Insurance Issues to Consider Before Retaining Contract Attorneys

Given the widespread use of contract attorneys, law firm managers should evaluate whether their firms' professional liability insurance policies, and those of their contract attorneys, provide adequate coverage. Some may be surprised to find that their policies have not kept pace with the times.

Rising Use of Contract Attorneys

Since at least the mid-1980s, firms have steadily increased their use of contract attorneys. The practice was born out of a desire for staffing flexibility: Contract attorneys could be retained on a project-by-project basis when cases were busy. Contract attorneys also enabled small firms to take on labor intensive matters they might otherwise not have been able to staff.

But the use of contract attorneys did not really begin to take off until the beginning of this century as discovery-intensive litigation exploded in number and magnitude, causing clients to demand that firms retain contract attorneys to perform routine tasks to reduce the cost of litigation. The economic downturn is creating added pressure. This year, Hildebrandt International and Citi Private Bank released a client advisory predicting an increase in the use of contract attorneys as firms rethink their staffing models to respond to the new economic climate.

Risky Business

Although the practice of hiring contract attorneys has been steadily increasing for more than two decades, until recently professional ethics committees gave little attention to the obligations of the law firms supervising the work. Then, in 2008, the ABA Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 08-451, Lawyer's Obligations When Outsourcing Legal and Nonlegal Support Services, which expressly adopted the position that outsourcing to contract attorneys was permissible. Of course, the opinion did not break new ground in approbating the practice. The use of contract attorneys was already a fixture of the legal landscape. But the opinion was useful because it identified a significant peril for law firms: Ultimately, firms might be forced to answer for contract attorney malpractice.

In the opinion, the ABA reasoned that lawyers who are ultimately responsible to the client have an obligation to provide legal services that are rendered competently under Rule 1.1 of the ABA Model Rules of Professional Conduct. This responsibility extends to the supervision of lawyers and non-lawyers under Rules 5.1 and 5.3. Rule 5.1(b) states that “[a] lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure that the other lawyer conforms to the Rules of Professional Conduct.” Rule 5.3(b) requires lawyers who employ, retain, or associate with nonlawyers to “make reasonable efforts to ensure that the person's conduct is compatible with the professional obligations of the lawyer.” According to the ABA, “[t]hese provisions apply regardless of whether the other lawyer or the nonlawyer is directly affiliated with the supervising lawyer's firm.”

The ABA Opinion is not binding, and each jurisdiction may ultimately take a different path when deciding if firms are responsible for the malpractice of contract attorneys. But while the precise contours of firm liability have yet to be fully revealed, there undoubtedly are risks that firms should address. The ABA Opinion suggests a number of ways that firms might reduce the risks of hiring contract attorneys, such as conducting reference checks and investigating their backgrounds, but these methods cannot guarantee the quality of the work performed. The last line of protection available to firms might be professional liability insurance.

The Firm's Professional Liability Insurance

To manage the risks of hiring contract attorneys, firms should conduct an evaluation of their own professional liability policies. Many policies still use language originally drafted long before the use of contract attorneys was prevalent. Some policies include contract attorneys as Insureds, which can have unanticipated results for the unwary. Other policies do not cover contract attorneys and completely exclude vicarious liability, which could present significant risks for the firm. The issues discussed in this article are not exhaustive: it is essential that the firm read and understand the entire policy and understand how all the provisions work together.

Who Is an 'Insured'?

Firms should first determine who is an “Insured.” The “Named Insured” usually is defined as the partnership, professional corporation, or in some cases, individual attorneys identified in the policy. Other lawyers covered by the policy are usually listed as “Other Insureds,” or simply “Insureds.” Firms should look closely to determine if independent contractors are included in the definition of Insureds.

If independent contractors are included in the definition of Insureds, then contract attorneys will probably be covered, subject to any other limitations contained in the policy. For example, some policies require that independent contractors act in the sole direction and control of the firm, which might affect how firms wish to structure relationships with their contract attorneys. Some policies require that the firm give the carrier notice of the use of independent contractors. If the firm wishes to cover its contract attorneys as Insureds under its own policy, it is important is that the firm identify all requirements for coverage and ensure that the requirements are complied with every time contract attorneys are retained.

Expanded Coverage Is Not Always a Good Thing

While including contract attorneys as Insureds may be one of the simplest ways to make sure a policy covers contract attorney malpractice, firms should also consider some of the potential downsides. In particular, firms should consider how the policy deals with claims against multiple Insureds.

For example, in many jurisdictions, the insurer has a duty to pay the policy limits in a reasonable settlement even if the settlement would deprive non-settling Insureds of coverage. This means that contract attorneys might be entitled to exhaust policy limits in a settlement that fails to secure the release of claims against the firm. This is a particular risk when dealing with a disparity in a firm's and its contract attorneys' financial resources. If the firm is better able to pay a settlement or judgment out of its own pocket, a plaintiff may recognize that the way to maximize its recovery is to settle first with the contract attorneys for policy limits. The plaintiff may then seek a settlement from the firm, which would not be covered by the already exhausted policy. In the end, including contract attorneys as Insureds under the firm's policy could end up depriving the firm of its own coverage.

Another potential concern is whether defense costs incurred by the firms' contract attorneys reduce the available limits. Many professional liability policies are wasting policies, or policies in which limits of liability for a settlement or judgment are reduced by the amount of legal costs and expenses incurred during the course of defense. If the firm's contract attorneys are Insureds, then they most likely would be entitled to a defense under the policy, just as the firm would. A claim against the firm and its contract attorneys could end up burning the policy from both ends, diminishing the coverage available to pay a settlement or judgment.

These are just two examples of why firms might someday regret elevating contract attorneys to the status of Insureds under their own professional liability policies. This is not to suggests that firms should never do it, but they should do so with eyes wide open.

If Contract Attorneys Are Not Insureds

If contract attorneys are not included as Insureds, firms should make sure that their policies provide coverage for their own risks arising from the supervision of contract attorneys. The first place to look in most policies will be the definition of “Wrongful Acts,” which is a key definition in determining the types of conduct for which coverage is available. In most instances, the definition of Wrongful Acts will include any error or omission in the rendering of or failure to render professional services. This generally should be broad enough to cover the failure to properly supervise contract attorneys. A more narrow definition of Wrongful Acts should be thoroughly examined by the firm.

Even if there is a broad definition of Wrongful Acts, some professional liability insurance policies have express exclusions for vicarious liability. This could create a serious coverage issue for the firm if the contract attorneys are not included as Insureds. It is difficult to say whether a vicarious liability exclusion would apply to a claim premised on the failure to adequately supervise contract attorneys. The precise wording of the exclusion and the circumstances of the claim will be very important. Firms should carefully examine any vicarious liability exclusion under the assumption that it could present substantial risk that coverage will be excluded.

Talk to an Insurance Broker

Firms should also discuss coverage of contract attorneys with their insurance brokers. Carriers have begun offering policies that more directly deal with contract attorneys, some which might provide firms with more options for coverage without all the pitfalls described in this article. A carefully tailored policy may provide the best of both worlds.

Vigilance Cannot Stop After the Engagement

Even after the firm has satisfied itself that its professional liability insurance adequately protects it from the risks of using contract attorneys, the firm must remain vigilant in addressing these issues. Most professional liability policies are claims-made policies. Under a claims-made form, an incident must be reported to the insurance company while the policy is in force. If a firm utilizes a claims-made policy and changes its coverage, e.g., by moving to a different carrier, it must make sure that the new policy will cover claims arising from the firm's past use of contract attorneys because the policy in effect at the time the work was performed will no longer provide coverage (an exception might exist if an extended reporting period is available under the old policy).

Contract Attorneys' Professional Liability Insurance

Even if a firm is satisfied with its own professional liability coverage, it is advisable that the firm insist that contract attorneys maintain their own professional liability insurance providing both indemnity and legal defense. Otherwise, the firm may be put in the difficult situation of having a co-defendant with no resources to mount an adequate defense, which is of particular concern where the firm's liability may be premised on the co-defendant's mistakes. Even if contract attorneys are covered as Insureds under the firm's policy, it is in the firm's interest that its contract attorneys turn first to their own coverage before diminishing the available coverage under the firm's policy.

Compare 'Other Insurance' Clauses

The firm and contract lawyer should compare coverages to determine which policy has priority to the extent there is overlapping coverage. Generally, it will be advantageous for the firm to have its own policy excess of the contract attorneys' policy. To determine which policy has priority, in most instances the firm should look to the “Other Insurance” clauses. If the two clauses are in agreement, e.g., one policy expressly states that it is primary and the other policy states that it is excess, then the language of the Other Insurance clauses will govern.

Unfortunately, Other Insurance clauses often conflict with each other. As a general rule, if both policies have similar Other Insurance clauses stating that the policies are excess over any other policies, the provisions are disregarded and losses will be apportioned between both policies. Not all Other Insurance provisions are created equal, however. Usually a policy whose Other Insurance provision is more specific will apply as excess over a policy whose Other Insurance wording is more general. The best way for the firm to increase the chances that its professional liability insurance will be excess is to make the language of the Other Insurance provision in its own policy as specific as possible when referencing contract attorneys.

Here Today, Gone Tomorrow

Even after insisting that contract attorneys carry their own professional liability insurance, firms should be cautious in placing too much reliance on contract attorneys' policies when managing their own risks. Most contract attorneys' insurance will be claims-made policies. If a contract attorney decides not to renew its insurance after the engagement is terminated, e.g., the staffing agency is no longer in business, the policy may not be available to answer to claims.

Conclusion

Contract attorneys will continue to perform a substantial amount of work that once would have been handled by the firms themselves. Law firm managers must take steps to not only reduce the liability risks, but also to make sure those risks are covered by their firms' professional liability insurance. Most issues should be easily resolved with a few changes to the policy, but only if they are recognized before a claim arises.

John Franklin Guild is an associate in the Litigation and Insurance and Reinsurance practice groups at Gibson, Dunn & Crutcher LLP.

Given the widespread use of contract attorneys, law firm managers should evaluate whether their firms' professional liability insurance policies, and those of their contract attorneys, provide adequate coverage. Some may be surprised to find that their policies have not kept pace with the times.

Rising Use of Contract Attorneys

Since at least the mid-1980s, firms have steadily increased their use of contract attorneys. The practice was born out of a desire for staffing flexibility: Contract attorneys could be retained on a project-by-project basis when cases were busy. Contract attorneys also enabled small firms to take on labor intensive matters they might otherwise not have been able to staff.

But the use of contract attorneys did not really begin to take off until the beginning of this century as discovery-intensive litigation exploded in number and magnitude, causing clients to demand that firms retain contract attorneys to perform routine tasks to reduce the cost of litigation. The economic downturn is creating added pressure. This year, Hildebrandt International and Citi Private Bank released a client advisory predicting an increase in the use of contract attorneys as firms rethink their staffing models to respond to the new economic climate.

Risky Business

Although the practice of hiring contract attorneys has been steadily increasing for more than two decades, until recently professional ethics committees gave little attention to the obligations of the law firms supervising the work. Then, in 2008, the ABA Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 08-451, Lawyer's Obligations When Outsourcing Legal and Nonlegal Support Services, which expressly adopted the position that outsourcing to contract attorneys was permissible. Of course, the opinion did not break new ground in approbating the practice. The use of contract attorneys was already a fixture of the legal landscape. But the opinion was useful because it identified a significant peril for law firms: Ultimately, firms might be forced to answer for contract attorney malpractice.

In the opinion, the ABA reasoned that lawyers who are ultimately responsible to the client have an obligation to provide legal services that are rendered competently under Rule 1.1 of the ABA Model Rules of Professional Conduct. This responsibility extends to the supervision of lawyers and non-lawyers under Rules 5.1 and 5.3. Rule 5.1(b) states that “[a] lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure that the other lawyer conforms to the Rules of Professional Conduct.” Rule 5.3(b) requires lawyers who employ, retain, or associate with nonlawyers to “make reasonable efforts to ensure that the person's conduct is compatible with the professional obligations of the lawyer.” According to the ABA, “[t]hese provisions apply regardless of whether the other lawyer or the nonlawyer is directly affiliated with the supervising lawyer's firm.”

The ABA Opinion is not binding, and each jurisdiction may ultimately take a different path when deciding if firms are responsible for the malpractice of contract attorneys. But while the precise contours of firm liability have yet to be fully revealed, there undoubtedly are risks that firms should address. The ABA Opinion suggests a number of ways that firms might reduce the risks of hiring contract attorneys, such as conducting reference checks and investigating their backgrounds, but these methods cannot guarantee the quality of the work performed. The last line of protection available to firms might be professional liability insurance.

The Firm's Professional Liability Insurance

To manage the risks of hiring contract attorneys, firms should conduct an evaluation of their own professional liability policies. Many policies still use language originally drafted long before the use of contract attorneys was prevalent. Some policies include contract attorneys as Insureds, which can have unanticipated results for the unwary. Other policies do not cover contract attorneys and completely exclude vicarious liability, which could present significant risks for the firm. The issues discussed in this article are not exhaustive: it is essential that the firm read and understand the entire policy and understand how all the provisions work together.

Who Is an 'Insured'?

Firms should first determine who is an “Insured.” The “Named Insured” usually is defined as the partnership, professional corporation, or in some cases, individual attorneys identified in the policy. Other lawyers covered by the policy are usually listed as “Other Insureds,” or simply “Insureds.” Firms should look closely to determine if independent contractors are included in the definition of Insureds.

If independent contractors are included in the definition of Insureds, then contract attorneys will probably be covered, subject to any other limitations contained in the policy. For example, some policies require that independent contractors act in the sole direction and control of the firm, which might affect how firms wish to structure relationships with their contract attorneys. Some policies require that the firm give the carrier notice of the use of independent contractors. If the firm wishes to cover its contract attorneys as Insureds under its own policy, it is important is that the firm identify all requirements for coverage and ensure that the requirements are complied with every time contract attorneys are retained.

Expanded Coverage Is Not Always a Good Thing

While including contract attorneys as Insureds may be one of the simplest ways to make sure a policy covers contract attorney malpractice, firms should also consider some of the potential downsides. In particular, firms should consider how the policy deals with claims against multiple Insureds.

For example, in many jurisdictions, the insurer has a duty to pay the policy limits in a reasonable settlement even if the settlement would deprive non-settling Insureds of coverage. This means that contract attorneys might be entitled to exhaust policy limits in a settlement that fails to secure the release of claims against the firm. This is a particular risk when dealing with a disparity in a firm's and its contract attorneys' financial resources. If the firm is better able to pay a settlement or judgment out of its own pocket, a plaintiff may recognize that the way to maximize its recovery is to settle first with the contract attorneys for policy limits. The plaintiff may then seek a settlement from the firm, which would not be covered by the already exhausted policy. In the end, including contract attorneys as Insureds under the firm's policy could end up depriving the firm of its own coverage.

Another potential concern is whether defense costs incurred by the firms' contract attorneys reduce the available limits. Many professional liability policies are wasting policies, or policies in which limits of liability for a settlement or judgment are reduced by the amount of legal costs and expenses incurred during the course of defense. If the firm's contract attorneys are Insureds, then they most likely would be entitled to a defense under the policy, just as the firm would. A claim against the firm and its contract attorneys could end up burning the policy from both ends, diminishing the coverage available to pay a settlement or judgment.

These are just two examples of why firms might someday regret elevating contract attorneys to the status of Insureds under their own professional liability policies. This is not to suggests that firms should never do it, but they should do so with eyes wide open.

If Contract Attorneys Are Not Insureds

If contract attorneys are not included as Insureds, firms should make sure that their policies provide coverage for their own risks arising from the supervision of contract attorneys. The first place to look in most policies will be the definition of “Wrongful Acts,” which is a key definition in determining the types of conduct for which coverage is available. In most instances, the definition of Wrongful Acts will include any error or omission in the rendering of or failure to render professional services. This generally should be broad enough to cover the failure to properly supervise contract attorneys. A more narrow definition of Wrongful Acts should be thoroughly examined by the firm.

Even if there is a broad definition of Wrongful Acts, some professional liability insurance policies have express exclusions for vicarious liability. This could create a serious coverage issue for the firm if the contract attorneys are not included as Insureds. It is difficult to say whether a vicarious liability exclusion would apply to a claim premised on the failure to adequately supervise contract attorneys. The precise wording of the exclusion and the circumstances of the claim will be very important. Firms should carefully examine any vicarious liability exclusion under the assumption that it could present substantial risk that coverage will be excluded.

Talk to an Insurance Broker

Firms should also discuss coverage of contract attorneys with their insurance brokers. Carriers have begun offering policies that more directly deal with contract attorneys, some which might provide firms with more options for coverage without all the pitfalls described in this article. A carefully tailored policy may provide the best of both worlds.

Vigilance Cannot Stop After the Engagement

Even after the firm has satisfied itself that its professional liability insurance adequately protects it from the risks of using contract attorneys, the firm must remain vigilant in addressing these issues. Most professional liability policies are claims-made policies. Under a claims-made form, an incident must be reported to the insurance company while the policy is in force. If a firm utilizes a claims-made policy and changes its coverage, e.g., by moving to a different carrier, it must make sure that the new policy will cover claims arising from the firm's past use of contract attorneys because the policy in effect at the time the work was performed will no longer provide coverage (an exception might exist if an extended reporting period is available under the old policy).

Contract Attorneys' Professional Liability Insurance

Even if a firm is satisfied with its own professional liability coverage, it is advisable that the firm insist that contract attorneys maintain their own professional liability insurance providing both indemnity and legal defense. Otherwise, the firm may be put in the difficult situation of having a co-defendant with no resources to mount an adequate defense, which is of particular concern where the firm's liability may be premised on the co-defendant's mistakes. Even if contract attorneys are covered as Insureds under the firm's policy, it is in the firm's interest that its contract attorneys turn first to their own coverage before diminishing the available coverage under the firm's policy.

Compare 'Other Insurance' Clauses

The firm and contract lawyer should compare coverages to determine which policy has priority to the extent there is overlapping coverage. Generally, it will be advantageous for the firm to have its own policy excess of the contract attorneys' policy. To determine which policy has priority, in most instances the firm should look to the “Other Insurance” clauses. If the two clauses are in agreement, e.g., one policy expressly states that it is primary and the other policy states that it is excess, then the language of the Other Insurance clauses will govern.

Unfortunately, Other Insurance clauses often conflict with each other. As a general rule, if both policies have similar Other Insurance clauses stating that the policies are excess over any other policies, the provisions are disregarded and losses will be apportioned between both policies. Not all Other Insurance provisions are created equal, however. Usually a policy whose Other Insurance provision is more specific will apply as excess over a policy whose Other Insurance wording is more general. The best way for the firm to increase the chances that its professional liability insurance will be excess is to make the language of the Other Insurance provision in its own policy as specific as possible when referencing contract attorneys.

Here Today, Gone Tomorrow

Even after insisting that contract attorneys carry their own professional liability insurance, firms should be cautious in placing too much reliance on contract attorneys' policies when managing their own risks. Most contract attorneys' insurance will be claims-made policies. If a contract attorney decides not to renew its insurance after the engagement is terminated, e.g., the staffing agency is no longer in business, the policy may not be available to answer to claims.

Conclusion

Contract attorneys will continue to perform a substantial amount of work that once would have been handled by the firms themselves. Law firm managers must take steps to not only reduce the liability risks, but also to make sure those risks are covered by their firms' professional liability insurance. Most issues should be easily resolved with a few changes to the policy, but only if they are recognized before a claim arises.

John Franklin Guild is an associate in the Litigation and Insurance and Reinsurance practice groups at Gibson, Dunn & Crutcher LLP.