Outline of Study Undertaken by Client Protection Subcommittee
REPORT OF STUDY UNDERTAKEN BY CLIENT PROTECTION SUBCOMMITTEE
OF THE SPECIAL COMMITTEE ON LAWYERS MALPRACTICE INSURANCE
2005-2006
I. Background
A. In spring 2005, the Supreme Court of Virginia requested the Virginia State Bar (VSB),
through its Lawyer Malpractice Insurance Committee (LMIC), to:
1. review the adequacy of the VSB’s current program to encourage acquisition of
professional liability (malpractice) insurance by its members, and
2. consider alternative approaches to enhancing client protection from acts, errors,
or omissions arising out of the lawyer’s practice of law.
B. In fall 2005, LMIC presented its initial report to Bar’s Executive Committee which:
1. summarized on-going VSB efforts to ensure availability of affordable malpractice
insurance and to promote its acquisition by Virginia lawyers including:
a. support of the work of its Special Committee on Lawyer Malpractice Insurance
b. endorsement by the Bar of a malpractice carrier to help ensure the availability of a
high quality lawyer malpractice insurance product at a fair price
c. support of various risk management activities including seminars free to all Virginia
lawyers, a confidential hotline where lawyers can obtain independent advice about
malpractice insurance and malpractice issues, the opportunity to access low priced
law firm audits, and articles on malpractice issues appearing in Bar publications
d. annual mandatory certification to the Bar by all activemembers of the Bar regarding
professional liability insurance and unsatisfied judgments arising from legal services
e. access to the certification information by the public through a web based search
function and through Bar staff during working hours;
2. discussed Virginia’s current disclosure rule and identified possible measures to strengthen
the VSB’s disclosure requirement
a. by requiring provision of specific policy information as part of the annual disclosure
b. by requiring provision of certificate of insurance to the Bar along with disclosure
c. by offering on the Bar’s website, in conjunction with the attorney record search,
an explanation of the Bar’s malpractice insurance disclosure rule
d. by undertaking additional education efforts, directed to both members of bar
and consumers of legal services, regarding importance of malpractice insurance
e. by requiring disclosure of malpractice coverage to clients as well as to the Bar; and
3. identified models beyond disclosure for protecting the public which should be examined,
all concentrating on lawyers in private practice offering legal services to clients drawn from the general public:
a. Uninsured Lawyer Malpractice Claims Fund (similar to Clients’ Protection Fund)
b. mandatory malpractice coverage with reliance exclusively on commercial market
c. mandatory malpractice coverage through Bar controlled fund
d. mandatory malpractice coverage with reliance on commercial market supplemented by
Bar controlled Assigned Risk Fund.
C. In February 2006, Virginia House of Delegates passed House Resolution 6 by a vote of 92-6
1. Referenced fact that “many malpractice policies do not cover illegal activities such as
fraud and theft” and cited the possibility that without malpractice insurance, the injured
client would have no remedy, and
2. Encouraged the Supreme Court of Virginia and the VSB to consider the “problem” of
uninsured attorneys and to consider some form of mandatory insurance for attorneys, or
an uninsured attorneys’ fund for compensation of victims of malpractice committed by
uninsured Virginia attorneys.
II. Current Status of Required Malpractice Coverage in Virginia
A. There is no universal requirement in Virginia that lawyers obtain malpractice insurance.
B. There is a requirement that lawyers participating in the Virginia Lawyer Referral Service
certify malpractice coverage with limits of no less than $100,000/$300,000 and provide
the name of carrier, policy number and expiration date.
C. There is a requirement that attorneys covered by the Virginia Consumer Real Estate Settlement Protection Act:
1. certify malpractice insurance “issued by a company authorized to provide such
coverage in Virginia providing first dollar coverage and limits of at least
$250,000 per claim,” and
2. certify coverage by a surety bond providing limits of at least $100,000 (original
bond must be submitted), and
3. certify coverage by a blanket fidelity bond or employee dishonesty insurance
policy providing limits of at least $100,000 covering all other employees (or
obtain exemption based on having no employees other than the lawyer.)
D. Lawyers who have been disciplined may be required to obtain and maintain a malpractice
insurance policy in an amount and for such term as set by the Disciplinary Board (Para.13
-Organization and Government of the VSB). This provision has not been used based on
the premise that the public is better served by suspending or disbarring such lawyers.
E. Professional limited liability entities authorized under Paragraph 14 were once required to
certify malpractice insurance coverage, but this is no longer the case. Requiring some, but
not all lawyers in private practice to carry malpractice insurance, was deemed inappropriate.
III. Most Recent Data on Lawyer Financial Responsibility as Self-Reported to VSB in
July 2005 for Fiscal Year 2005-2006
A. All active VSB members are required to disclose whether there are any unsatisfied legal
malpractice judgments arising from their performance of legal services.
1. 25,182 lawyers answered this question:
a. 25,170 responded “no” (99.95%), and
b. 12 responded “yes” (.05%).
2. Of these 12 lawyers reporting unsatisfied judgments:
a. 10 indicated they are in private practice (3 of the 10 reported being uninsured)
b. 6 out of 33 judicial circuits had lawyers with unsatisfied judgments
c. lawyers with unsatisfied judgments had been licensed in Virginia between
6 and 37 years.
B. All active members in private practice representing clients drawn from the general public
are required to disclose annually to the Bar whether they are currently covered by a
professional liability insurance policy, other than an extended reporting endorsement.
1. 25,182 lawyers answered the professional liability insurance question.
2. 16,914 indicated they are in private practice:
a.. 15,079 indicated they had insurance (89.15%)
b. 1,835 indicated they had no insurance (10.85%)
i. 16% of this total have been licensed in VA less than 5 years
ii. 26% of this total have been licensed in VA between 5 & 15 years
iii. 31% of this total have been licensed in VA between 15 and 25 years
iv. 27% of this total have been licensed in VA more than 25 years
v. 26 out of 31 judicial circuits had uninsured lawyers in private practice
vi. Circuit 19 had the highest percentage of uninsured lawyers—23%
vii. Circuit 13 had the 2nd highest percentage of uninsured lawyers –13%.
C. The VSB makes available to the public, by phone and on its website, the information
disclosed to the Bar by each attorney regarding malpractice insurance coverage.
a. the VSB’s Internet attorney record site receives about 1,100 “hits” per month
b. the VSB office receives about 100 calls per month seeking this information
c. there is no current tracking of whether these inquiries originate with members
of the general public, other lawyers, or insurers.
IV. Current Statusof Malpractice Coverage Levels in Virginia
A. Data requested by the Client Protection Subcommittee and provided by two liability
insurance providers in Virginia, indicated the following regarding limits for 2005
1. Attorneys Liability Protection Society (ALPS)
a. 43.7% of the insured lawyers carried no more than $1,000,000 aggregate limits
32.0% of the policies written provided no more than $1,000,000 aggregate limits.
b. 56.3% of the insured lawyers carried more than $1,000,000 aggregate limits
68.0% of the policies written provided more than $1,000,000 aggregate limits.
c. a further breakdown of the ALPS lower limits is as follows:
LawyersPolicies
ALPS Limits Percent Percent
100,000 / 300,000 6.0%11.6%
250,000 / 250,000 2.1% 4.9%
250,000 / 500,000 3.5% 6.3%
500,000 / 500,000 6.6% 10.8%
500,000 / 1,000,000 7.3% 11.2%
1,000,000 / 1,000,000 18.2% 23.1%
2. Minnesota Lawyers Mututal (MLM)
a. 30.07% of the insured lawyers carried no more than $1,500,000 aggregate limits
49.13% of the policies written provided no more than $1,500,000 aggregate limits
b. 69.93% of the insured lawyers carried more than $1,500,000 aggregate limits
50.87% of the policies written provided more than $1,500,000 aggregate limits
c. a further breakdown of the MLM lower limits is as follows:
LawyersPolicies
MLM Limits PercentPercent
200,000 / 600,000 8.44%13.04%
300,000 / 900,000 9.32% 16.52%
500,000 / 1,500,000 12.31% 19.57%
B. Not surprisingly, a review of the raw data driving these percentages, indicates that
many solo practitioners, and lawyers in 2-3 person firms carry the lowest limits of
coverage. Many of the largest firms in Virginia are not insured by the reporting carriers, and have significant basic coverage limits, plus excess coverage.
V. Information Regarding Average Annual Cost for Malpractice Insurance
A. The Client Protection Subcommittee asked these same carriers to provide information
regarding average basic premium costs in Virginia. It must be emphasized that these
figures are offered WITHOUT considering variances resulting from underwriting based on
area of practice and claims history, WITHOUT considering the application of any credits
for claims free history with the insurer or attendance at risk management CLEs, WITHOUT
considering step increases based on years in practice, and most significantly, ASSUMING
FULL PRIOR ACTS COVERAGE.
B. ALPS policies are quoted with defense costs outside the policy limits:
Per lawyer average annual cost for $100,000/300,000 with $1,000 deductible = $1029
Per lawyer average annual cost for $250,000/250,000 with $1,000 deductible = $1473
Per lawyer average annual cost for $250,000/500,000 with $1,000 deductible = $1867
C. MLM policies are quoted with defense costs inside the policy limits (i.e. eroding limits)
Per lawyer average annual cost for $200,000/600,000 with $1,000 deductible = $1300-1700
Per lawyer average annual cost for $300,000/900,000 with $1,000 deductible = $1400-1800
VI. Report on Recent Claims Experience in Virginia and Nationally
A. Data requested by the Client Protection Subcommittee provided by these same liability insurance providers for claims closed in the years 2003, 2004, and 2005, regardless of year opened, indicated the following regarding claims.
1. Percent of claims by expense paid (predominantly defense costs):
$0 Paid 69%
$1 to $10,000 Paid 21%
$10,001 to $50,000 Paid 7%
$50,001 to $100,000 Paid 2%
$100,001 to $250,000 Paid 1%
$250,001 to $500,000 Paid 1%
2. Percent of claims by indemnity dollars paid to claimant:
$0 Paid 79%
$1 to $10,000 Paid 9%
$10,001 to $50,000 Paid 8%
$50,001 to $100,000 Paid 3%
$100,001 to $250,000 Paid 1%
3. Percent of claims by total dollars paid (defense and indemnity/settlements):
$0 Paid 58%
$1 to $10,000 Paid 24%
$10,001 to $50,000 Paid11%
$50,001 to $100,000 Paid 5%
$100,001 to $250,000 Paid 1%
$250,001 to $500,000 Paid 1%
B. Data published by ABA Standing Committee on Lawyers’ Professional Liability” in its
most recent report, “Profile of Legal Malpractice Claims, 2000-2003”
1. Percent of claims by expense paid reported for 30,369 claims:
$0Paid 58.61%17,798
$1 to $1,000 Paid 7.21% 2,189
$1,001 to $5,000 Paid11.68%3,546
$5,001 to $10,000 Paid 6.57% 1,995
$10,001 to $25,000 7.81%2,372
$25,001 to $50,000 4.19%1,272
$50,001 to $100,000 2.35% 715
Over $100,000 1.59%482
Total 100%30,369
2. Percent of claims by indemnity dollars paid to claimant based on 30,444 claims:
$0Paid 78.02%23,751
$1 to $10,000 6.35% 1,934
$10,001 to $50,000 9.35% 2,845
$50,001 to $100,000 2.78% 845
$100,001 to $250,000 2.01% 613
$250,001to$500,000 0.89% 271
$500,001 to $1,000,000 0.42% 129
$1,000,001 to $2,000,0000.12% 37
Over $2,000,0000.06% 19
Total 100% 30,444
3. Percent of claims by total dollars paid (expense and indemnity) to claimant
reported on 30, 484 claims:
$0Paid 52.31%15,947
$1 to $10,000 22.52% 6,865
$10,001 to $50,00015.30% 4,664
$50,001 to $100,000 4.63% 1,410
$100,001 to $250,000 3.17% 965
$250,001to$500,000 1.27% 386
$500,001 to $1,000,000 0.53%163
$1,000,001 to $2,000,0000.20%60
Over $2,000,0000.08%24
Total 100%30,484
VII. Conclusions to Date Reached by the Client Protection Subcommittee:
A. No data is available to support a conclusion that uninsured lawyers, including those who
practice part-time, or those who practice in areas of the law difficult to underwrite, commit
malpractice with any greater frequency than insured lawyers.
B. Similarly, no data is available to support a conclusion that the majority of uninsured
lawyers in private practice are uninsured because they have a negative claims history and are thus considered by insurers to be “bad risks” who have either been denied coverage or who have been offered coverage only at extraordinary premium rates.
C. The likely response rate to a voluntary polling of the approximately 2,000 lawyers
currently reporting that they have no insurance coverage as to why they are uninsured
would not warrant the effort. Anecdotal reports suggest the following reasons:
a. cannot justify premium cost because lawyer only practices part-time
b. cannot afford premium because lawyer is in a high risk area of practice
c. belief that the application process is burdensome and they are “too busy”
d. belief that lawyer is uninsurable because of claims history or pending claim
e. belief that lawyer is in a low-risk area of practice, and does not need insurance
f. belief that lawyer has protected his/her assets and is judgment proof
g. belief that if lawyer became aware he/she had malpracticed, the lawyer
would satisfy the claim from personal assets
h. belief that if potential malpractice plaintiff learned attorney had no insurance,
claim would not be pursued
i. distrust of defense insurance companies would offer, preferring to personally
handle and attempt to repair any potential claim.
D. Policy limits, particularly at the lower end of available limits, can be eroded by defense
costs and/or prior claims paid to other victims, making “underinsurance” a concern.
E. The perception of some members of the Bar, and many members of the public, is that
all lawyers in private practice in Virginia are currently required to maintain malpractice
insurance.
F. The self-reported total of 90% of lawyers having malpractice insurance is significantly higher than the national average of 60-70%. As of March 2006, the ABA reports that 16 states have adopted some form of malpractice insurance disclosure requirement. Some doubt has been expressed that the Virginia figure is accurate. Apparently, some lawyers are confused by the current wording of the questions in spite of every effort towards clarity. Others may misreport their status. Requiring a certificate of insurance from those lawyers responding in the affirmative to the malpractice coverage question would eliminate this issue. Representatives of the two carriers participating in this study assured the subcommittee that providing a certificate of insurance to their insureds for submission to the Bar would not be a problem.
G. The Bar’s Clients’ Protection Fund (CPF) currently provides reasonable compensation to victims of lawyer dishonesty. During the 2004-2005 fiscal year, the CPF paid out $300,000 representing 86 claims. The maximum payment allowed from the fund for a single claim is $50,000 for losses incurred on or after July 1, 2000. Increasing the funding of the Clients’ Protection Fund would not have any effect on the incidence of lawyer dishonesty, it would simply increase the total amount available to reimburse all claimants on account of the dishonest conduct of any one lawyer or association of lawyers.
H. No conclusion can be drawn from the data currently self-reported on unsatisfied judgments (12 lawyers out of 25,000) or on the percentage of uninsured lawyers in private practice (11% out of 17,000) that the public is adequately protected from the harm caused by lawyers who commit malpractice. Pursuing a legal malpractice claim to judgment is always onerous, most often expensive, and for many overwhelming. It is significant that approximately 25% of the petitions filed with the Clients’ Protection Fund are denied because the behavior complained of constitutes malpractice, not dishonesty. This fact underscores the conclusion that the low incidence of self-reported unsatisfied malpractice judgments simply reflects “the tip of the iceberg” in assessing how many clients in Virginia are financially harmed by lawyer malpractice and remain uncompensated.
I. Just as the incidence of dishonest lawyers is not limited to either uninsured or insured
lawyers, the incidence of lawyers who malpractice is not limited to either uninsured or
insured lawyers.
J. Malpractice insurance carriers typically provide the insured lawyer with a range of valuable services including: resources for effective practice management, screening of non-meritorious claims, professional claims repair to minimize client damages, an option for defense of Bar complaints, and “innocent insured” protection if a claim is made because of the dishonest act of another lawyer in the firm. These benefits inure to both the lawyer and the client.
VIII. Disclaimer
It should be noted that statistics, especially those that are partial, unaudited, and unverified for
statistical credibility, can be misleading.
The Virginia data herein reflect just two of the companies (albeit major ones) writing in Virginia. It
is estimated that together they write about 1/3 of the insured attorneys in private practice in the state, with a heavy concentration of solo and 2-3 person firms. It is also likely that the majority of the lawyers who are reporting to the Bar that they are uninsured are solo or small firm practitioners.
The ABA data is derived from studies by the ABA on a large number of claims that have been submitted by cooperating insurance carriers. The currently reported data covers the period 2000-2003. Thus neither the Virginia nor the national compilation of numbers has been compiled from all claims or all insureds. The data presented in this report offer a part of the picturewhich may or may not be representative of the whole. Further analyses, including actuarial studies of issues such as the adequacy of various liability insurance coverage limits and potential increases in premium costs, should be completed before any recommendations having potential substantial financial impact on members of the Bar are finally approved.
IX. Recommendation
The subcommittee recommends that if the Supreme Court of Virginia, the Virginia General Assembly, and/or the Virginia State Bar Council wishes to pursue the issue of minimizing the incidence of members of the public being financially harmed by Virginia lawyers who commit malpractice, one or more of the following models should be fully developed and considered.
X. Description of Models of Public Protection against Lawyers who Commit Malpractice
(Note, a briefer description highlighting perceived advantages and disadvantage of each
model was incorporated into the Committee’s interim report dated 8/31/05)
A. Uninsured Lawyer Malpractice Claims Fund
This model is similar in concept and operation to the Clients’ Protection Fund currently
operated by the VSB. The major distinction arises from the nature of the funding options,
The Malpractice Claims Fund could be capitalized through an assessment levied only on uninsured lawyers (no prescribed minimum coverage) in private practice representing clients drawn from the general public, ($1500 was the suggested minimum). Based on an estimated 2000 uninsured lawyers paying this assessment, the Fund would be initially capitalized with $3,000,000. However, the number of contributing lawyers might well increase with adoption of a requirement that each lawyer submit a certificate of insurance if certifying malpractice insurance coverage.
Alternatively, all active members of the Bar could be assessed either a one-time or an annual fee to provide sufficient operating funds. Based on an estimated 25,000 lawyers paying an assessment of $120, the same initial capital would be available. Claims payments would initially need to be capped at a low level to protect the Fund’s solvency. Over time, this cap could be increased.