 which was accomplished in April 2008. 10 The council also asked for pro and con opinion pieces to be published in the Virginia Lawyer, which occurred in April 2008 and July 2008. 11
After the March 2008 council meeting, and in view of the council’s concern about limiting all pro bono representation to insured lawyers, the LMI committee revisited the proposal. The proposal was subsequently modified in an attempt to avoid any unintended consequence. The change was explained in a memo to the council provided in advance of its June 2008 meeting. 12 At that meeting, the council voted to officially publish the revised proposed rule with a disclaimer that there had been no position taken on its merits. 13 The proposed rule was published on the VSB website on July 1, 2008, and in the August/September Virginia Lawyer Register, which was posted on the website on July 29, 2008, and was scheduled to mail August 12, 2008. 14
Alternatives to Mandatory Insurance and Alternative Models of Mandatory Insurance
The Client Protection Subcommittee of the LMI Committee considered three different alternatives for enhancing lawyer financial responsibility that did not involve imposing a mandatory insurance requirement. The first alternative was to tighten the current financial responsibility disclosure rule 15 by requiring additional information and documentation from lawyers who certify that they have insurance. Approximately half the state bars in the United States currently require some form of disclosure to the bar regarding insurance, and many of these require that the lawyer provide the name of the carrier, policy limits, and/or policy coverage period. 16 This approach was narrowly recommended by the LMI Committee in March 2007 because of concerns regarding the administrative burden on the bar to review the responses, store the declaration pages or certificates of insurance submitted if such were required, and maintain the privacy of the information. This approach was withdrawn in favor of developing the current proposal.
A second alternative would have the bar require lawyers without insurance to disclose this fact directly to their clients. This is a model adopted by at least five other states (Alaska, New Hampshire, Ohio, Pennsylvania, and South Dakota.) 17 The overwhelming response to this proposal was that it was an unnecessary intrusion into an individual lawyer-client relationship and extremely difficult to enforce. It was seen as an indirect rather than direct effort to achieve universal coverage by intimidating lawyers into buying coverage. Concerns over the purchase of “over the Internet” discount insurance and lawyers buying, then dropping, coverage during representation were also cited as a basis for rejecting this approach.
A third alternative to mandatory insurance was a modification of a measure proposed in the Virginia General Assembly. 18 The committee considered an approach that would require uninsured lawyers in private practice to pay a substantial fee into a bar-controlled fund (similar to the current Clients’ Protection Fund). That fund would provide some compensation to victims of lawyer malpractice insurance. In this model, a claimant would have to have a final unsatisfied judgment of malpractice to be eligible for compensation. This alternative was rejected as expensive and cumbersome, and because it does not address the hurdle faced by clients who are unable to find an attorney to represent them in a malpractice claim in the absence of insurance.
Two other potential models of mandatory malpractice insurance were considered as an alternative to the model ultimately selected, which relies exclusively on the open market to provide the required insurance. One model would have involved the bar in operating its own insurance company and requiring all lawyers to obtain a minimum level of insurance from this source. This approach is used in Oregon — the only state to currently require all lawyers in private practice to have insurance. 19 This model was rejected for Virginia on the basis that it would definitely increase the cost of malpractice insurance (doubling in many cases) for bar members. The other model would have involved creating an assigned risk pool for lawyers who could not obtain insurance in the open market. This approach was rejected on the basis that it would be prohibitively expensive and likely require the rest of the bar to pay to subsidize the assigned risk pool. No one liked this approach.
The Specifics of the Proposed Rule and the Reasoning Underlying Its Provisions
The proposed rule is not complicated.
Currently, all active members of the bar engaged in the private practice of law representing clients drawn from the general public must disclose each year on the member’s annual bar registration whether they are covered under a professional liability insurance policy. 20 This information is then made available to the public.
The proposed rule also would apply to all active members regularly engaged in the private practice of law representing clients drawn from the general public. It and would require them to be covered under a malpractice policy obtained in the open market. The minimum acceptable policy would provide either $100,000 worth of claims indemnity coverage and an additional $50,000 worth of claims expense coverage, or $200,000 worth of claims indemnity coverage with no additional claims expense coverage. The active member shall then certify on the member’s annual VSB registration that he or she has the required insurance and shall provide the name of the insurance company and the policy number. An extended reporting endorsement, or “tail coverage,” would not satisfy this requirement. Should a member’s insurance policy lapse, be no longer in effect, or terminate for any reason, and not be replaced within thirty days thereby avoiding a lapse in coverage, the member must report such event to the bar. Failure to comply with the proposed rule would subject the member to an administrative suspension from the practice of law. No exceptions are provided. The proposed rule would become effective July 1 in the year following approval by the Supreme Court of Virginia.
The first version of the proposed rule applied to all active members engaged in the private practice of law representing clients drawn from the general public. Subsequently, a revision was made to limit the application of the rule to active members regularly engaged in the private practice of law representing clients drawn from the general public. Without the limitation of “regularly,” government attorneys, corporate attorneys, and other lawyers who only occasionally represent clients drawn from the public — including pro bono clients — would be forced to choose between declining such representation or paying for an insurance policy. Ultimately a decision was made to target the class of lawyers most likely to commit an act of malpractice based on the volume of legal work they perform. The rationale for the limitation of “regularly” is more fully discussed in a recent memorandum to the VSB Council. 21
The prescribed minimum coverage standards mirror the basic (lowest) policy currently offered by the two insurance companies that insure the majority of the solo and small-firm practitioners in Virginia — Attorneys Liability Protection Society (ALPS) and Minnesota Lawyers Mutual (MLM). While $100,000/$200,000 of malpractice coverage may well be inadequate for certain exposures, based on available data from ALPS, MLM, and the American Bar Association’s Lawyers’ Professional Liability Committee, these limits would cover more than 90 percent of malpractice claims. 22 Under the published proposal, insurers would continue to determine appropriate deductibles on an individual case basis and in accordance with their own underwriting standards and the insured's preferences.
In recent years, between 87 percent and 89 percent of lawyers who reported that they were in private practice representing clients drawn from the general public also indicated that they were covered under a professional liability policy. 23 For these lawyers, the change in the reporting requirements under the existing rule on financial responsibility and the proposed rule on mandatory insurance are negligible. The only difference is that the proposed rule requires the member to additionally report the name of the carrier and the policy number. Currently, members who report that they have malpractice insurance must report within thirty days if such coverage lapses or is terminated for any reason. This reporting requirement would not change under the proposed rule, but the member would be required to report the name of the replacement carrier and replacement policy number. (Exact figures for fiscal 2008-09 — derived from the certifications due July 31, 2008 — will be made available prior to the October 2008 council meeting.)
The proposed rule does provide a mechanism for the bar to verify with the named insurer the policy’s existence. The proposed certification requires the member to authorize the insurer to provide the information upon request if a question arises as to the accuracy of a member’s certification. It is not anticipated that this authority would be invoked by the bar with any frequency.
The penalty for failure to comply with the proposed rule is the member’s administrative suspension until the member is in compliance and seeks reinstatement. This is consistent with the penalty for failing to comply with the mandatory continuing education requirements. What distinguishes the two mandatory rules is the fact that the proposed mandatory insurance rule does not provide a “for good cause” exception.
The reasoning behind not including a provision in the proposed rule for considering exceptions is twofold. First, it seemed premature to articulate a standard for what might be considered good cause to excuse noncompliance before there was a clear indication from the VSB Council that the proposed rule was generally acceptable, and until the bar had an indication of how many requests for exceptions may be forthcoming. Second, the most obvious reasons for requesting an exception are themselves problematic. For example, it may be the case that a member cannot obtain an affordable policy because past claims make the member an expensive risk to underwrite. But would nonaffordability be a reasonable basis for an exception under these circumstances? Similarly, it may be the case that a member cannot obtain a policy because of a past or present involvement in the VSB disciplinary system. But would noninsurability be a reasonable basis for an exception under these circumstances? If you accept the premise for the rule as being client protection, positing circumstances that would justify an exception becomes extremely difficult. This question leads directly to an analysis of the merits of adopting a mandatory malpractice rule, as opposed to a mere description of what such a rule might involve.
Analysis of Arguments For and Against the Proposed Rule
Over the past three years, raising the issue of mandatory malpractice insurance has sparked an animated, if not always well-informed, response. For example, in the spring of 2006 there was a letter to the editor in the Virginia Lawyers Weekly from a bar member critical of the news that the VSB was studying the question of mandatory malpractice insurance and apparently under the mistaken impression that the VSB Clients’ Protection Fund compensates victims of lawyer malpractice. 24 Many of the opponents of mandatory malpractice insurance believe that there is simply insufficient evidence to justify the bar imposing a requirement that could result in members losing their licenses to practice law. On the other side, proponents believe that some potential individual hardship is justified by the need to protect the public. This “data driven” vs. “principle driven” paradigm is discussed more fully in the October 2007 report to the bar council. 25 Reference is also made to the pro and con articles cited above and written by members of the LMI Committee. 26
Arguments in Support of Mandatory Malpractice Insurance
Proponents of mandatory malpractice insurance cite protection of the public as justification. While it is true that malpractice insurance is not designed solely to protect the public, it is hard to dismiss the significant degree of public protection that results from its availability. ALPS, the VSB’s endorsed malpractice carrier, reports incurring since 2002 a total of $12.6 million in loss and $9 million in defense costs. 27 That's $12.6 million of protection for members of the public harmed by the malpractice of Virginia lawyers. Regrettably, the incidence of lawyer malpractice is not declining. ALPS also reports as of May 31, 2008, having $8 million in outstanding reserves in Virginia for 168 open claims. 28
While acknowledging that malpractice insurance is primarily designed to protect the lawyer's reputation, time, and assets, it should also be acknowledged how the coverage simultaneously benefits the public. Competent claims handling provided by the malpractice carrier to deal with unfounded claims for the lawyer, and experienced defense counsel assigned should a malpractice claim be litigated, takes an enormous burden off the lawyer involved. This protects allof the other clients of that lawyer by allowing the lawyer to focus on their ongoing cases instead of the past case which gave rise to the claim.
Without malpractice insurance coverage, there undoubtedly will be members of the public injured by lawyer malpractice who are left with no means of recovery. The Clients’ Protection Fund does not handle losses arising from malpractice; it consistently turns down a volume of such requests each year. 29 If a client suffers a loss arising out of lawyer malpractice and the lawyer is not insured, the sole recourse is against the lawyer’s personal assets, which may well be unreachable or insufficient to pay the claim. In addition, without the potential for recovery against an insurance policy, potential claimants face a much harder challenge in obtaining representation to handle a malpractice claim.
The argument is also made that it is a privilege to be licensed to practice law in Virginia and that it would enhance the reputation of the bar to require its members to protect clients by having insurance. The VSB and state already require certain lawyers to have insurance coverage or some sort of bond. For example, lawyers who participate in the Virginia Lawyer Referral Service must have insurance, 30 and lawyers who handle real estate closings must be bonded. 31 The fact that nearly 90 percent of lawyers in private practice representing clients drawn from the public already have malpractice insurance is seen as recognition of its importance to the lawyer and the public.
Arguments Against Mandatory Malpractice Insurance
Opponents of mandatory malpractice insurance unfailingly cite the lack of data documenting the extent of harm to clients of Virginia lawyers from uninsured lawyers as a basis for their position. This data is simply unavailable because it cannot be determined how many potentially justified claims are never brought because of the absence of insurance. This argument is captured in the often-repeated statement that mandatory insurance is “a supposed cure for an alleged problem.”
The description of mandatory insurance being a “supposed cure” is valid in view of the limits in malpractice insurance coverage. There is a concern that imposing mandatory malpractice insurance would create in the public a false sense of security. It is undeniable that circumstances exist wherein a client harmed by the malpractice of an insured lawyer would be in no better position than a client harmed by the malpractice of an uninsured lawyer. This is the case, for example, where a lawyer is either underinsured and has insufficient limits to satisfy the claim, or where the lawyer failed to timely disclose the claim to the carrier, resulting in a denial of coverage.
Opponents of mandatory malpractice insurance most often cite the potential financial impact on all lawyers in private practice if such a rule were adopted. There is a deep suspicion that in a mandatory insurance environment, carriers would be tempted to increase the cost of insurance across the board. Similarly there is a fear that the expense of complying with such a rule would force lawyers who practice part time out of active practice. Making the rule applicable only to lawyers who “regularly” practice law is an attempt to minimize this impact, but would not eliminate its occurrence.
The argument that mandatory malpractice insurance would generate a flood of new malpractice lawsuits cuts both ways. Certainly, the availability of insurance would be an incentive for a disgruntled client to find a lawyer to pursue a malpractice claim -- and not all frivolous claims would be rejected by plaintiffs' lawyers. However, this argument seems to support the proposition that there are currently many malpractice actions (both legitimate and spurious) not being prosecuted for lack of insurance. This forbearance from suit may be a short-term advantage to the lawyers involved, but ultimately may harm the profession.
The most troubling aspect of the proposal is the concern that it would allow insurance companies to dictate who gets to practice law. While insurance might be available to lawyers with a poor claims history or a lawyer in a high-risk area of practice, the cost of that insurance might be prohibitive. A significant hardship would be imposed on a lawyer who is denied coverage because of a pending disciplinary complaint when ultimately the lawyer is exonerated of wrongdoing. If in the meantime his or her license to practice law is suspended because of an inability to obtain insurance coverage as a result of the pending complaint, the lawyer may suffer irreparable harm.
If you support the concept of protecting the public by requiring all lawyers who regularly represent clients drawn from the public to have malpractice insurance, the proposed rule accomplishes this goal as simply and inexpensively as possible. As proposed, it does have the potential of depriving some lawyers of their ability to engage in the private practice of law representing clients drawn from the general public. Those lawyers would be forced to change their type of practice. There are valid arguments on both sides of this issue. After three years of discussion, it’s time to call the question.
1 “Proposed Rule Published for Comment,” http://www.vsb.org/site/news/item/proposed-insurance-requirement, 7.14.08.
2 Darrel T. Mason, “Status Report on the Work of the Client Protection Subcommittee,” Report to Virginia State Bar Council (August 31, 2005). [download Word doc]
3 Darrel T. Mason, “Report of Study Undertaken by Client Protection Subcommittee of the Special Committee on Lawyer Malpractice Insurance 2005-2006” (June 2006), at 5-6. [download Word doc]
4 “Virginia State Bar’s Special Committee on Lawyer Malpractice Insurance Seeking Public Comment on Proposed Amendments to Part 6, Section IV, Paragraph 18 of the Rules of the Supreme Court of Virginia,” Virginia Lawyer Register 55 (March 2007), at 29.
5 Alan Cooper, “VSB to revisit issue of mandatory insurance,” Virginia Lawyers Weekly 22 (June 25, 2007) , at 1 and 26.
6 Darrel T. Mason, “Mandatory Malpractice Insurance Issue,” Report to Virginia State Bar Council (October 2, 2007) [download PDF file]
7. Alan Cooper, "Mandatory malpractice insurance still on table," Virginia Lawyers Weekly 22 (October 29, 2007) , at 1 and 21,.
8 Karen A. Gould., “Malpractice Proposal Needs Member Comment,” Virginia Lawyer 56 (February 2008), at 11. http://www.vsb.org/docs/valawyermagazine/vl0208_exec-message.pdf
9 Alan Cooper, "VSB Meeting is dominated by client protection," Virginia Lawyers Weekly 23 (March 10, 2008), at 1 and 19.
10 Darrel T. Mason,, “An Overview: A Possible Mandatory Malpractice Rule,” Virginia Lawyer 56 (April 2008), at 9 and 39. http://www.vsb.org/docs/valawyermagazine/vl0408_comment-insurance.pdf.
11 Bruce M. Marshall, “Opinion: Private Practitioners Should Have Malpractice Insurance,” Virginia Lawyer 56 (April 2008), at 10 and 40. http://www.vsb.org/docs/valawyermagazine/vl0408_debate-insurance.pdf
Jeannie P. Dahnk, ”Opinion: Legal Malpractice Insurance Should Not Be Required,” Virginia Lawyer 57 (June/July 2008), at 11 and 18. http://www.vsb.org/docs/valawyermagazine/vl0708_debate-insurance.pdf.
12 Darrel T. Mason, “Revisions to Mandatory Malpractice Proposal” Report to Virginia State Bar Council (June 2008) [download PDF file].
13 Alan Cooper, "Mandatory coverage debate is still going," Virginia Lawyers Weekly 23 (June 30, 2008), at 1,
14 Supra, note 1.
15 Rules of the Supreme Court of Virginia Part 6, Section IV, Paragraph 18.
16 American Bar Association Standing Committee on Client Protection, "State Implementation of ABA Model Court Rule on Insurance Disclosure” (February 26, 2008).
18 Johnny Joannou, "HB 2142 Clients Protection Fund, assessment on uninsured attorneys,"
(Passed Virginia House of Delegates by a vote of 73-23 on February 3, 2005; left in Senate Committee for Courts of Justice on February 21, 2005).
19 Supra, note16.
20 Supra, note15.
21 Supra, note 6.
22 American Bar Association Standing Committee on Lawyers' Professional Liability, "Profile of Legal Malpractice Claims, 2003-2005."
23 Supra, note 6.
24 H. Watkins Ellerson, "Lawyer objects to mandatory liability coverage," Virginia Lawyers Weekly 21 (April 17, 2006), at 2,
25 Supra, note 6.
26 Supra, note 11.
27 Robert Minto, President and CEO of Attorneys Liability Protection Society, e-mail to Darrrel T. Mason (June 17, 2008)
29 During the 2005-06 fiscal year, approximately 25 percent of the claims denied by the Clients' Protection Fund Board involved allegations of attorney negligence as opposed to dishonesty as reported by the Clients' Protection Fund Board.
30 Virginia State Bar, “Virginia Lawyer Referral Service Application,” Rule 4.b (July 1, 2007) http://www.vsb.org/docs/VLRS_app.pdf
31 Va. Code §.6.1-2.21