REPORT OF STUDY UNDERTAKEN BY CLIENT PROTECTION SUBCOMMITTEE
OF THE SPECIAL COMMITTEE ON LAWYERS MALPRACTICE INSURANCE
2005-2006
I. Background
A. In spring 2005, the Supreme Court of Virginia requested the Virginia State Bar (VSB),
through its Lawyer Malpractice Insurance Committee (LMIC), to:
1. review the adequacy of the VSB’s current program to encourage acquisition of
professional liability (malpractice) insurance by its members, and
2. consider alternative approaches to enhancing client protection from acts, errors,
or omissions arising out of the lawyer’s practice of law.
B. In fall 2005, LMIC presented its initial report to Bar’s Executive Committee which:
1. summarized on-going VSB efforts to ensure availability of affordable malpractice
insurance and to promote its acquisition by Virginia lawyers including:
a. support of the work of its Special Committee on Lawyer Malpractice Insurance
b. endorsement by the Bar of a malpractice carrier to help ensure the availability of a
high quality lawyer malpractice insurance product at a fair price
c. support of various risk management activities including seminars free to all Virginia
lawyers, a confidential hotline where lawyers can obtain independent advice about
malpractice insurance and malpractice issues, the opportunity to access low priced
law firm audits, and articles on malpractice issues appearing in Bar publications
d. annual mandatory certification to the Bar by all active members of the Bar regarding
professional liability insurance and unsatisfied judgments arising from legal services
e. access to the certification information by the public through a web based search
function and through Bar staff during working hours;
2. discussed Virginia’s current disclosure rule and identified possible measures to strengthen
the VSB’s disclosure requirement
a. by requiring provision of specific policy information as part of the annual disclosure
b. by requiring provision of certificate of insurance to the Bar along with disclosure
c. by offering on the Bar’s website, in conjunction with the attorney record search,
an explanation of the Bar’s malpractice insurance disclosure rule
d. by undertaking additional education efforts, directed to both members of bar
and consumers of legal services, regarding importance of malpractice insurance
e. by requiring disclosure of malpractice coverage to clients as well as to the Bar; and
3. identified models beyond disclosure for protecting the public which should be examined,
all concentrating on lawyers in private practice offering legal services to clients drawn
from the general public:
a. Uninsured Lawyer Malpractice Claims Fund (similar to Clients’ Protection Fund)
b. mandatory malpractice coverage with reliance exclusively on commercial market
c. mandatory malpractice coverage through Bar controlled fund
d. mandatory malpractice coverage with reliance on commercial market supplemented by
Bar controlled Assigned Risk Fund.
C. In February 2006, Virginia House of Delegates passed House Resolution 6 by a vote of 92-6
1. Referenced fact that “many malpractice policies do not cover illegal activities such as
fraud and theft” and cited the possibility that without malpractice insurance, the injured
client would have no remedy, and
2. Encouraged the Supreme Court of Virginia and the VSB to consider the “problem” of
uninsured attorneys and to consider some form of mandatory insurance for attorneys, or
an uninsured attorneys’ fund for compensation of victims of malpractice committed by
uninsured Virginia attorneys.
II. Current Status of Required Malpractice Coverage in Virginia
A. There is no universal requirement in Virginia that lawyers obtain malpractice insurance.
B. There is a requirement that lawyers participating in the Virginia Lawyer Referral Service
certify malpractice coverage with limits of no less than $100,000/$300,000 and provide
the name of carrier, policy number and expiration date.
C. There is a requirement that attorneys covered by the Virginia Consumer Real Estate
Settlement Protection Act:
1. certify malpractice insurance “issued by a company authorized to provide such
coverage in Virginia providing first dollar coverage and limits of at least
$250,000 per claim,” and
2. certify coverage by a surety bond providing limits of at least $100,000 (original
bond must be submitted), and
3. certify coverage by a blanket fidelity bond or employee dishonesty insurance
policy providing limits of at least $100,000 covering all other employees (or
obtain exemption based on having no employees other than the lawyer.)
D. Lawyers who have been disciplined may be required to obtain and maintain a malpractice
insurance policy in an amount and for such term as set by the Disciplinary Board (Para.13
-Organization and Government of the VSB). This provision has not been used based on
the premise that the public is better served by suspending or disbarring such lawyers.
E. Professional limited liability entities authorized under Paragraph 14 were once required to
certify malpractice insurance coverage, but this is no longer the case. Requiring some, but
not all lawyers in private practice to carry malpractice insurance, was deemed inappropriate.
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III. Most Recent Data on Lawyer Financial Responsibility as Self-Reported to VSB in
July 2005 for Fiscal Year 2005-2006
A. All active VSB members are required to disclose whether there are any unsatisfied legal
malpractice judgments arising from their performance of legal services.
1. 25,182 lawyers answered this question:
a. 25,170 responded “no” (99.95%), and
b. 12 responded “yes” (.05%).
2. Of these 12 lawyers reporting unsatisfied judgments:
a. 10 indicated they are in private practice (3 of the 10 reported being uninsured)
b. 6 out of 33 judicial circuits had lawyers with unsatisfied judgments
c. lawyers with unsatisfied judgments had been licensed in Virginia between
6 and 37 years.
B.
All active members in private practice representing clients drawn from the general public
are required to disclose annually to the Bar whether they are currently covered by a
professional liability insurance policy, other than an extended reporting endorsement.
1. 25,182 lawyers answered the professional liability insurance question.
2. 16,914 indicated they are in private practice:
a.. 15,079 indicated they had insurance (89.15%)
b. 1,835 indicated they had no insurance (10.85%)
i. 16% of this total have been licensed in VA less than 5 years
ii. 26% of this total have been licensed in VA between 5 & 15 years
iii. 31% of this total have been licensed in VA between 15 and 25 years
iv. 27% of this total have been licensed in VA more than 25 years
v. 26 out of 31 judicial circuits had uninsured lawyers in private practice
vi. Circuit 19 had the highest percentage of uninsured lawyers—23%
vii. Circuit 13 had the 2nd highest percentage of uninsured lawyers –13%.
C. The VSB makes available to the public, by phone and on its website, the information
disclosed to the Bar by each attorney regarding malpractice insurance coverage.
a. the VSB’s Internet attorney record site receives about 1,100 “hits” per month
b. the VSB office receives about 100 calls per month seeking this information
c. there is no current tracking of whether these inquiries originate with members
of the general public, other lawyers, or insurers.
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IV. Current Status of Malpractice Coverage Levels in Virginia
A. Data requested by the Client Protection Subcommittee and provided by two liability
insurance providers in Virginia, indicated the following regarding limits for 2005
1. Attorneys Liability Protection Society (ALPS)
a. 43.7% of the insured lawyers carried no more than $1,000,000 aggregate limits
32.0% of the policies written provided no more than $1,000,000 aggregate limits.
b. 56.3% of the insured lawyers carried more than $1,000,000 aggregate limits
68.0% of the policies written provided more than $1,000,000 aggregate limits.
c. a further breakdown of the ALPS lower limits is as follows:
ALPS Limits
100,000 / 300,000
250,000 / 250,000
250,000 / 500,000
500,000 / 500,000
500,000 / 1,000,000
1,000,000 / 1,000,000
Lawyers
Percent
Policies
Percent
6.0%
2.1%
3.5%
6.6%
7.3%
18.2%
11.6%
4.9%
6.3%
10.8%
11.2%
23.1%
2. Minnesota Lawyers Mututal (MLM)
a. 30.07% of the insured lawyers carried no more than $1,500,000 aggregate limits
49.13% of the policies written provided no more than $1,500,000 aggregate limits
b. 69.93% of the insured lawyers carried more than $1,500,000 aggregate limits
50.87% of the policies written provided more than $1,500,000 aggregate limits
c. a further breakdown of the MLM lower limits is as follows:
MLM Limits
Lawyers
Percent
Policies
Percent
200,000 / 600,000
300,000 / 900,000
500,000 / 1,500,000
8.44%
9.32%
12.31%
13.04%
16.52%
19.57%
B. Not surprisingly, a review of the raw data driving these percentages, indicates that
many solo practitioners, and lawyers in 2-3 person firms carry the lowest limits of
coverage. Many of the largest firms in Virginia are not insured by the reporting carriers, and
have significant basic coverage limits, plus excess coverage.
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V. Information Regarding Average Annual Cost for Malpractice Insurance
A. The Client Protection Subcommittee asked these same carriers to provide information
regarding average basic premium costs in Virginia. It must be emphasized that these
figures are offered WITHOUT considering variances resulting from underwriting based on
area of practice and claims history, WITHOUT considering the application of any credits
for claims free history with the insurer or attendance at risk management CLEs, WITHOUT
considering step increases based on years in practice, and most significantly, ASSUMING
FULL PRIOR ACTS COVERAGE.
B. ALPS policies are quoted with defense costs outside the policy limits:
Per lawyer average annual cost for $100,000/300,000 with $1,000 deductible = $1029
Per lawyer average annual cost for $250,000/250,000 with $1,000 deductible = $1473
Per lawyer average annual cost for $250,000/500,000 with $1,000 deductible = $1867
C. MLM policies are quoted with defense costs inside the policy limits (i.e. eroding limits)
Per lawyer average annual cost for $200,000/600,000 with $1,000 deductible = $1300-1700
Per lawyer average annual cost for $300,000/900,000 with $1,000 deductible = $1400-1800
VI. Report on Recent Claims Experience in Virginia and Nationally
A. Data requested by the Client Protection Subcommittee provided by these same liability
insurance providers for claims closed in the years 2003, 2004, and 2005, regardless of year
opened, indicated the following regarding claims.
1. Percent of claims by expense paid (predominantly defense costs):
$0 Paid
$1 to $10,000 Paid
$10,001 to $50,000 Paid
$50,001 to $100,000 Paid
$100,001 to $250,000 Paid
$250,001 to $500,000 Paid
2.
69%
21%
7%
2%
1%
1%
Percent of claims by indemnity dollars paid to claimant:
$0 Paid
$1 to $10,000 Paid
$10,001 to $50,000 Paid
$50,001 to $100,000 Paid
$100,001 to $250,000 Paid
3.
79%
9%
8%
3%
1%
Percent of claims by total dollars paid (defense and indemnity/settlements):
$0 Paid
58%
5
$1 to $10,000 Paid
$10,001 to $50,000 Paid
$50,001 to $100,000 Paid
$100,001 to $250,000 Paid
$250,001 to $500,000 Paid
24%
11%
5%
1%
1%
B. Data published by ABA Standing Committee on Lawyers’ Professional Liability” in its
most recent report, “Profile of Legal Malpractice Claims, 2000-2003”
1. Percent of claims by expense paid reported for 30,369 claims:
$0 Paid
$1 to $1,000 Paid
$1,001 to $5,000 Paid
$5,001 to $10,000 Paid
$10,001 to $25,000
$25,001 to $50,000
$50,001 to $100,000
Over $100,000
Total
58.61%
7.21%
11.68%
6.57%
7.81%
4.19%
2.35%
1.59%
100%
17,798
2,189
3,546
1,995
2,372
1,272
715
482
30,369
2. Percent of claims by indemnity dollars paid to claimant based on 30,444 claims:
$0 Paid
$1 to $10,000
$10,001 to $50,000
$50,001 to $100,000
$100,001 to $250,000
$250,001 to $500,000
$500,001 to $1,000,000
$1,000,001 to $2,000,000
Over $2,000,000
Total
3.
78.02%
6.35%
9.35%
2.78%
2.01%
0.89%
0.42%
0.12%
0.06%
100%
23,751
1,934
2,845
845
613
271
129
37
19
30,444
Percent of claims by total dollars paid (expense and indemnity) to claimant
reported on 30, 484 claims:
$0 Paid
$1 to $10,000
$10,001 to $50,000
$50,001 to $100,000
$100,001 to $250,000
$250,001 to $500,000
$500,001 to $1,000,000
$1,000,001 to $2,000,000
Over $2,000,000
Total
52.31%
22.52%
15.30%
4.63%
3.17%
1.27%
0.53%
0.20%
0.08%
100%
6
15,947
6,865
4,664
1,410
965
386
163
60
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30,484
VII. Conclusions to Date Reached by the Client Protection Subcommittee:
A. No data is available to support a conclusion that uninsured lawyers, including those who
practice part-time, or those who practice in areas of the law difficult to underwrite, commit
malpractice with any greater frequency than insured lawyers.
B. Similarly, no data is available to support a conclusion that the majority of uninsured
lawyers in private practice are uninsured because they have a negative claims history and
are thus considered by insurers to be “bad risks” who have either been denied coverage or
who have been offered coverage only at extraordinary premium rates.
C. The likely response rate to a voluntary polling of the approximately 2,000 lawyers
currently reporting that they have no insurance coverage as to why they are uninsured
would not warrant the effort. Anecdotal reports suggest the following reasons:
a.
b.
c.
d.
e.
f.
g.
cannot justify premium cost because lawyer only practices part-time
cannot afford premium because lawyer is in a high risk area of practice
belief that the application process is burdensome and they are “too busy”
belief that lawyer is uninsurable because of claims history or pending claim
belief that lawyer is in a low-risk area of practice, and does not need insurance
belief that lawyer has protected his/her assets and is judgment proof
belief that if lawyer became aware he/she had malpracticed, the lawyer
would satisfy the claim from personal assets
h. belief that if potential malpractice plaintiff learned attorney had no insurance,
claim would not be pursued
i. distrust of defense insurance companies would offer, preferring to personally
handle and attempt to repair any potential claim.
D.
Policy limits, particularly at the lower end of available limits, can be eroded by defense
costs and/or prior claims paid to other victims, making “underinsurance” a concern.
E. The perception of some members of the Bar, and many members of the public, is that
all lawyers in private practice in Virginia are currently required to maintain malpractice
insurance.
F.
The self-reported total of 90% of lawyers having malpractice insurance is significantly
higher than the national average of 60-70%. As of March 2006, the ABA reports that 16
states have adopted some form of malpractice insurance disclosure requirement. Some
doubt has been expressed that the Virginia figure is accurate. Apparently, some lawyers
are confused by the current wording of the questions in spite of every effort towards
clarity. Others may misreport their status. Requiring a certificate of insurance from those
lawyers responding in the affirmative to the malpractice coverage question would
eliminate this issue. Representatives of the two carriers participating in this study assured
the subcommittee that providing a certificate of insurance to their insureds for submission
to the Bar would not be a problem.
G. The Bar’s Clients’ Protection Fund (CPF) currently provides reasonable compensation to
victims of lawyer dishonesty. During the 2004-2005 fiscal year, the CPF paid out
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$300,000 representing 86 claims. The maximum payment allowed from the fund for a
single claim is $50,000 for losses incurred on or after July 1, 2000. Increasing the funding
of the Clients’ Protection Fund would not have any effect on the incidence of lawyer
dishonesty, it would simply increase the total amount available to reimburse all claimants
on account of the dishonest conduct of any one lawyer or association of lawyers.
H.
No conclusion can be drawn from the data currently self-reported on unsatisfied judgments
(12 lawyers out of 25,000) or on the percentage of uninsured lawyers in private practice
(11% out of 17,000) that the public is adequately protected from the harm caused by
lawyers who commit malpractice. Pursuing a legal malpractice claim to judgment is
always onerous, most often expensive, and for many overwhelming. It is significant that
approximately 25% of the petitions filed with the Clients’ Protection Fund are denied
because the behavior complained of constitutes malpractice, not dishonesty. This fact
underscores the conclusion that the low incidence of self-reported unsatisfied malpractice
judgments simply reflects “the tip of the iceberg” in assessing how many clients in
Virginia are financially harmed by lawyer malpractice and remain uncompensated.
I.
Just as the incidence of dishonest lawyers is not limited to either uninsured or insured
lawyers, the incidence of lawyers who malpractice is not limited to either uninsured or
insured lawyers.
J.
Malpractice insurance carriers typically provide the insured lawyer with a range of
valuable services including: resources for effective practice management, screening of
non-meritorious claims, professional claims repair to minimize client damages, an option
for defense of Bar complaints, and “innocent insured” protection if a claim is made
because of the dishonest act of another lawyer in the firm. These benefits inure to both the
lawyer and the client.
VIII. Disclaimer
It should be noted that statistics, especially those that are partial, unaudited, and unverified for
statistical credibility, can be misleading.
The Virginia data herein reflect just two of the companies (albeit major ones) writing in Virginia. It
is estimated that together they write about 1/3 of the insured attorneys in private practice in the
state, with a heavy concentration of solo and 2-3 person firms. It is also likely that the majority of
the lawyers who are reporting to the Bar that they are uninsured are solo or small firm practitioners.
The ABA data is derived from studies by the ABA on a large number of claims that have been
submitted by cooperating insurance carriers. The currently reported data covers the period 20002003. Thus neither the Virginia nor the national compilation of numbers has been compiled from
all claims or all insureds. The data presented in this report offer a part of the picturewhich may or
may not be representative of the whole. Further analyses, including actuarial studies of issues such
as the adequacy of various liability insurance coverage limits and potential increases in premium
costs, should be completed before any recommendations having potential substantial financial
impact on members of the Bar are finally approved.
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IX. Recommendation
The subcommittee recommends that if the Supreme Court of Virginia, the Virginia General
Assembly, and/or the Virginia State Bar Council wishes to pursue the issue of minimizing the
incidence of members of the public being financially harmed by Virginia lawyers who commit
malpractice, one or more of the following models should be fully developed and considered.
X. Description of Models of Public Protection against Lawyers who Commit Malpractice
(Note, a briefer description highlighting perceived advantages and disadvantage of each
model was incorporated into the Committee’s interim report dated 8/31/05)
A. Uninsured Lawyer Malpractice Claims Fund
This model is similar in concept and operation to the Clients’ Protection Fund currently
operated by the VSB. The major distinction arises from the nature of the funding options,
The Malpractice Claims Fund could be capitalized through an assessment levied only on
uninsured lawyers (no prescribed minimum coverage) in private practice representing clients drawn
from the general public, ($1500 was the suggested minimum). Based on an estimated 2000
uninsured lawyers paying this assessment, the Fund would be initially capitalized with $3,000,000.
However, the number of contributing lawyers might well increase with adoption of a requirement
that each lawyer submit a certificate of insurance if certifying malpractice insurance coverage.
Alternatively, all active members of the Bar could be assessed either a one-time or an
annual fee to provide sufficient operating funds. Based on an estimated 25,000 lawyers paying an
assessment of $120, the same initial capital would be available. Claims payments would initially
need to be capped at a low level to protect the Fund’s solvency. Over time, this cap could be
increased.
If claimants were limited to those with unsatisfied final malpractice judgments, this
program would not assist those claimants who were unable to afford the cost of litigation, or who
could not find an attorney to represent them in obtaining a final judgment. If claimants were limited
to those with an unsatisfied final malpractice judgment levied against only uninsured lawyers, there
would be no protection for claimants with such judgments against underinsured lawyers.
Finally, if the uninsured assessment was actually less than a member’s current malpractice
premium, more lawyers might opt to become uninsured. This would be extremely detrimental
because of the myriad benefits available to insured lawyers beyond the obvious benefit of protection
from indemnity and defense costs arising out of accusations of malpractice.
If an additional assessment were levied against lawyers in Virginia based on an
undocumented perception that uninsured lawyers are creating a problem, there would undoubtedly
be resistance and resentment by members of the Bar who struggle currently to pay for their own
malpractice insurance premiums.
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B. Mandatory Coverage with Reliance Exclusively on Open (Commercial) Market
In the Open Market Model, every lawyer licensed to practice law representing clients drawn
from the general public in Virginia would be required to maintain professional liability insurance
consistent with the standards set by the Supreme Court of Virginia and the Bar. In addition, this
model would require professional liability insurers to report all cancellations and non-renewals. In
its simplicity, this program establishes minimum standards of required coverage and reporting
requirements, but allows attorneys the flexibility to select their own insurance carrier and operates
entirely in the open market. Violations of this requirement would result in an administrative
suspension of the member, followed in some cases by a disciplinary or UPL prosecution if the
member continued to practice.
For purposes of this report, assume a minimum coverage limit for all lawyers of $250,000
per occurrence/$250,000 annual aggregate, with a deductible not to exceed $2500 per attorney
insured under the policy. For policies covering firms and lawyers practicing in an office sharing
arrangement, the per occurrence limits would be $250,000 multiplied by the number of lawyers
covered by the policy. The maximum deductible on any policy could not exceed $2500 multiplied
by the number of lawyers covered. For example, a four-person firm would be required to carry
$1,000,000 per occurrence with $1,000,000 in the aggregate with a maximum deductible of
$10,000. A twenty-person firm would be required to carry $5,000,000 per occurrence with
$5,000,000 in the aggregate.
The open market model creates an administrative reporting responsibility for lawyers’
professional liability insurers (LPLI) by requiring them to report cancellations and non-renewals to
the State Bar. The simplest method for insurers would be to require them to provide the Bar with
duplicate copies of all non-renewal and cancellation notices at the time such notices are sent to the
attorney and to update the Bar upon any final rescissions, cancellations or non-renewals.
While this reporting by insurers could be accomplished on a voluntary basis by requiring
members to secure their insurance from companies that agree to comply, it creates an initial
administrative burden in securing commitments from the insurers. The list of approved insurers
would need to be publicized. As an alternative, a legislative approach requiring compliance by all
companies wishing to offer LPLI coverage in Virginia could be pursued.
The open market model would require insurers to provide each insured lawyer, at initial
issuance or renewal, with a Certificate of Insurance on a form acceptable to the Bar. This form
would then be submitted annually with the individual lawyer’s license renewal as proof of
insurance. At this point all that remains is for the insurers to provide the Bar with copies of all
notices of non-renewal, cancellation and rescission and for the Bar to handle the enforcement
process.
The enforcement process would mirror to a great extent, the MCLE enforcement process.
If an attorney allowed his or her LPLI coverage to lapse, the attorney would be placed on
administrative suspension pending coverage reinstatement or a request for an exemption. If the
attorney fails to comply and continues to practice, the matter can be dealt with either in the
discipline system or by accessing remedies available through prosecution for the unauthorized
practice of law.
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Some attorneys will not be able to acquire coverage in the commercial market for a number
of reasons. Most, if not all, of these involve risk factors and focus directly on competency or
impairment issues. Whether through the discipline process or other administrative process, these
attorneys may require an opportunity to present their case for an exemption. This mechanism will
require the Bar to make decisions on a case by case basis after an appropriate hearing process and a
potential appeal to the Court if the Bar denies the exemption. The conditions for this type of
exemption need to be well defined in rules and must be strictly applied.
The open market model would be administered by the Bar, or its designated Program
Administrator. These responsibilities would include the following:



collection of filings from insurers and/or attorneys
processing of requests for exemption, and such other tasks as the Court or Bar may
determine as appropriate for the administration of the program
periodic notification to the Court as to the exemptions and suspensions occurring under the
program
The introduction of such a model would require significant lead time to inform both members of
the Bar and malpractice insurance providers regarding the new requirements.
C. Mandatory Malpractice Coverage through Bar Controlled Fund
Participation in the Fund would be mandatory for attorneys in private practice representing
clients drawn from the general public. This model is currently in place in Oregon
As this is a fund based on assessments charged to members of the Bar engaged in private
practice and administered by the Bar pursuant to appropriate legislation, it would not be formed as
an insurance entity that would require supervision or oversight by the State Corporation
Commission’s Bureau of Insurance. This is a significant feature as it allows for the program to be
formed without mandated initial capitalization. The assessments would be determined annually
based on the actuarially determined funding needs for the payment of existing claims. In short, the
first year’s assessments would be determined based on industry loss data and each year thereafter
the assessment would be determined by reviewing the Fund’s own loss data to determine needs for
the current year and any short fall that may occur in the current outstanding claims book.
The Fund would provide all participants with basic $500,000 LPLI coverage with no
deductible. The coverage would be similar to that provided by carriers in the commercial market,
but would be customized prior to inception to address any desired specific coverage or exclusion
identified by the Fund board. Those lawyers wishing to have higher limits of liability would be able
to obtain excess coverage above the Fund in the open market through commercial carriers.
Experience in Oregon and all the Canadian provinces have shown that the market for such
additional limits remains competitive.
The professional liability insurance assessments for the Fund could be developed using one
of two approaches. Both would collect the same total assessment for the Fund, but illustrate two
different ways of distributing the assessment among participants. Note that the illustrations below
are not actuarially determined, but rather represent an actuary’s preliminary estimate for the sole
11
purpose of presenting this model. If the decision is made to give further consideration to this model,
it would be necessary to engage an actuary to determine the appropriate initial assessment and to
establish the base upon which future year assessments can be determined.
The first approach requires no underwriting, and would charge an equal base assessment to
each and every participant. Preliminary review indicates that the initial year’s assessment for the
program would fall within the following range:
Limit
Assessment Range
$500,000
$1,875 - $2,500
The second approach effectively underwrites attorneys by area of practice according to
simplified classes of practice. Attorneys in higher-risk categories of practice (including but not
limited to mergers and acquisitions and securities law) would be charged an assessment closer to the
top of the range; attorneys in medium-risk practice (such as civil litigation plaintiffs law and real
estate) would be charged an assessment in the middle of the range; and attorneys in lower-risk
practice would be charged a lower assessment. The preliminary indications of the range for this
model are broader to reflect the risk classifications and higher expense involved in the additional
underwriting:
Limit
Assessment Range
$500,000
$1,300 - $6,500
There are a number of considerations common to both approaches which include claims
surcharges, assessment of part-time practices, and new attorneys. Attorneys with malpractice
claims assessed against the fund would be charged an additional assessment to reflect their
increased loss activity. These claims surcharges would be developed by the Fund’s actuary to
reflect both claims frequency and severity. The issue of part-time vs full-time attorneys poses an
interesting dilemma. Part-time practices are sometimes “dabbling” sort of practices which create a
higher risk of claims frequency. On the other hand, national loss data indicates that most part-time
practices have fewer clients and are generally focused in specialized areas of practice which in the
end relates to fewer claims. Actuarially determined criteria could be established that would allow a
part-time private practice lawyer to petition for a special premium based on case load and fee
generation. Under the underwritten approach, area of practice adjustments would be included.
New attorneys entering the Bar right out of law school or new admittees who have
purchased an extended reporting endorsement from a prior carrier represent a significantly reduced
risk to the Fund. Accordingly, actuarial criteria would be established to determine a step rating
process that would allow such attorneys to pay annually assessments until they reach the mature
level. This usually occurs in year five or six depending on the actuarial assumptions employed.
The Fund could be overseen and governed by a board of trustees, selected from the Virginia
Bench and Bar. The Fund would be administered by the Bar through a Program Administrator
selected by the Fund’s Board and charged at a minimum with performing the following functions.
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




Determine individual attorney assessments and dissemination of license renewal materials.
Administer a website for attorneys to renew licenses and pay assessments online. If
applicable, it would also maintain the attorney profiles and underwriting information (if
administering the underwritten model).
Offer annual assessment payment options including full payment at time of binding
coverage, credit card billing for full premium payment at time of binding coverage, and
privately funded financing plan terms of up to nine months.
Issue a Certificate of Coverage exhibiting the coverage terms and conditions. Once issued,
the Certificate of Insurance remains in force until cancelled.
Provide a full staff of customer service representatives available for telephone contact and
discussion of the Fund and services.
The Program Administrator would provide experienced claims professionals to
administrator all aspects of claims intake and handling. This staff would include Virginia-based
claims attorneys and appropriate support staff. With respect to matters related to the Fund, the
Administrator would be solely responsible for the process through final resolution of all malpractice
claims including:






Determination of whether the allegations fall within the coverage extended by the Fund.
Investigation and evaluation of each claim to determine the risk posed to the Fund. If
litigation becomes necessary, the Administrator will hire defense counsel to respond on
behalf of the covered attorney and will monitor the claim throughout the litigation process.
From the initial investigation through the conclusion of the claim, the Administrator will
make reasonable efforts to resolve the claim expeditiously and cost effectively under the
facts and the law at issue.
Timely establish and post the appropriate reserves reflecting the Fund’s risk for its amount
of coverage.
Manage the reserve portfolio for the Fund.
Coordinate with the excess carrier responsible for the excess layer of coverage, if any is
purchased by the individual attorney or firm.
Report relevant claims statistics so the Fund can determine the risk posed to the Fund each
year and can appropriately assess the Fund’s attorneys.
The Program Administrator would:
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Receive assessments
Manage assessment financing
Account the books of the Fund on a GAAP basis
Manage accounts payable and receivable
Prepare monthly financial statements
Book reserves as directed by the claims manager
Issue expense and claim checks
With the assistance of the actuary review reserve adequacy, prepare annual budget
recommendations, and set the annual assessment amount.
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By statute all assessments, reserves, surplus accruals and recoveries generated by or
produced by the Fund should be considered Special Designated Funds and not part of the
Commonwealth of Virginia’s General Fund. In this regard, and under the direct supervision of the
Fund’s Board of Trustees, the Program Administrator will manage the assets of the Fund in a
manner designed to ensure adequate liquidity to meet the Fund’s obligation, and provide an
advantageous investment return so as to keep all reserves adequate to pay claims and future
assessments to members as reasonable as possible.
Preliminary calculations suggested that the average per lawyer cost for insurance at the
minimum levels recommended would increase by at least 25% for solo or small firm lawyers and
possibly even more for large firm lawyers who would no longer be able to negotiate discounts for
the minimum coverage, and would still have to go through an underwriting process and pay to
obtain the higher amount of coverage necessary to be adequately insured.
Under the Mandatory Fund model, there would predictably be an increase in the frequency
of malpractice claims in Virginia over the current experience. For example, Oregon’s mandatory
program reports frequency in the range of 13-14 malpractice claims out of every 100 covered
lawyers, whereas claims experience in Virginia is estimated to be in the range of 4-9 out of every
100 lawyers. Therefore, a general one-time assessment of all active members of the Bar might be
necessary to initially capitalize the program, and subsequent general assessments might also be
necessary depending on the claims experience.
D. Mandatory Malpractice Coverage with Reliance on Commercial Market Supplemented by
Bar Controlled Assigned Risk Fund
Under this model every lawyer licensed to practice law in Virginia representing clients
drawn from the general public must maintain professional liability insurance consistent with the
standards set by the Supreme Court of Virginia and the Bar. Lawyers would either obtain such
coverage in the commercial marketplace, or they would be placed in the Pool which would operate
in a very similar fashion as the Fund Model, but on a much smaller scale. For purposes of this
report, we will assume a minimum limit of $250,000 per occurrence, and $250,000 annual
aggregate with a deductible not to exceed $2500 per attorney insured under the policy. No prior acts
coverage would be provided.
It is certainly the case that more lawyers than the 11% currently self-reporting being
uninsured at any coverage limit, are in fact not covered by a professional liability insurance policy
with limits of at least $250,000/250,000. For purposes of this illustration, assume another 5%-15%
may actually not be insured at this level. That would increase the potential number of uninsured or
underinsured lawyers in private practice in Virginia to somewhere between 2720 (16% of 17,000)
and 4420 (26% of 17,000). Also assuming that some of those lawyers do not actually practice—for
example, they are retired but keep an active license—that leaves us with a lesser number who
actually choose to be uninsured or who cannot readily obtain insurance coverage. This is the group
that would ultimately comprise the Assigned Risk Pool.
Providing malpractice insurance coverage at the minimum recommended level to only
those lawyers who were rejected by commercial carriers would be extra-ordinarily expensive. If the
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pool of assigned risk lawyers were forced to pay an assessment high enough to fund the program,
many, but not all of these lawyers would likely be forced out of the practice of law.
In order to limit the amount of the individual uninsured assessment, frequent general
assessments of all active members of the Bar would undoubtedly be necessary to capitalize the
program. At present, there appears to be limited justification for burdening the general membership
and the VSB in this manner.
CONCLUSION
Any incidence of lawyer malpractice that results in uncompensated financial harm to a
client is arguably a “problem” for both the lawyer and the client, and casts the profession in a
negative light. The VSB’s current efforts to minimize these occurrences are substantial. Additional
models, affording even greater client protection, are available for consideration.
Prepared by Darrel Tillar Mason, Chair
Special Committee on Lawyer Malpractice Insurance
June 2006
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