January 16, 2013 Top Story

Malpractice Insurer Must Defend Lawyer Who Admits Mistake

Ethical duty trumps policy that prohibits admission of liability

Jannis E. Goodnow

The ethics rules usually bind lawyers to tell their clients when they have made a mistake, but should they lose their malpractice insurance as a result? In a question of first impression, the Illinois Appellate Court said no, ruling that an insurer had a duty to defend an insured attorney who disclosed his error, allegedly in violation of his malpractice policy. Illinois State Bar Association Mutual Insurance Co. v. Frank M. Greenfield & Assocs. [PDF].

Lawyer Admits Mistake, Loses Coverage

Attorney Greenfield was Muriel and Leonard Perry’s estate planning attorney for many years, drafting wills and trusts for both of them. Leonard gave Muriel a “power of appointment,” which allowed her to make changes in the distribution of his trust. After Leonard died, Greenfield drafted a will for Muriel that specifically exercised that power to distribute the assets of Leonard’s trust according to the terms of Muriel’s trust. When Muriel amended her will, Greenfield failed to include the language that Muriel was exercising her power of appointment regarding those assets. After Muriel died, Greenfield discovered the discrepancy and sent a letter to certain beneficiaries of Muriel’s trust, admitting that he had made a “scrivener’s error” in the later will and that, but for that error, those beneficiaries would have been entitled to $863,900 more. While Greenfield encouraged the trustees to implement Muriel’s intentions rather than the letter of the later will, they apparently did not, and the beneficiaries sued Greenfield for malpractice.

Greenfield tendered his defense to his legal malpractice insurer, the Illinois State Bar Association Mutual Insurance Company. ISBA Mutual filed suit seeking a declaration that it had no duty to defend Greenfield because he had sent his letter to the beneficiaries without ISBA Mutual’s written consent. The insurer relied on the following Voluntary Payment provision of the policy, which is standard in most professional liability policies:

The INSURED, except at its own cost, will not admit any liability, assume any obligation, incur any expense, make any payment, or settle any CLAIM, without the COMPANY’S prior written consent.

On cross motions for summary judgment, the trial court held that ISBA Mutual had a duty to defend since Greenfield did not admit liability in the letter and consequently did not trigger the Voluntary Payment provision. ISBA Mutual appealed.

Admitting Fault is Not Admitting Liability

Addressing the question under Illinois law, the Illinois Appellate Court first distinguished between admitting fault—that is, admitting the truth of facts—and admitting or assuming legal liability. Here, Greenfield’s letter to the beneficiaries did no more than state factually what had occurred. The court went on to rule, however, that even if Greenfield had breached the Voluntary Payment provision, it was not enforceable for public policy reasons.

Ethical Obligations Trump Coverage Condition

The insurer argued that, had Greenfield discussed the letter with the carrier before sending it to the beneficiaries, the insurer would not have interfered with Greenfield’s compliance with his ethical obligation to disclose. The court, however, was “uncomfortable with the idea of an insurance company advising an attorney of his ethical obligation to his clients, especially since, as in the case at bar, the insurance company may advise the attorney to disclose less information than the attorney would otherwise choose to disclose.” The court concluded that, as “it is the attorney’s responsibility to comply with the ethical rules as he understands them,” the policy provision is against public policy because it may operate to limit an attorney’s ethically required disclosures.

Necessary Protection for the Ethical Policyholder?

“The majority noted in a forceful way that an attorney’s ethical obligations do not yield to insurance coverage considerations,” states Sherilyn Pastor, Newark, NJ, cochair of the ABA Section of Litigation’s Insurance Coverage Litigation Committee, noting that “an attorney should not be pressured or dissuaded by a non-attorney” regarding the contents of a disclosure the attorney feels ethically bound to make. “The court got it exactly right,” agrees David M. Brenner, Seattle, cochair of the Ethics & Professionalism Subcommittee of the Section of Litigation’s Insurance Coverage Litigation Committee. “The bottom line is, if you make a mistake, you have to be able to have a candid conversation with your client. We should not craft our advice in light of the possibility of losing malpractice coverage,” he adds.

Not all Section leaders agree. “This is too harsh a result,” opines David A. Grossbaum, Boston, cochair of the Professional Liability Subcommittee of the Section’s Insurance Coverage Litigation Committee (insurer side). The case leaves open the possibility that an attorney “may go too far in admitting liability to make malpractice insurance proceeds available to a potential plaintiff,” he suspects.

Candor vs. Coverage

Rather than decide the case on public policy grounds, the appellate court could have simply affirmed the trial court’s determination that the attorney had not made an admission of liability and, thus, had not violated the policy. “But that would require the court in every instance to examine whether the attorney went too far” in disclosing an error, believes Alicia G. Curran, Dallas, cochair of the Ethics & Professionalism Subcommittee of the Section’s Insurance Coverage Litigation Committee. The distinction between admitting fault and admitting liability “is too fine a question to have to work through,” agrees Brenner. “Having to think about it at all could cause an attorney to start shading a disclosure in the direction of coverage instead of candor to the client,” he cautions.

Call the Hotline First

The interests of malpractice carriers and their attorney policyholders are not, however, always in conflict. The court’s approach “ignores the reality of how malpractice insurers operate,” says Ronald L. Kammer, Coral Gables, FL, cochair of the Section’s Insurance Coverage Litigation Committee. Many malpractice insurers offer “hotlines” for insured attorneys who may have erred. “When you call the hotline, you are calling an attorney who specializes in legal malpractice. The carriers have every incentive to advise their insureds appropriately regarding ethical obligations, as this can minimize exposure to liability and damages,” Kammer explains.

The insurer’s counsel “can help the attorney discharge ethical obligations without saying more than necessary,” advises Grossbaum. He adds that, without the guidance of the carrier’s in-house or hotline counsel, an attorney may make a disclosure “that is not ethically mandated because he or she is just uninformed or does not understand all of the potential defenses” to liability.

Jannis E. Goodnow is an associate editor for Litigation News.

Keywords: legal malpractice, insurance coverage, ethics, professional liability

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