Lawyers will find a loophole

The California State Bar Board of Governors last week adopted a new professional rule of conduct. Lawyers must now advise their clients in writing when they do not carry malpractice insurance, either in their engagement agreement or in a separate document.

The rule is flawed, as I’ve argued in more than one past post. Since lawyers are skilled in finding loopholes, I suspect that this new rule will be honored in its breach … and therefore not provide meaningful protection to clients.

There are creative alternatives the 30,000 sole and small firm lawyers impacted by this rule may take to avoid the intent of the Board and its new rule:

1.    Become a professional corporation. The State Bar allows shareholders of a professional corporation to go without insurance if they assume personal responsibility for claims up to a maximum of $50,000.  No financial statement or bond is required, only a signature.  The balance of any claim would be paid by the professional corporation … and not the shareholder (unless the corporate veil could be pierced).  Since a sole practitioner is responsible for the entire claim, this would enable the lawyer to put a cap on any malpractice claim.  Of course, if the lawyer had few assets or were judgment-proof, the client would get little or nothing. The cost of a professional corporation would be $800 per year — the minimum tax California imposes on professional corporations, a sum significantly less than current premiums for malpractice insurance.

2.    Encourage insurance carriers to create a new product. The new product would be, for example, a malpractice insurance policy of some minimal amount such as $25,000 or $50,000, with a deductible of $10,000 or more. The premium would be low, perhaps even lower than the $800 tax cost of a professional corporation. With defense costs being attributed to the policy value, again the client would get little or nothing.

3.    “Bury” the language to be required in the fee agreement and never mention it to the client … it’s unlikely the client will raise the issue … and pretend the language is not there.

4.    Raise the issue with the client and suggest to the client that the client is actually better off without malpractice insurance involved since the entire estate of the lawyer is backing up his/her practice and likely to give the client more protection than a minimal insurance policy would.

I’m sure creative lawyers can and will suggest other options. The action of the Board of Governors, in this writer’s opinion, will do more harm than good. It will encourage lawyers to find the loophole, to by-pass the good intentions of the Board. It will create ambiguities that will have to be litigated for clarification. And it will not provide protection to the public that the public deserves. But, at least, the Board of Governors can feel good … and its sponsored insurance carrier may have one more tag line for its advertising

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