Confession to client threatens malpractice insurance
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
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.
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.
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 firstname.lastname@example.org.