10 | COLORADO LAWYER | JUNE 2019
DEPARTMENT | SUB TITLEDEPARTMENTS | WHOOPS—LEGAL MALPRACTICE PREVENTION
W
hoops! Imagine being sued or
grieved and discovering you
don’t have insurance to pay
your defense or the judgment
entered against you. You could lose your savings,
your home, and other signicant personal assets.
You might even have to le for bankruptcy.
Every attorney who practices privately
must decide whether to purchase lawyers’
professional liability insurance (LPLI), and if
so, which policy to buy. But the topic of liability
insurance is not taught in law school, and most
lawyers know very little about the industry.
When presented with options, many lawyers
(and certainly young lawyers) don’t understand
the basic terms of the policy or know anything
about the nancial status of the company they
are buying the policy from. Terms like “claims
made and reported” and “exclusions” are foreign
phrases. Often, lawyers will simply purchase the
absolute cheapest policy they can nd. is is
a bad business practice, because the cheapest
policies usually have inadequate coverage and
unfavorable terms for the lawyer.
is article discusses some common issues
regarding LPLI.
1
It is not intended to discuss
insurance law or provide legal advice. Lawyers
are advised to consult more in-depth treatises
regarding LPLI that may be applicable to their
individual situation.
2
Should I Buy LPLI?
Practicing law without LPLI is dangerous—akin
to not having health insurance, car insurance, or
homeowners insurance. e Colorado Rules of
Professional Conduct restrict our ability to limit
our own liability to our clients.
3
If you believe
you have LPLI through your PC or LLC, you are
wrong. If you practice without LPLI, then you
are putting your home, your automobile, and
everything else you have at risk.
According to the Colorado Supreme Court,
a staggering 15% of Colorado lawyers in private
practice do not carry LPLI.
4
But any attor-
ney, at any time, can be the subject of a large
malpractice claim or be forced to respond to
an investigation from the Colorado Oce of
Attorney Regulation Counsel (OARC). As we
attorneys know, just the cost of defending
against a lawsuit can be several hundred
thousand dollars or more, not including the
liability for the claim itself. Are you prepared
to pay for that out of your own pocket if you
do not have LPLI?
CRCP 227(c) requires all attorneys in private
practice to disclose whether they carry LPLI.
is information is available to the public on the
Colorado Supreme Court’s website.
5
Notably,
the Court encourages the public “to discuss
the issue of malpractice coverage with [their]
lawyer.”
6
us, you should always be prepared to
eld questions from clients or potential clients
about your malpractice insurance. In addition,
consider checking the Court’s website before
referring clients to other attorneys, because it
could be deemed malpractice to refer a case
to a lawyer who does not carry LPLI.
7
Eroding Limits Policies
An “eroding limits” policy means that the
amount of liability coverage decreases dollar
for dollar as defense costs are incurred; it is said
the defense costs are “inside” the policy. For
example, if you have $1 million in coverage and
the attorney fees and costs for defending a claim
are $500,000, only $500,000 would remain in
liability coverage to pay any settlement on the
claim. ese policies are cheaper to buy (i.e.,
the premium is less expensive) because there
is less exposure for the insurance company
and more exposure for the lawyer. However,
they can cause serious coverage problems. For
example, if your liability coverage is $100,000
and a $500,000 claim is asserted against you,
defense costs will quickly eat up your coverage,
with nothing left to cover the $500,000 in
potential liability. at means the claimant
may eventually pursue your personal assets.
Eroding limits policies also invite conicts
with your insurance company. If the claim
greatly exceeds coverage, should you and your
Lawyers’ Professional
Liability Insurance
Purchase and Coverage Issues
BY MICHAEL R. MCCORMICK
According to the
Colorado Supreme
Court, a staggering
15% of Colorado
lawyers in private
practice do not
carry LPLI. But
any attorney, at
any time, can be
the subject of a
large malpractice
claim or be forced
to respond to
an investigation
from the Colorado
Oce of Attorney
Regulation
Counsel.
JUNE 2019 | COLORADO LAWYER | 11
insurance company emphasize a strong (and
expensive) defense? Or should you do as little
as possible to preserve the minimal amount
of coverage you do have? What if you and the
insurance company disagree on these issues?
e best way to avoid these problems is not to
purchase eroding limits policies. However, they
have become more and more commonplace.
If you do buy one, make sure the policy has a
large amount of liability coverage.
The “Hammer Clause”
Usually the insurance company does not have
the right to settle a claim without your consent.
However, many policies have a “hammer clause”
stating that if the lawyer does not consent to a
proposed settlement at an amount approved by
the plainti, but the insurance company wants
to settle for that amount, then the insurance
company’s liability is limited to the amount for
which the claim could have settled, plus defense
costs incurred up until the day the lawyer
refused to settle. Although these provisions are
rarely invoked, they can come into play during
settlement negotiations and could result in
personal liability for you.
Cyberliability Coverage
Cyber-related legal malpractice claims are on
the rise. Sometimes these result from outside
hackers, but they can also result from internal
hacks by “rogue” employees. Most LPLI policies
do not include cyberliability coverage or oer
only minimal protection. You should strongly
consider buying a standalone policy or sup-
plemental coverage on your existing policy to
adequately protect against cyberliability.
You should also carefully consider what
armative steps you and your rm are taking
to avoid cyberliability. ink about what will
happen if a hacker steals your client’s infor-
mation or you lose your laptop at the airport
with your client’s les on it. If a claim arises,
you will have to answer hard questions about
what steps you and your law rm took to protect
the information, what security measures you
had in place (including password protection),
what training you and your employees had,
and whether you complied with cybersecurity
laws and regulations, such as Colorado’s new
cybersecurity law.
8
It’s best to take proactive
measures now, before an incident occurs.
Another common sense measure is to have
a response plan in place. If a cybersecurity
incident occurs, how will you inform your
client(s) and comply with cybersecurity laws?
9
What steps will you take to avoid further security
breaches? When and how will you inform your
insurance company? How you respond can
be critical to minimizing the damage and
maintaining the viability of your business.
Other Coverage Considerations
According to a 2017 survey by Ames & Gough,
the number of new legal malpractice claims
brought against law firms is stabilizing but
historically has demonstrated an upward
trend.
10
Conicts of interest are perhaps the
most common alleged legal malpractice error.
Carefully checking for conicts of interest and
obtaining adequate conict waivers are critical
to avoiding claims.
Many conicts of interest claims are based
on lateral hires.
11
Too often lateral hires are
inadequately screened for conicts. Sometimes,
even when conicts are discovered, they are
brushed aside and ignored. at can result in
extremely costly claims.
Other common practice areas with higher
numbers of claims are business transactions
(such as mergers and acquisitions), corporate
and securities law, probate law, and trusts
and estates.
12
Buying policies that cover these
areas may be more expensive, but nevertheless
necessary. Be sure to carefully examine whether
your practice areas are covered by your LPLI
policy. For example, many insurance companies
exclude or do not cover certain practice areas,
such as securities law. In that case, you may
need to buy a special policy.
Generally LPLI policies are “claims made”
policies, in contrast to “occurrence” policies.
Under a “claims made” policy, coverage depends
on when the claim is made and reported to the
insurer, not when the claim actually occurred.
However, the policy may have an exclusion for
an event that occurred before the rst day of the
policy coverage period. In that case, consider
buying “prior claims” coverage. You may also
want to buy a “tail policy” for claims that are
made after the policy terminates. Always make
sure you have adequate coverage in place for
all time periods, no matter when the event
triggering the claim occurred (i.e., avoid any
gaps in coverage).
Coverage issues can also become important
when changing law rms or upon retirement. If
you change law rms, make lateral hires, or are
about to retire, carefully examine the applicable
LPLI policy (or policies) to make sure you are
covered during the transition, and consider
purchasing additional coverage if necessary.
LPLI typically covers legal malpractice in
rendering legal advice and providing profes-
sional legal services, not other types of acts. So,
for example, it usually does not cover dishonest,
fraudulent, or malicious acts, comingling client
funds, intentional torts, physical injuries to your
employees, criminal acts, and so on. Lawyers’
business ventures and entrepreneurial activities
with clients are also typically excluded under
LPLI policies.
Most LPLI policies
do not include
cyberliability
coverage or oer
only minimal
protection. You
should strongly
consider buying a
standalone policy
or supplemental
coverage on your
existing policy
to adequately
protect against
cyberliability.
12 | COLORADO LAWYER | JUNE 2019
DEPARTMENT | SUB TITLE
Claims for Fee Disputes
and Unpaid Attorney Fees
LPLI policies typically exclude coverage for
attorney fee disputes and have exclusions for
paying your unpaid attorney fees. Not surpris-
ingly, if your former client does not want to
pay your attorney fees related to your former
representation, your insurance company does
not want to pay them either.
Want to invite a lawsuit against you for legal
malpractice? One surere way is to sue your
former client for unpaid attorney fees. The
former client will often assert a counterclaim
for legal malpractice. Instead, consider taking
some proactive steps now. Seek a retainer at the
outset of the representation adequate to cover
several months of work before you begin. If your
client stops paying her bills, then promptly call
her to see what is going on. is will alert you
to a problem sooner rather than later. Also, put
a provision in your engagement letter giving
you the right to promptly withdraw for cause if
your invoice is not timely paid. ese situations
cannot always be avoided. However, taking
these steps now may help you avoid racking
up a huge unpaid bill.
Report Claims Early
Most LPLI policies include a deadline for report-
ing claims within a certain time period. Make
sure you comply with any such deadlines or
you may be excluded from coverage. When in
doubt, promptly report a potential claim to your
insurance company. Although your premiums
could rise or your policy may not be renewed,
that is better than being excluded from coverage
with respect to an expensive claim that you
cannot aord to pay on your own.
Choice of Counsel
If you are sued for legal malpractice, you will
want the best available lawyer, so try to have as
much input as possible on who will represent
you. Most insurance companies have a panel
of counsel available to defend lawsuits. While
some policies require the insurance company
to select the lawyer, others allow you to select
from the panel.
Disciplinary Coverage
What if you are grieved by a client? Does your
LPLI policy cover you? Many LPLI policies have
coverage available for you to hire a lawyer to
respond to the OARC. Some lawyers make the
mistake of responding to the OARC themselves
without hiring a lawyer. at is not a good idea.
Inevitably your emotions will get the best of
you and you will not present your best self to
the OARC.
Choosing the Right
Insurance Company
Not all insurance companies are equal. If a
claim is made against you, will the insurance
company fulfill its promises and pay your
defense costs? Will the insurance company
be able to pay to settle the claim? e more
reputable, experienced, and nancially stable
the insurance company, the more likely it is
to deliver on its promises. It is a good idea to
Trial Coming Up?
I can help
SCOTT JURDEM
Best Lawyers in America
Inducted American Board
of Trial Aorneys
Board Certied Civil Trial Advocate —
National Board of Trial Advocacy
Life Member — NACDL
2006–2019 Colorado Super Lawyer
“Don’t Get Outgunned”
JURDEM, LLC
820 Pearl Street, Suite H, Boulder, Colorado, 80302
303-402-6717 [email protected] www.jurdem.com
Want to invite a
lawsuit against
you for legal
malpractice? One
surefire way is to
sue your former
client for unpaid
attorney fees.
The former client
will often assert a
counterclaim for
legal malpractice.
DEPARTMENTS | WHOOPS—LEGAL MALPRACTICE PREVENTION
JUNE 2019 | COLORADO LAWYER | 13
check the insurance company’s A.M. Best
Company rating.
13
Insurance companies also vary widely in
their ability to manage legal malpractice claims.
Some are heavily experienced in managing legal
malpractice claims and others have almost no
experience at all. Needless to say, companies
with little experience managing legal malpractice
claims are not a great choice for you.
The flip side of these considerations is
price. Typically, but not always, the better
the insurance company, the more expensive
the policy. If your policy is cheap, this is a red
ag that the insurance company may not be
very good. Or the insurance company may
be reputable, but the policy terms may be so
lacking that they provide very little coverage
and protection. On the other hand, sometimes
reputable insurance companies oer special
introductory rates on premiums for sound
policies. Always read the specic policy terms
to know what you are buying.
Where to Get Help
e Colorado Bar Association assists its members
by educating them about LPLI. CBA members
are encouraged to visit the CBA’s website for
more information.
14
NOTES
1. For more information on LPLI, see Little,
“Lawyers’ Professional Liability Insurance: Why
You Need It and Where to Get It,” 46 Colo. Law.
79 (Feb. 2017).
2. For more detailed information regarding
purchase and coverage issues for LPLI, see
the ABA Standing Committee on Lawyers’
Professional Liability website at www.
americanbar.org/groups/lawyers_professional_
liability/resources/risk_management_resources.
html, and Mallen, Legal Malpractice: The Law
Oce Guide to Purchasing Legal Malpractice
Insurance (Thomson Reuters 2019).
3. See, e.g., Colo. RPC 1.8(h) (“A lawyer shall not
. . . make an agreement prospectively limiting
the lawyer’s liability to a client for malpractice
unless the client is independently represented
in making the agreement . . . .”).
4. See, e.g., Colorado Oce of Attorney
Regulation Counsel 2017 Annual Report at
62–82, www.coloradosupremecourt.com/
PDF/AboutUs/Annual%20Reports/2017%20
Annual%20Report.pdf.
5. See the Attorney Search and Disciplinary
History page on the Colorado Supreme Court’s
website, www.coloradosupremecourt.com/
Search/AttSearch.asp.
6. See www.coloradosupremecourt.com/
PDF/Complaints/A%20word%20about%20
professional%20liability.pdf.
7. See CJI-Civ. 15:23 (2019) (Referral of Client to
Another Attorney) (referring attorney who fails
to exercise reasonable care in selecting another
attorney may be held responsible for her own
negligence).
8. On September 1, 2018, Colorado enacted
HB 18-1128 (codified at CRS §§ 6-1-701 et
seq.), which strengthened protections for
consumer data privacy. The new law includes
requirements for storing and protecting client
data and notifications for security breaches.
9. Colorado’s new cybersecurity law includes
requirements to notify aected individuals
of a data breach and to notify the Colorado
Attorney General’s Oce under certain
circumstances.
10. See Ames & Gough News Release, “Legal
Malpractice Claims Stabilize, But Remain Above
Pre-Recession Levels” (June 28, 2017), www.
amesgough.com/sites/default/files/AG%20
News%20Release%20-%202017%20LPLI%20
Claims%20%20Survey%20-%206-28-17.pdf.
11. Id.
12. Id.
13. See www.ambest.com.
14. The CBA’s Lawyers Professional Liability
Committee provides educational resources on
LPLI, improving the quality of legal practice,
and avoiding legal malpractice claims. For more
information, visit the Committee’s website at
www.cobar.org/For-Members/Committees/
Lawyers-Professional-Liability-Committee.
Michael R. McCormick is a shareholder
with Montgomery, Little & Soran P.C.
He defends professionals, including
attorneys and appraisers, against
professional liability, malpractice,
and disciplinary actions—(303) 773-8100,
mmccormick@montgomerylittle.com.
Coordinating Editor: Chris Little, clittle@
montgomerylittle.com
If you are sued for
legal malpractice,
you will want the
best available
lawyer, so try to
have as much input
as possible on who
will represent you.
©2019 Colorado Bar Association. All rights reserved.
14 | COLORADO LAWYER | JUNE 2019
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