Articles are provided regularly by LACBA’s longstanding Professional Responsibility and Ethics Committee

By Lee B. Ackerman
Rule 1.4.2(a) of the California Rules of Professional Conduct provides that a “lawyer who knows or reasonably should know that the lawyer does not have professional liability insurance shall inform a client in writing, at the time of the client’s engagement of the lawyer, that the lawyer does not have professional liability insurance.” If no such notice has been provided, presumably because the lawyer, at the time of the engagement had liability insurance, the “lawyer shall inform the client in writing within thirty days of the date the lawyer knows or reasonably should know that the lawyer no longer has professional liability insurance during the representation of the client.” (Rule 1.4.2(b).) What happens if the lawyer fails to notify the client either at the outset of the representation, or subsequently during the representation, that the lawyer does not have liability insurance? At a minimum, the fee agreement may be deemed void and unenforceable and the lawyer may be subject to disciplinary action.  
     
The only known reported California case to address the question is Hance v. Super Store Industries (2020) 44 Cal.App.5th 676, in which the Fifth Appellate District concluded that the failure to provide notice of no liability insurance in the initial fee agreement rendered the agreement void and unenforceable , but the lawyer nevertheless could recover compensation on a quantum meruit basis. (Id. at 685, 687-688, 695). Whether the failure to give notice of no liability insurance in the initial fee agreement or thereafter during the course of the representation also would be grounds for disciplinary action against the attorney was not addressed in Hance. However, the Court’s reasoning regarding the purpose and goal of the Rules of Professional Conduct, as well as the Rules themselves, make clear that a failure to notify the client that there is no liability insurance may suffice to support disciplinary action against the lawyer. 

The Hance court first noted that the “apparent intent of the rule was to require the attorney to disclose the lack of professional liability insurance to the client, at the time the client retained the attorney, so the client could consider that information in making the decision to retain or not retain the attorney. The disclosure would enable the client to make an informed decision whether to engage an attorney who did not carry insurance that would protect the client in the event of the attorney's negligent or other wrongful conduct that might have an adverse effect on the client's case.” (Hance, 44 Cal.App.5th at 685; emphasis added.) The court then stated:

To allow [the lawyer] to recover his agreed upon percentage of the attorney fee award, despite noncompliance with the requirements of the rule, would effectively condone that violation, contrary to the purpose behind the rules—“to protect the public and to promote respect and confidence in the legal profession.” (Former rule 1-100(A).) It would bind the clients to an agreement they might not have entered into, or to a consent to fee division they might not have given, if the required disclosure had been made. It would send an implicit message to attorneys that former rule 3-410 (and its successor, rule 1.4.2), despite being phrased in mandatory language and being included in the Rules of Professional Conduct that bind all members of the State Bar, lacks sufficient importance for courts to enforce compliance. “It is clearly contrary to the public policy of this state to condone a violation of  ethical duties which an attorney owes to his client.” (Id. 687-688; citations omitted.)

In concluding the fee agreement was unenforceable, the court further stated: 

The purpose of the Rules of Professional Conduct is “‘to protect the public and to promote respect and confidence in the legal profession.’” Uninsured attorneys would have an incentive to fail 
to disclose the lack of insurance to their clients, if they were permitted to benefit from an uninformed consent to representation and fee division. Enforcing the agreement would appear to elevate the interests of the attorney above the interests of the client. It would also give the appearance of condoning a violation of the Rules of Professional Conduct, which would adversely affect the public's confidence in the commitment of the legal profession to ethical conduct by its members.(Id. at 689; citations omitted.)

It is clear that the lawyer’s failure to notify the client that the lawyer does not have professional liability insurance constitutes a violation of Rule 1.4.2. Any violation of the rules of Professional Conduct constitutes “professional misconduct” (Rule 8.4(a)) and a willful violation of any of the rules “is a basis for discipline.” (Rule 1.0(b)(1).)  

Left unresolved by Hance and by the Rules themselves, is the question of what constitutes not having liability insurance? For example, is the lawyer who is hired to represent a client in a transaction (or a lawsuit) that is worth $1,000,000, and has an insurance policy that provides coverage of $100,000 per claim, required to notify the client of insufficient liability insurance? Since the lawyer carries a policy of insurance it would not be necessary to give the notice required by Rule 1.4.2. But given the significant underinsurance, would a lawyer be subject to disciplinary action for not advising the client of the clear lack of sufficient insurance? After all, the client’s concern is the ability to be indemnified for malpractice through the insurance and a $100,000 policy is, effectively, a small war chest, inasmuch as it will be nonexistent by the time most legal malpractice cases come to trial. 

The court’s reference to a client’s “informed decision” presumably means the same as “informed consent” which is defined as “a person’s agreement to a proposed course of conduct after the lawyer has communicated and explained (i) the relevant circumstances and (ii) the material risks, including any actual and reasonably foreseeable adverse consequences of the proposed course of conduct.” (Rule 1.01(e).) Based upon the language and holding of Hance, as well as the Rules themselves, there can be little doubt that in order for the client to make an “informed decision” there must be full disclosure to the client that the lawyer, although maintaining a policy of liability insurance, does not have sufficient insurance to cover a claim arising from the services to be performed for that client. A failure to provide such information would undermine trust and confidence in the legal profession just as much as failing to notify the client that the lawyer has no liability insurance.
 
Rule 1.4.2(b) requires the lawyer to notify the client within 30 days that the lawyer no longer has liability insurance. Such notice is consistent with the requirement that the lawyer “keep the client reasonably informed about significant developments relating to the representation”. (Rule 1.4(a)(1), (3).) There can be little doubt that the loss of malpractice insurance is a “significant development” that requires disclosure to the client.  Would not the same disclosure be required if, during the course of the representation, there were claims asserted against the lawyer that would have the effect of rendering the lawyer uninsured as to any other claim? Notably, the attorney is required to report to the State Bar if there are filed against the lawyer three or more lawsuits in a twelve month period. (Bus. & Prof. Code §6068(o)(1).) There does not appear to be any justification for not requiring the lawyer to similarly report to clients the fact that claims have been brought against the lawyer that, even if successfully defended by the lawyer, nevertheless could completely exhaust coverage under the policy. Would not the lawyer be in the same position as the attorney who either cancels the policy or has the policy cancelled during the representation? 

There is a need to clarify the meaning and implementation of Rule 1.4.2.Until that happens, the attorney should be mindful that merely having a policy of malpractice insurance may not be sufficient to prevent a fee agreement from being void and unenforceable or to preclude disciplinary proceedings by the State Bar for not making “full disclosure” to the client. 

Lee B. Ackerman has been a civil litigator for more than 45 years, often representing plaintiffs in legal malpractice actions. He is a member of the LACBA Professional Responsibility and Ethics Committee and can be reached at leeackerman@sbcglobal.net. The views/opinions expressed herein are his own.

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1 Former rule 3-410 was in effect in early 2012, when the fee agreement in Hance was entered into. Rule 1.4.2, with substantially the same content, went into effect on November 1, 2018. 
2  See, however, In re Matter of Harney (1995) 3 Cal.State Bar Ct. Rptr. 226, which held that a violation of the fee agreement requirements of Bus. & Prof. Code §§ 6147 and 6148 is “not by its terms a disciplinable offense.” The Court did not address the question of whether a failure to disclose a lack of malpractice insurance could give rise to disciplinary action for violation of the Rules of Professional Conduct.
3  Similarly, the fact that the lawyer has insurance does not mean the lawyer will be insured at the time a claim is made, which could be after expiration of the policy that was in effect during the time of the representation. No state, including those that require the lawyer to carry liability insurance (and some set a minimum amount), requires disclosure of the nature of the coverage or the policy limits.
4  Under Rule 1.4(b), the lawyer is required to “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.”