Confession to client threatens malpractice insurance coverage

By Diane Karpman

A legal malpractice insurance carrier denies coverage because the lawyer admitted to his client that he (the lawyer) had screwed up!

Wait a minute, you say, because all lawyers have a fundamental fiduciary duty to communicate significant events to their clients (Rule 3‑500, Business and Professions Code Section 6068 (m)). Inherent in that duty of communications is the obligation to convey the information with absolute candor and honesty.

"Where there is a duty to disclose, the disclosure must be full and complete, and any material concealment or misrepresentation will amount to fraud..." ( Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 181, 98 Cal.Rptr. 837). Cases suggest that a failure to make full disclosure or "nondisclosure" could be construed as "fraud." (See Neel)

There is robust debate in the ethics community about just how much the lawyer must disclose. Some authorities maintain that a lawyer need only disclose the material facts, period. Others assert that the client retained counsel to translate the byzantine legal system, so a mere bare-bones disclosure could lull the client into a false sense of security, exacerbating the harm. An ambiguous disclosure might stop the statute-of-limitations clock from running.

Carriers have many exclusionary clauses that can void the coverage that a lawyer has purchased. As we all know, the practice of law is heavily regulated. A secondary level of regulation, which is unsupervised, is imposed by legal malpractice insurance carriers and their exclusionary clauses. An exclusionary clause is a clause in an insurance policy that specifically excludes coverage for certain specified acts. For example, going into business with a client can in some policies void coverage.

In Illinois State Bar Assn. Mut Ins. Co. v. Frank M. Greenfield and Associates, P.C., 2012 IL App (1st) 110337, a matter of first impression, there was a "voluntary payments" provision that prohibited the lawyer from admitting liability in any claims without the carrier’s prior written consent. Greenfield made a simple scrivener’s error because of a change in his computer’s software (technological version of the banal “dog ate the homework” excuse) in drafting a client’s will. Of course, those probate clients are notorious for dying, which is precisely what occurred in this case. JP Morgan Chase was threatening to notify the 27 beneficiaries about the million-dollar mistake, if Greenfield failed to do so.

The notification letter is reprinted in the case. (Save this – it could be a future template.) It gave rise to the carrier’s claims that it triggered the "voluntary payment prohibition" contained in the policy, therefore there was no duty to defend. Greenfield claimed he did not admit liability but merely informed the beneficiaries of what occurred. The trial court agreed, but the Illinois State Bar Association Mutual Insurance Co. objected.

The appeals court went further, basing its affirmance on public policy. Lawyers are required to keep their clients informed about significant events. The voluntary payments provision in the insurance contract created a conflict with the attorney’s ethical obligations. The attorney’s ethical obligations to the client trump any insurance clauses that impair a lawyer’s performance of his duties to the clients.

Obviously, this is the only appropriate result. Nevertheless, it’s probably a good idea to contact your carriers before you notify a client because maybe they can help you fix the problem.

Diane Karpman of Karpman & Associates is a State Bar certified specialist in legal malpractice law. She can be contacted at 310-887-3900 or karpethics@aol.com.