Kentuckians are familiar with the concept of requiring individuals to procure certain minimum liability insurance before engaging in potentially risky behavior. Perhaps the most ubiquitous risky behavior – operating an automobile – has long required motorists to obtain liability insurance. Kentucky law also requires individuals who practice certain occupations such as electricians and plumbers, for example, to maintain a minimum level of liability insurance. The rationale for mandatory liability insurance is clear; it protects the public in the event of inevitable mistakes.
The practice of law is fraught with the opportunity for mistakes. Attorneys are fiduciaries for their clients in a landscape that is full of deadlines and close calls and where the rules are constantly changing. Attorney errors are inevitable and can sometimes cause extraordinary consequences for clients. Despite this, Kentucky does not mandate all practicing attorneys procure liability insurance. In 2000, the Kentucky Supreme Court enacted a rule that requires attorneys who practice in limited liability business entities to maintain either “adequate professional liability insurance” or “adequate financial coverage.” The required amount of insurance varies between $250,000 per claim and $500,000 per year and $5,000,000 per claim and $10,000,000 per year, depending upon the number of attorneys in the entity. Attorneys in these entities may avoid the required liability insurance by having deposits, a letter of credit, or a surety bond of between $250,000 and $5,000,000, again depending upon the number of attorneys in the entity. No rule requires disclosure of an attorney’s security status to clients or the public. For those attorneys who practice outside a limited liability entity, there is no requirement for liability insurance at all.
In 2015, William E. Johnson, then-President of the Kentucky Bar Association (“KBA”), commissioned a Taskforce on Professional Liability Insurance (the “Taskforce”) to study various issues involving professional liability insurance, including mandatory coverage and/or mandatory disclosure of coverage. The Taskforce consisted of practitioners from around the Commonwealth (including the authors) and was co-chaired by Charles E. “Buzz” English, Jr. and Beverly R. Storm. The Taskforce studied the approaches to this issue taken by jurisdictions throughout the country. On August 5, 2015, the Taskforce delivered its report to Douglass Farnsley, current KBA President. The Taskforce unanimously recommended the adoption of the American Bar Association (“ABA”) Model Rule on disclosure of liability insurance (discussed below). The KBA Board of Governors is considering the Taskforce’s recommendation.
II. The Varying Landscape
“Mandatory Insurance” is a common phrase used to describe a varying set of rules and provisions relating to the regulation of lawyers and professional liability insurance. By its clear terms, the phrase would seem to indicate that “mandatory insurance” means that lawyers are required to maintain professional liability insurance or else face risk of ethical violation or sanction. But that is not the case. Only the state of Oregon requires all lawyers to maintain a minimum level of professional liability coverage, but it has created a mandatory provider (the Professional Liability Fund) with the support of state government to help lawyers meet that requirement. Since 1978, the Oregon Professional Liability Fund has provided coverage of $300,000.00 per claim/$300,000.00 aggregate to all attorneys engaged in the private practice of law, and lawyers are assessed a base fee (e.g., $3,000.00) for this coverage. Many other states have some form of mandatorydisclosure of an attorney’s professional liability insurance.
As one may expect, rules regarding mandatory disclosure of lawyer professional liability insurance vary by jurisdiction. Twenty-six states have adopted some form of required disclosure. Mandatory disclosure regimes can be divided into two general types: 1) those that require disclosure directly to the client; and 2) those that require disclosure only to the state regulatory organization. Those jurisdictions requiring disclosure to the regulator outnumber by two-to-one those that require disclosure directly to the client.
To better understand the wide variety in the mandatory disclosure landscape, consider Michigan and South Dakota. These states are among those at both ends of the disclosure spectrum. In Michigan, a lawyer must confidentially report to the state bar association whether he or she has liability insurance. South Dakota is at the other end of the spectrum with “the most stringent reporting requirement of any state.” Like Michigan, South Dakota lawyers must disclose to the state bar association whether they carry professional liability insurance. Yet in addition, South Dakota requires lawyers carrying less than $100,000.00 in liability insurance to state that they are not insured both on their letterhead and in “every written communication with a client.” Not coincidentally, 97% of South Dakota lawyers report carrying liability insurance with limits of at least $100,000.00.
Of the seven states bordering Kentucky, four have some type of mandatory disclosure rule (Illinois, Ohio, Virginia, and West Virginia). Ohio is one of the few states that require direct disclosure to the client. There, any lawyer with professional liability insurance limits of less than $100,000.00 per occurrence and $300,000.00 aggregate must disclose that fact to the client in a writing signed by both the lawyer and the client. Virginia’s rule is patterned on the ABA Model Rule discussed below. Virginia lawyers must simply disclose whether they carry professional liability insurance in response to the annual dues statement. The list of attorneys without insurance is available to the public on a searchable website.
Those on both sides of the mandatory disclosure debate cite a number of arguments for their positions. Those in favor of required disclosure often argue that it helps clients make an informed decision in retaining an attorney and, because it encourages lawyers to obtain insurance, helps protect clients and others who may be harmed by a lawyer’s negligence. Individuals against mandatory disclosure often argue that it is not necessary because of the perceived low numbers of uninsured lawyers. Opponents also assert that required disclosure may lead to negative consequences such as increasing the cost of legal services, stigmatizing those who cannot afford insurance, and increasing the number of malpractice lawsuits.
While only approximately one-half of the states have a mandatory disclosure requirement, the number has been increasing. Indeed, the number of states with mandatory disclosure has more than doubled since the adoption of the ABA Model Rule in 2004. Of the states to expressly consider the issue, only five have rejected a disclosure rule. A sixth state – North Carolina – initially adopted but then later repealed its mandatory disclosure rule.
II. American Bar Association Model Rule and Taskforce Recommendation
After four years of discussion and debate, the ABA House of Delegates narrowly approved a Model Court Rule on Insurance Disclosure (the “Model Rule”) in 2004. The Model Rule requires any lawyer in private practice to annually certify to the state’s highest court whether he or she is currently covered by professional liability insurance. The Model Rule also requires attorneys to notify the court if that coverage lapses or terminates. Any lawyer not complying with the rule is unauthorized to practice until he or she complies. Those providing false information are subject to disciplinary action. The ABA recommends that attorneys’ insurance status be available to the public.
The Taskforce unanimously proposed the adoption of a new Supreme Court Rule patterned on the ABA Model Rule. Under the Taskforce’s proposal, every attorney engaged in the private practice of law (government and in-house attorneys would be exempt) would have to certify to the KBA annually whether he or she is covered by professional liability insurance with minimum limits of at least $100,000 per claim and $300,000 per aggregate. Attorneys would be required to notify the KBA within thirty days of any lapse in coverage. Whether an attorney has liability insurance would be information available to the public. Nothing in the Taskforce’s proposed rule would require attorneys to purchase insurance. Rather, attorneys would simply have to report whether they have certain minimum insurance. The Taskforce felt this approach balanced the interests of attorneys in being able to choose whether to purchase insurance and the public in having access to attorneys’ insurance status.
The Taskforce’s recommendation is just that – a recommendation. The KBA Board of Governors has a process for vetting and approving proposed Supreme Court Rules before submitting proposals to the Kentucky Supreme Court for consideration. Whether to enact a rule relating to insurance disclosure is ultimately a determination for the Supreme Court. Hopefully, the research compiled by the Taskforce will be useful as KBA leaders and the Court weigh the interests involved in this complex area.
Dustin E. Meek