Saturday, November 7, 2009

Malpractice insurance and Legal Process Outsourcing

[Please remember that only the insurance policy can give actual terms, coverage amounts, conditions & exclusions. This article neither renders legal opinion nor recommends the pros and cons of malpractice insurance. The article is a simple compilation of the requirement of malpractice insurance for Legal Outsourcing vendors. The article is not a substitute of recipients' obligation to ensure compliance.]

This issue was discussed with brevity in the last article posted. The previous article collectively dealt with seven myths in the Legal Outsourcing Industry. However a need was felt to exhaustively deal with this issue of malpractice insurance, hence this article.

What is Insurance?

Insurance is an agreement (generally in standard form) between the policy holder and the insurer, where the insurer agrees to indemnify the policy holder upon the occurrence of a contingent event. In the absence or lapse of insurance, the wrongdoer is personally liable to compensate the alleged victim.

What is Malpractice Insurance and what does it cover?

Malpractice Insurance is one category of insurance, specifically meant for professional practitioners like physicians, lawyers, accountants etc., which provides coverage to these policyholders against potential negligence claim made by their clients/patients. The malpractice insurance taken by attorneys is popularly known as legal malpractice insurance. Legal malpractice is defined as the failure of an attorney to deliver competent services to his client. If the latter is harmed by the failure of the attorney, then he can pursue a claim for legal malpractice. This insurance generally covers defense costs, deposition representation, defendant expenses, license protection, and any liability occurrences. Some also offer the coverage of assaults, personal liability, personal injury, first aid expenses, medical payments, and damage to the property of others depending upon the scope of agreement. Malpractice Insurance is a general liability insurance.

Who are covered under a Legal Malpractice Insurance?

By the doctrine of respondent superior and vicarious liability, the employer is responsible for the torts of their employees or agents when the wrongdoing occurs within the scope of employment. Under the same principle, in case if a paralegal or junior associate commits a tort within the scope of employment, the client can sue the paralegal, the associate, the attorney or all. This is a reason why most of the legal malpractice insurance covers each and all of them.

Is it mandatory for the US Attorneys' to have legal malpractice insurance?

Oregon is currently the only state to have a mandatory program requiring all private practice attorneys to carry malpractice insurance. Four states - Alaska, Ohio, South Dakota and Virginia - have varying requirements for disclosure of professional liability coverage. The Supreme Court of California adopted new Rule of Professional Conduct 3-410 on August 26, 2009, effective from January 1, 2010. This Rule 3-410 requires lawyers without professional liability insurance to provide written disclosure of their lack of coverage to all, i.e. to both the new clients as well as the clients which return to the attorney with new assignments. The mandatory disclosure is to be made at the onset of any client's engagement, beginning January1, 2010. It is imperative to note here that although having such an insurance cover just may be desirable, but is not a mandate to follow even after Rule 3-410 is effective. But this rule is widely opposed by the legal fraternity at large. It is believed that once the Rule is made effective, it shall bring to foyer larger difficulties for uninsured attorney's to generate business. At this time, I would like to quote a study by Louisiana State Bar, Oral Report to the House of Delegates, January 19, 2002 that "…. only half of American attorneys carried insurance protection (at that time)…..".

How painful is it for a client to sue an attorney for a malpractice?

Areas of law practice where lawyers get most frequently sued are Personal Injury, Domestic Relations, General Corporate and Real estate. The most common errors due to which lawyers get sued are: failure to timely file or respond, improper advice, unethical conduct, failure to advise, misrepresentation, inadequate investigation or preparation, failure to follow instructions etc. In case of any malpractice on account of the attorney, the client has two options: either to approach the state bar with a written complaint or to file a malpractice case.

In case of the former, if the ABA data has to be believed, only 0.27% attorneys were formally charged for disciplinary action in 2004 [American Bar Association, Center for Professional Responsibility, Survey on Lawyer Discipline Systems2004, available at] .

Unfortunately, it is also hard to win a malpractice case. Malpractice means that the lawyer failed to deploy the ordinary skill and care that would have been deployed by other lawyers in handling a similar problem or case under similar circumstances. To win a malpractice case against an attorney, the alleged victim needs to prove four basic things:

  • Duty -- that the attorney owed a duty to act properly,
  • Breach -- that the attorney breached that duty,
  • Causation -- that this conduct caused actual damages, and
  • Damages -- that financial loss resulted due to this above conduct.

The biggest hurdles amongst the 4 above are: Causation and Damages. To win a malpractice case, the alleged victim must first (I) show that he would have won the case that the lawyer mishandled. And second(II), he is required to prove that the victim would have been able to collect compensation from the defendant (unless he is in the state of Ohio, where the second part is not required).

For example, let us say the victim who was hit by a vehicle, hired an attorney who failed to file the claim-suit within limitation. To win the malpractice case against his attorney, this victim, inter alia, has to show that the vehicle driver has sufficient funds or insurance. Now if the victim cannot prove that the driver has assets which can be used to pay the judgment, then the victim will not win this malpractice case despite the fact that both the lawyer and the driver were at fault. Additionally, expert evidence may also be sought to facilitate the case proceeding. Malpractice cases often fail because mere bad outcomes or ill-advised strategic choices by an attorney are not considered deviations from the standard of care, though in more complicated cases this can be a very gray area. Limitation, case within a case, standard of care and attorney judgment rule are some strong defenses available with attorneys in cases of legal malpractice. To sum up, without an expert attorney on the claimant's side, the chances of winning a legal malpractice case are bleak.

In an effort to reimburse defrauded clients who cannot get reimbursement from the attorney who caused the loss or from insurance, some states have Client Protection Fund. The fund is financed through annual registration fees and administered by the state courts. But unfortunately a client's ability to recover under the Client Protection Fund is usually severely limited.

Now let us look at how the legal malpractice insurance and the Legal Process Outsourcing industry norms are intertwined.

Understanding the models of Legal Process Outsourcing:

Traditionally there are two popular modules in which legal processes are outsourced, Third Party Service Providers/vendors (TPSP's) and owned captive unit. A TPSP vendor (commonly referred to as LPO vendors) assists foreign law firms and in-house legal departments to achieve cost effective legal support. TPSP's are not law firms and do not practices law in any domestic or foreign location. They are engaged by foreign attorneys and work on set guidelines to assist them. They have internal Quality checks to ensure consistent quality work product (deliverables). This work product (deliverables) is also supervised by licensed US attorney. Captive unit in the simplest way is an extension of your office.

Do LPOs need malpractice insurance?

The answer as obvious is NO. Since an LPO is not engaged in practice of law, it does not require insurance cover for malpractice. The law firm outsourcing work should ensure from their insurance agent, for the coverage of TPSP's attorney. LPOs do not take malpractice insurance. With malpractice insurance, the argument is that a TPSP or its employee does not work in direct contact with clients and therefore would not be sued for malpractice. In fact for the reasons mentioned above in the article, the probability for TPSP's being sued as defendant, co-defendant or even a third-party defendant in a malpractice suit is limited. To the extent they can be, TPSP's are covered by the malpractice insurance of the outsourcer. Associates of counsels, paralegals and virtual lawyers are generally covered in malpractice insurance policy depending on how broad the coverage is. Please contact the insurance broker or agent for more detail.

Which Insurance cover is then required by TPSP?

It is necessary and desirable that TPSPs have an E & O (Errors and Omissions) insurance coverage. Though it is interchangeably used, there is a difference between malpractice and E & O insurance cover. Malpractice insurance covers defense costs, deposition representation, defendant expenses, license protection, and any liability occurrences. Some insurer also covers assaults, personal liability, personal injury, first aid expenses, medical payments, and damages to the property of others. E & O insurance protects TPSP and its employees in the event a client alleges to have suffered a financial loss as a result of an error and/or omission committed by TPSP in the delivery of legal outsourced services. It is unlikely that any foreign attorney who understands the nature and scope of malpractice insurance and the scope and obligations of outsourcing would ask a TPSP to have malpractice insurance.

E & O insurance coverage is flexible and can be taken exclusively for each assignment to better cover a specific situation. In majority of cases the SLA signed between the outsourcer and TPSP, provides for some form or the other of indemnity. This indemnity risk can be better covered by entering a clause in the SLA to an effect that TPSP obtains E & O insurance cover for risk mitigation.

It is not just a fundamental but also a technical analysis of the scenarios in the outsourcing industry today that inspires someone to outsource work to TPSP. Weigh the dependability and reliability of the organizations to which you want to outsource. A thorough due diligence should be made about TPSP. Free trials are occasionally offered, which helps the outsourcer to understand the nature, scope and standard of work-product (deliverables), before outsourcing.


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