The lawyers professional liability form may be written as an endorsement to the commercial general liability policy or as a free standing policy by attaching the standard provisions for general liability policies to the lawyers professional liability form.

Analysis

Although partnership or corporate practice is as common among lawyers as among physicians, lawyers liability forms GL 00 23 and GL 00 24 do not have separate insuring clauses for individual coverage and partnership, association, or corporation coverage as in physicians liability forms. The persons insured provisions of those forms automatically provide coverage for individual lawyers and the professional partnership, association, or corporation to which they belong.

The single insuring agreement of the current forms expresses the insurer's promise to pay damages for which the insured becomes liable “because of any act or omission of the insured, or of any other person for whose acts or omissions the insured is legally responsible… arising out of the performance of professional services for others in the insured's profession as a lawyer.” The portion deleted from the quotation is the wording that determines whether the policy covers on a claims-made or an occurrence basis. Claims-made coverage triggers are discussed elsewhere; see Claims-Made CGL Form, Casualty and Surety, Public Liability section.

It should be noted that the older lawyers liability form, GL 00 20, used virtually the same provisions in its two insuring agreements, except that there was no reference to when the policy covers; that information was provided in the policy period provision. If the older form is ever used for an individual lawyer who is also a member of a partnership, it is essential that partnership coverage be arranged in addition to individual coverage. This is because the coverage A insuring agreement states that it will not provide any coverage “if one or more claims arising out of the same professional service are made (1) jointly or severally against two or more members of the partnership or against any member and the partnership, (2) against the partnership or (3) against the insured solely because he is a member of the partnership.” These exposures are specifically covered under the coverage B agreement, which is the partnership liability section of the older form.

A possible source of argument under the insuring agreements seems to be what constitutes a person's “profession as a lawyer.” While, in the great majority of cases, there should be no argument, attorneys perform so many different services that there does seem to be a strong possibility of an occasional borderline case. The policy does not define “profession as a lawyer,” but it does contain a statement regarding situations in which the insured acts as an administrator, conservator, executor, guardian, trustee, or in any similar fiduciary capacity. Acts or omissions in that capacity are stated to be “professional services for others in the insured's profession as a lawyer,” but this is qualified by the important limitation “but only to the extent that such acts and omissions are those for which in the usual attorney-client relationship the insured would be legally responsible as attorney for a fiduciary.”

This provision recognizes that lawyers frequently serve as executors, trustees, etc., as a matter of convenience to clients who might otherwise have to assume these positions in their own names. The purpose of the quoted language is to restrict protection to that sort of situation. In addition, the lawyers liability forms all exclude loss sustained by the insured “as the beneficiary or distributee of any trust or estate.” The current lawyers liability forms also contain an exclusion of the insured's “activities as a fiduciary under the Employees Retirement Income Security Act of 1974 and any amendment thereof or any regulation or orders issued pursuant thereto.”

Analysis

The defense coverage of the lawyers liability forms is similar to and, at the same time is different from the usual defense coverage of general liability forms. The lawyers liability forms, like the current general liability forms, define “suit” to include “an arbitration proceeding to which the insured is required to submit or to which the insured has submitted with the company's consent,” thereby providing defense coverage for such proceedings, which might not otherwise be viewed as suits. However, the lawyers forms also provide that the duty to defend ends when the applicable limit of the company's liability has been exhausted by payment of judgments, settlements, or claims expenses. In the standard ISO general liability forms, claims expenses are not included in the limit of liability. The lawyers forms define “claims expenses” as “(1) fees charged by an attorney or arbitrator designated by the company, and (2) all other fees, costs, and expenses resulting from the investigation, adjustment, or defense of a claim, arbitration, or suit arising in connection therewith if incurred by the company.” The “claims expenses” term is stated not to include supplementary payments, salary charges of regular employees or officials of the insurer, or fees and expenses of independent adjusters.

It can be pointed out that the defense coverage of the older lawyers liability form was more advantageous to the insured. It contained the consent to settle clause characteristic of the older standard forms for professional liability insurance see Professional Liability Insurance, Casualty & Surety, Public Liability pages and it did not tie payment of defense costs to the duty to defend. As for supplementary payments, the older form included those that are on the current forms plus the usual provisions relating to post judgment interest and bonds to release attachments. The older form did not, however, contain the definition of “suit” that clearly provides defense coverage for arbitration proceedings.

Analysis

The current lawyers liability forms have eight exclusions in common (apart from the broad form nuclear energy liability exclusion), the first four of which, to be noted, are the only exclusions in the older lawyers liability form.

The first exclusion applies to any claim arising out of dishonest, fraudulent, criminal, or malicious acts or omissions of any insured or employee of the insured. This particular exclusion is worth discussing, in part, because of the exclusion of fraudulent acts. Some courts have made a distinction between constructive fraud and actual fraud, holding that the exclusion applies only to actual fraud. One such court decision was Brooks, Tarlton, Gilbert, etc., v. U.S. Fire Insurance Company, 832 F.2d 1358 (1987) wherein a federal court of appeals held that the basis of the complaint in the lawsuit was a breach of a fiduciary duty owed by the lawyers and that this involved constructive fraud, where a lawyer's intent or state of mind was immaterial. The court went on to state that the policy exclusion did not refer to constructive fraud, but actual fraud only, which would include an element of wrongful intent; therefore, coverage was afforded under the policy.

The court in the Brooks case based its decision on an earlier Texas case which spoke of the distinction between actual and constructive fraud; the earlier case was Archer v. Griffith, 390 S.W.2d 735 (1964). Building upon the Archer case, the federal court in the Brooks decision said that actual fraud usually involves dishonesty of purpose or intent to deceive whereas the benchmark of constructive fraud is the existence of a fiduciary relationship; it is the existence of the relationship, apart from any state of mind of the attorney, that casts doubt on a transaction between the attorney and client. It is possible for an attorney to be liable for constructive fraud even though the attorney operated completely in good faith. Therefore, the question is whether the common meaning of the term fraud as it appears in the exclusion provision of the insurance policy includes constructive as well as actual fraud; the court held that it did not.

The point of all this is that insurers may want to think twice before summarily declining a claim based on grounds of alleged fraudulent acts of the insured. If a court accepts a distinction between actual fraud and constructive fraud, a decision by the insurer to decline a claim due to the fraudulent acts exclusion may very well be overruled by the court; the insurer will end up paying the original claim and possibly be hit with a bad faith claim.

There is also an exclusion of any claim made by an employer against an insured who is a salaried employee of that employer. This would apply to a case where an employed attorney—not a partner—who is covered as an additional insured commits some act that the employing attorney believes has caused him financial loss. The policy is not intended to protect the employed attorney against any liability he may have to the employer under those circumstances. In the current lawyers liability forms, the exclusion is worded to apply also to claims made by a parent or subsidiary corporation or by any director, officer, or stockholder against an insured, if the employer is a corporation.

The third exclusion applies to liability for bodily injury to, or sickness, disease, or death of, any person; or for injury to or destruction of any tangible property, including loss of its use. An example would be an insured attorney mistakenly advising a client to refuse someone admittance to disputed premises, the client being injured in a resulting fracas and bringing suit against the attorney.

The exclusion that applies to any loss sustained by the insured as a beneficiary or distributee of a trust or estate was explained earlier within the discussion of the insuring agreements.

The fifth exclusion applies to acts or omissions involving any security or any activities or transactions subject or claimed to be subject in whole or in part to The Securities Act of 1933, The Securities Exchange Act of 1934, The Public Utility Holding Company Act of 1935, The Trust Indenture Act of 1939, The Investment Company Act of 1940, or The Investment Advisors Act of 1940. The exclusion also applies to errors and omissions involving the purchase, sale, or offering of any security to or from the public that is subject or claimed to be subject to any State Blue Sky or Securities Law.

There is also an exclusion—more in the way of a clarification of the phrase “insured's profession as a lawyer”—of any claim arising out of the conduct of any business enterprise owned, operated, controlled, or managed by the insured either individually or in a fiduciary capacity, other than the professional practice of law.

The seventh exclusion applies to any claim arising out of any insured's activities in the dual capacity as a lawyer and as officer, director, partner, etc., of any entity other than that of the named insured. The exclusion also applies to the insured's activities in the dual capacity as a lawyer and as a public official or employee of a governmental entity.

The last exclusion found in both of the current lawyers liability forms applies to claims arising out of the insured's activities as a fiduciary under the Employees Retirement Income Security Act of 1974 and any amendments thereof. Separate fiduciary liability coverage is required if an insured faces this exposure. See Fiduciary Errors and Omissions Review, Companies & Coverages, Specialty Lines pages.

The claims-made lawyers form contains one additional exclusion, which excludes claims arising out of acts or omissions occurring prior to the effective date of the policy if at the effective date of the policy the insured knew or could have reasonably foreseen that such acts or omissions might be expected to be the basis of a claim or suit.

Analysis

The current lawyers forms modify the usual supplementary payments of the general liability forms, to include only premiums on appeal bonds and all reasonable expenses other than loss of earnings incurred by the insured at the insurance company's request in assisting the insurer in the investigation or defense of a claim or suit. These are payable in addition to the applicable limits of liability.

Analysis

Under the current lawyers liability forms, it is necessary to show as named insured only the name of the sole proprietor, partnership, professional association, or professional corporation being insured. When that is done, insured status is provided for the named entity; and for any lawyer who previously qualified as an insured prior to termination of the required relationship with the named insured.

Note that the coverage for previously insured lawyers applies only for professional services rendered prior to the termination of the required relationship. Thus, for example, a partner who leaves the insured partnership will need to be covered under another policy for further work as a lawyer. If the ex-partner was insured on a claims-made form, he will also need to purchase prior acts coverage under his new policy, unless he can be assured of continuity of coverage under the old policy for claims made after his departure but attributable to prior acts or omissions. With respect to lawyers who become insured subsequent to the policy's effective date, the policy period begins as of the subsequent date.

In the older lawyers liability form, “insured” was defined separately with respect to individual coverage and partnership coverage. For individual coverage, “insured” included (1) each lawyer named in the declarations; (2) any additional lawyers who during the policy period become partners of the insured partnership; and (3) any additional lawyers employed during the policy period by the insured or by such partnership provided that at its inception date the policy included as insureds all lawyers employed by the insured or the partnership. For coverage B, the insured was, of course, the partnership described in the declarations. This included each member of the partnership and any change in membership that might occur in the partnership during the policy period.

None of the lawyers liability forms require notice of any changes in the number of insured employed attorneys or changes in the partnerships (i.e., more or fewer partners), but such changes call for a pro rata adjustment in premium at the end of the policy period.

The forms contain no provision for covering additional interests, and the CLM specifically prohibits it. The contract is intended exclusively as a professional liability policy for attorneys. If, for example, the insured has a close connection with a business, financial, or other organization that might expose it to liability from professional acts or omissions of the insured attorney, that organization must arrange for its own liability insurance.

Analysis

Each of the lawyers liability forms carries two limits of liability. In the forms, there is an aggregate limit, which is the total liability of the insurance company for all damages and “claims expenses,” and another limit applicable to all claims arising out of the same or related professional services. The forms stipulate that claims expenses are to be deducted from the limit of liability first, and that the remainder is the amount available to pay damages. They further stipulate that if the limits of liability are exhausted prior to settlement or judgment of any pending claim or suit, the company may withdraw from further investigation or defense by tendering control of the investigation or defense of the insured. There is also a reimbursement clause, which requires the insured to reimburse the insurance company if it has paid any amounts in excess of the applicable limit of liability or within the amount of any applicable deductible.

The older lawyers liability form contains a limits of liability clause that is more favorable to the insured. It too imposes an aggregate limit, but it is merely the total limit of the company's liability for all damages; claims expenses are not counted. There is also a limit applicable to all damages arising out of all acts or omissions in connection with the same professional service regardless of the number of claims or claimants. Although this is referred to as an “each claim” limit in the declarations, the clarifying statement in the form gives this limit the same applicability as the comparable limit in the current forms, except of course that the limits in the current forms are reduced by claims expenses. The older form does not have the references to deductibles, reimbursement of the company, and the insurer's right to withdraw from defense upon exhaustion of the limit of liability.

Analysis

See Defense Expense, above, for analysis of where the special definition of “claims expenses” impacts coverage under the lawyers professional liability forms.

Analysis

The amended conditions spell out the insured's duty in regard to assistance and cooperation in investigating and settling claims and specifically makes the coverage nonassignable.

ISO rules and classifications for lawyers liability insurance are contained in the professional liability subdivision of the ISO loss costs manual. There is a classification for lawyers and another classification for employed law clerks, investigators, abstractors, and paralegals. Annual premiums for each individual can be looked up in the appropriate state rate pages. There is no separate charge for partnership or corporate liability, as with the physicians liability policy.

Basic limits are $25,000 for all damages and claims expenses arising out of all acts or omissions in connection with the same professional service, $75,000 aggregate. Increased limits factors for lawyers are shown in increased limits table VI at the back of the professional liability subdivision in the manual (or among the state exceptions). Claims-made factors must also be applied to base premiums if the policy is written on that basis. There is a minimum premium of $250 per policy.