No lawyer wants to make mistakes, and no lawyer wants to have to report a claim or potential claim to his or her malpractice insurance carrier. But if there’s one thing worse than getting sued for malpractice, it’s failing to have coverage when it happens. Of course, it isn’t easy acknowledging a potential claim. If you are a solo practitioner, it means you must notify the client, who might not be aware of the claim. If you are an associate, it means telling your boss. If you are a partner, it means telling your colleagues. And of course, it also means notifying your insurance carrier.
When should you report? Joe McCarthy, vice president of claims and underwriting at Wisconsin Lawyers Mutual Insurance Co. (WILMIC), says he tells policyholders to err on the side of caution.
“The claims you are obligated to report include matters in which the client is making the claim, regardless of whether or not you believe the allegation has any merit. Malpractice insurance policies are ‘claims-made’ policies. That means coverage is provided for matters first made against you and reported in writing to the insurance carrier during the policy period. That is important. You have to have a policy in place when you first become aware of the claim or potential claim and report it, regardless of when you did the work.”
Here are some typical questions we hear during CLE presentations:
1) What if I fail to report the problem right away?
Failing to report the potential claim when you become aware of it can result in the loss of coverage. McCarthy says, “The existence of a claim, which is an allegation of a mistake and a demand for payment, is usually obvious. Lawyers certainly understand those matters need to be reported immediately. For example, when a client alleges that you made a mistake and demands restitution, a claim exists. The compensation sought by a client could range from a return of your fees to a demand for outright payment of financial losses allegedly suffered.”
2) What about a matter that has not yet resulted in a claim, but I become aware there could be a problem?
These matters are often referred to as “potential claims.” McCarthy notes, “They may be more subtle and you may be either reluctant or unsure to report it. For example, in reviewing a file, you may discover a problem of which no one else is aware. Although you may want to look the other way, you have a duty under the terms of your policy to inform your insurance carrier immediately.”
McCarthy adds, “The typical insurance language says you should report to your carrier ‘when you first become aware of a matter that a reasonably prudent lawyer might expect to be the basis of a claim.’”
Often, lawyers think the allegation is frivolous or they can fix the problem. Therefore, they believe they need not report it. McCarthy says that approach is a mistake.
“Not reporting a matter during the policy period in which you became aware of it could void coverage. Under most policies, an attempt by a lawyer to unilaterally remedy a problem or simply pretend that it does not exist could jeopardize coverage.
“If you believe the allegation is frivolous, you still have a duty to report it. As a condition of coverage, you have the duty to report any circumstance which could give rise to a claim, regardless of whether or not you believe the matter is defensible. If the matter is without merit, by reporting it to your insurance carrier you have done your duty and have triggered protection just in case the matter would mushroom into a problem.”
McCarthy says timely reporting has several benefits for both you and your insurance carrier:
- Mitigation: “Getting information about a claim or potential claim allows WILMIC and other malpractice insurance carriers to get involved and proactively address both liability and damages issues. We hopefully can help repair the issue or prevent it from getting worse. Repairing and containing the issues is good for the policyholder, the company, and the claimant.”
- Defense: “Early notice of a claim or potential claim allows the insurance carrier to gather the relevant documents and evidence. With the passage of time, documents get misplaced, the focus of the evidence on the related issues gets blurred, and people’s memories fade. Gathering the evidence when everything is fresh can be critical to a successful defense.”
- It allows for accurate accounting to the applicable fiscal year, affecting financial statements and rate-making.
- Timely reporting by the lawyer makes possible timely reporting to reinsurance carriers (participation by reinsurance carriers varies from one treaty year to another).
- Thorough, complete disclosure builds trust (for example, between the lawyer and the underwriter and between the underwriter and the reinsurance carrier).
- Benefits other policyholders or owners of a mutual insurance company: “When all policyholders report claims and potential claims early, it allows the insurance carrier to be proactive in repairing and containing claims. This can help reduce defense costs and may also help limit indemnity exposure. The resulting benefit to the collective group of policyholders is reduction in risk and exposure. Lower financial exposure helps keep premiums down for everyone.”
There is nothing wrong with trying to fix a potential problem. However, as McCarthy says, doing so does not negate the duty to report the matter to your insurance carrier. In addition, claims attorneys are often in a better position to help repair the potential claim, if that is possible. If you’re trying to fix the problem yourself, you must avoid inadvertently engaging in a “prohibited transaction” with your former client after you discover you have made a mistake.
Brian Anderson, senior claims attorney at WILMIC, describes an instructive scenario.
A lawyer returns from vacation and discovers he did not timely file a notice of appeal. The deadline to file the appeal has passed, resulting in the waiver of the client’s right to appeal. After reporting this legal malpractice claim to his professional liability carrier, the lawyer contacts the client directly to discuss the error. After the client expresses dissatisfaction with the way his case was handled, he indicates that he would like to put the matter behind him. The client states he is willing to let bygones be bygones in return for $5,000.
1) Can the lawyer resolve this legal malpractice claim directly with the former client?
Yes. Pursuant to SCR 20:1.8(h)(2), a lawyer is allowed to settle a claim or potential claim with a now unrepresented former client, so long as that person is advised in writing to seek the advice of independent legal counsel regarding the underlying representation and given a reasonable period of time to do so.
Anderson cautions, “It is important that the lawyer consider the inherent danger of appearing to take unfair advantage of an unrepresented former client after a mistake has been made. This is especially the case when the lawyer may be the only attorney the client has ever worked with and the client has always relied on that lawyer for advice and guidance.”
2) Can the lawyer condition a legal malpractice settlement agreement upon the client also agreeing not to report the lawyer’s conduct to disciplinary authorities?
No. Pursuant to SCR 20:1.8(h)(3), a lawyer cannot enter into a settlement agreement with a client or former client that limits that individual’s ability to report the lawyer’s conduct to disciplinary authorities.
“It might be frustrating to the lawyer; however, the client has the right to file an OLR grievance even after the former client has been paid a settlement releasing his or her legal malpractice claim,” Anderson says. “The ethics complaint cannot be subject to any settlement terms between the parties.”
3) Should the lawyer notify his professional liability carrier before settling the claim directly with the former client?
Anderson says, “Yes, if he wants to protect his coverage. As a condition of coverage under a lawyer’s professional liability policy, the lawyer must report all claims and potential claims to the insurance carrier during the policy period. A lawyer may decide not to use the policy to resolve a legal malpractice claim; however, to protect coverage, a lawyer must report all claim matters during the policy period in which the claim is first made or the potential claim first exists.
“Sometimes, what looks like a fairly straightforward issue turns out to be far more complicated than expected. Or, it is possible that the lawyer missed a change in the law that dramatically increased the claim risk. In these instances and in matters where the former client later changes his or her mind regarding the settlement agreement, the lawyer may need to involve the malpractice insurance carrier. To ensure coverage, the lawyer must notify the carrier of the claim at the outset, before reaching any settlement. This is the essence of a ‘claims-made and reported’ policy.”
Use Your Malpractice Carrier When Needed –
That’s What You’re Paying For
This claim scenario highlights the precarious position a lawyer occupies in potential conflict with a now former client after a mistake has been made that affects that former client’s legal rights.
Anderson suggests, “Don’t complicate a legal malpractice error by inadvertently entering into a prohibited transaction with your former and unrepresented client while trying to rectify your mistake. And remember that, unlike under an occurrence insurance policy, as a condition under your professional liability policy, you must report all claim matters to your professional liability carrier in writing during the policy period in which you first become aware of the matter. We will help see you through it. There may be a resolution that can avoid a claim, so call us – that’s why we’re here.”