Why You Need Insurance

***The following rule became effective January 1, 2010:

California Rules of Professional Conduct:

Rule 3-410. Disclosure of Professional Liability Insurance

A member who knows or should know that he or she does not have professional liability insurance shall inform a client in writing, at the time of the clientÕs engagement of the member, that the member does not have professional liability insurance whenever it is reasonably foreseeable that the total amount of the memberÕs legal representation of the client in the matter will exceed four hours.

If a member does not provide the notice required under paragraph (A) at the time of a clientÕs engagement of the member, and the member subsequently knows or should know that he or she no longer has professional liability insurance during the representation of the client, the member shall inform the client in writing within 30 days of the date that the member knows or should know that he or she no longer has professional liability insurance.

This rule does not apply to a member who is employed as a government lawyer or in-house counsel when that member is representing or providing legal advise to a client in that capacity.

View the entire rule on the California State Bar website

Some attorneys may argue that having insurance just makes one a target for lawsuits. The truth is that not having insurance does not prevent claims. Especially in these times, it is important to protect everything that you have worked so hard to build.

Historically, about 35% of insurance payments in professional liability are for litigation expenses. Why would an attorney risk bankruptcy, stress and lost time defending and paying for a claim when the cost of malpractice insurance is so affordable?

The following Case Studies illustrate how the risks inherent in practicing law can result in costly claims for a sole practitioner or firm. Had the following firms not had insurance, they would have paid expenses and indemnity out of their own pocket.


General Nature of the Claim:

Lawyer, a short time after being admitted to practice, met some friends at a local athletic club. These friends were very active in the business community. They asked for Lawyer's advice as to "what she thought" about a very complicated investment scheme. She casually advised them that "it looks okay to me." Lawyer believed that they were simply showing her the documents to see if she was interested in investing. It turned out that the investors, including Lawyer, were mistaken as to the nature of the loan. Each of the investors had unknowingly executed personal guarantees. When the investment scheme went sour, there was a deficiency of $500,000 which was pursued against each of the investors. The investors, in turn, looked to Lawyer, indicating that it was in reliance on her advice that they became involved in the transaction.

How the Claim Could Have Been Avoided:

Lawyer should never have given advice on a transaction in which she was not retained. Lawyer should not counsel and advise in a social setting and should never give advice about matters outside the area of her expertise. Lawyer was a recent law school graduate and, admittedly, was not capable of handling such a matter. She should have also been attuned to the fact that giving such important advice in such a casual context would expose her to liability for erroneous advice. No advice should be given without reviewing all pertinent documents. Avoid giving material advice to a new or prospective client over the telephone. Either set up an office appointment or decline the matter. Free legal advice is just as dangerous as that for which compensation is paid.

Cost To Carrier:
Indemnity: $300,000 Defense Costs: $75,000


General Nature of the Claim:

Attorney was retained to form a corporation. During the course of working on the matter, he ran into unforeseen difficulties. It took much longer to do the work than he had anticipated. During the period of time he was working on the case, the client made repeated efforts to contact Attorney. Since Attorney was concentrating on putting together various incorporating documents and performing research with respect to a potential stock offering for another client, he did not return the client's phone calls. Later, Attorney acknowledged that he intended to return the calls when he had something to tell the client. In the meantime, the client went to another lawyer. That lawyer made contact with Attorney and demanded the file. The new lawyer reviewed the file, and determined that there had been legal malpractice and that an action should be filed against Attorney.

How the Claim Could Have Been Avoided:

This claim may have been avoided simply by the return of phone calls to the client. Client calls should be returned, even though nothing new has occurred in the case. If you cannot talk to the client immediately, have your assistant make an evening or early morning telephone appointment at a time when you are available to talk to the client or see if your assistant can assist the client with the problem. The client should be made aware that he is paying for the time the calls take. This attorney also made the common mistake of "biting off more legal work than he could chew." Taking on too many cases creates an environment that encourages malpractice but is no excuse.

Cost To Carrier:
Indemnity: $85,000 Defense Costs: $18,000


General Nature of the Claim:

Attorney was retained to handle a wrongful death medical malpractice action on behalf of the heirs of the decedent. Attorney, after reviewing the entire file, determined that it was far beyond his expertise and that he would refer the matter to another lawyer. The other lawyer was a medical malpractice specialist. Attorney advised the client that the matter was beyond his expertise and obtained the client's consent to refer the matter to the subsequent attorney. All this occurred one month prior to the running of the statue of limitations on the wrongful death action. The subsequent firm alleged they never received the file. Thinking that the subsequent firm was handling the matter, Attorney did nothing further. The statute of limitations ran on the action, and six months later, Attorney was sued by the client for legal malpractice.

How the Claim Could Have Been Avoided:

The importance of documenting non-engagement cannot be overstated. Any time an attorney makes a determination that he is not going to be engaged by a client or, after commencing the attorney-client relationship, makes the determination to continue no further, the lawyer must document that decision. (See discussion on non-engagement and disengagement, supra, Chapter Two.)

Cost To Carrier:
Indemnity: $74,000 Defense Costs: $23,000