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Preventing Legal Malpractice

COLORADO BAR ASSOCIATION CLE CLE in Colorado, Inc. is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association


Preventing Legal Malpractice LIVE PROGRAM

HOMESTUDY

4 General Credits, including 2 Ethics

4 General Credits, including 2 Ethics

INFORMATION ON AUDIO HOMESTUDY AFFIDAVITS *Every Colorado Attorney was provided his or her homestudy affidavit from the Supreme Court. To obtain a replacement audio homestudy affidavit, please contact the Supreme Court Board of Continuing Legal & Judicial Education at 303-866-6500. To receive credits for this or any homestudy course a *homestudy affidavit must be submitted to: Supreme Court Board of Continuing Legal and Judicial Education 1560 Broadway, Ste. 1820 Denver, CO 80202 Please note: All homestudies that are accredited are valid for 2 years, expiring in the month of December of the 2-year period. Some courses are reapplied for through the Supreme Court Board for an extended time. Please contact CLE at (303) 860-0608 if you have any further questions. Published by: CONTINUING LEGAL EDUCATION IN COLORADO, INC. 1900 Grant Street, Suite 300 Denver, Colorado 80203-4301 Phone: (303) 860-0608 Fax: (303) 860-0624

Toll free: (888) 860-2531 E-mail: cle@cobar.org

Web site: www.cobar.org/cle

Continuing Legal Education in Colorado, Inc. (CLECI) publications are intended to provide current and accurate information about the subject matter covered and are designed to help attorneys maintain their professional competence. Publications are distributed with the understanding that CLECI does not render any legal, accounting, or other professional service. No representation or warranty is made concerning the application of the legal or other principles discussed by the authors to any specific fact situation, nor is any prediction made concerning how any particular judge or other official will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner, and CLECI disclaims all liability therefore. As with any legal textbook or other secondary authority, attorneys dealing with specific legal matters should also research fully current, primary authorities.

Š 2008 by Continuing Legal Education in Colorado, Inc. All Rights Reserved. No part of this publication may be reproduced in any form or by any process without permission in writing from Continuing Legal Education in Colorado, Inc. IRS CIRCULAR 230 NOTICE. To ensure compliance with requirements imposed by the IRS, unless specifically indicated otherwise, any tax advice contained within this manual was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.

Source Code LI013108L


AGENDA 8:30

Registration

9:00

Case Law Update and Recent Developments

9:30

Insurance Coverage: What’s in your policy? Part 1 – The Policy Basics ■ The Insurance Application ■ Claims-Made Policies ■ The Parts of Your Policy ■ The Declarations Page ■ The Insuring Agreement ■ The Exclusions, Conditions, and Endorsements

10:20

Underwriting ■ Overview of the Lawyers Professional Liability Application & Process ■ Underwriter's Considerations in the Process ■ Factors a Firm Should Consider

10:40

Break

10:50

Insurance Coverage: What’s in your policy? Part II – Choosing the Right Coverage ■ Liability Limits ■ The Deductible & Defense Costs ■ Policy Coverage Provisions: Professional Legal Services, Insureds, Claims-Made Policies ■ Notice of Loss: Incidents & Claims ■ Prior Acts, Retroactive Dates, and Tail Coverage ■ Leaving a Firm: Going Solo or Lateral Hire ■ Practical Considerations for Retiring or Part-time Lawyers ■ Firm Dissolution

11:40

Risk Management & The New Ethics Rules ■ C.R.C.P 265 ■ What is Risk Management? ■ Alternative Lawyer Relationships ■ Ten Commandments to Promote Effective Communication with Your Client & Avoid Malpractice OGRAM AGENDA: 12:05 Life Cycle of a Malpractice Case: The Perspective of the Insured

12:30

Adjourn


Denver Bar Association Principles of Professionalism Adopted by the Denver Bar Association Board of Trustees on April 8, 1999; as amended May 2007.


DENVER BAR ASSOCIATION Denver Bar Association Principles of Professionalism Adopted by the Denver Bar Association Board of Trustees on April 8, 1999; as amended May 2007.

PRINCIPLES OF PROFESSIONALISM PREAMBLE The law is the means by which our society seeks to ensure justice for all. A lawyer’s role is to help people to act within the law, and, when they have disputes and grievances, to resolve them within the law. How we conduct ourselves is part of the process of the law. As much as the substantive law, how we conduct ourselves affects whether the parties achieve justice. The effectiveness of the legal system depends upon our conduct. Among the purposes of the law is the fair and efficient resolution of disputes and the fostering of civil relationships in society. In carrying out our duty to advance the purposes of the law, we are committed to conducting ourselves according to the following precepts: We believe that integrity, honesty, candor, fairness, trust, respect, dignity and courtesy are guiding principles of our conduct. Professionalism is fundamental to the effective and efficient representation of clients in the legal system and the even-handed administration of justice. We will endeavor to make legal services available to people who have legal needs, but cannot afford to pay customary charges, and will also strive to provide advisory or other assistance to non-profit community service organizations As officers of the court, we represent our clients within the system of justice and represent the system of justice to our clients. Justice is never obtained when success is achieved at the expense of the rights and legitimate interests of others. We are committed to the zealous representation of our clients, using our skills and training to seek their legitimate ends. We are equally committed to preventing the use of the legal system to cause unjust harm or to gain unjust advantage. We recognize that just as legal action pursued for legitimate ends can accomplish great good, legal action pursued for improper purposes or by unjust means can cause great harm. We must accept fully the responsibility that comes with the privilege and licensure of practicing law. This requires that we respect the legal rights of others, that we act reasonably and with candor toward others, and that we not seek to advance our personal interests at the expense of the legitimate interests of others. Justice is not achieved where short-term victory plants the seed of future conflict. The satisfactory completion of a transaction creates a foundation for future cooperation. The just resolution of a dispute begins a process of reconciliation for the parties. Neither we nor our clients are the sole possessors of truth or righteousness in any circumstance. While we may strive zealously for our clients’ rights, our zeal also must be directed to achieving justice in the process. An unjust process can never lead to a just result, and a successful result cannot remedy the harm of an unjust process. As licensed professionals, we understand that the law is more than a business, it is also a calling. We will keep our Lawyer’s Oath in mind in our daily practice. We understand and accept our role in the American justice system, and freely accept our responsibility to support and defend the Constitution of the United States of America and the State of Colorado.

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The following principles are designed to promote professionalism by providing guidance for the many choices we have to make in conducting ourselves as lawyers. They apply to all aspects and areas of the practice of law. They are not intended to replace the Rules of Professional Conduct, nor are they intended to establish enforceable standards of practice for lawyers. Rather, these are principles upon which we can build professional relationships. COURTESY AND CIVILITY 1. We will work together toward resolution of our cases by being reasonable. 2. We will be cooperative, to the extent it does not prejudice our clients’ legitimate interests. 3. We will treat others with courtesy and respect. We will always endeavor to retain our objectivity, and will try not to take personally disagreements that arise in the zealous representation of our clients. 4. We will communicate promptly with opposing counsel to discuss any disputes, ambiguities or other issues. We recognize that in most instances genuine, personal interaction serves our clients better than perfunctory communication. While electronic means are appropriate methods to communicate, we will not use electronic communication such as facsimile transmission, email, text messaging or telephone contact as a means of gaining unfair advantage or as a substitute for effective interpersonal dialogue. 5. We will allow ourselves and each other sufficient time to resolve any dispute or disagreement by communicating with one another in a timely and professional manner and by agreeing to reasonable deadlines in light of the nature and status of the matter. 6. We will scrupulously refrain from making misleading statements of law or fact, whether by omission, inference or implication. We will refrain from unseemly or discourteous references to opposing parties, counsel, courts, legal systems, or other civil and criminal justice professionals. 7. We will respond to all communications in a timely manner, and allow for reasonable time for opposing counsel to respond. 8. We will work to reduce the level of anger or animosity among or between parties to a conflict or transaction wherever and whenever we can, and will strive whenever possible not to add to, or manipulate, the emotional overburden of any dispute or transaction by our conduct, words, or attitudes. AGREEMENTS, TRANSACTIONS, AND STIPULATIONS 1. We will abide by our promises and agreements, whether written or oral. Our word is our bond. In the event of a conflict, we will attempt in good faith to resolve the conflict before seeking court intervention. 2. We will cooperate in presenting evidence by providing the court and counsel with the names of witnesses to be called and estimates of time for examination, and by sharing equipment (such as audio-visual equipment) in the courtroom. 3. We will cooperate by agreeing upon and keeping reasonable deadlines for exchanging drafts, scheduling and completing transactions, and providing required documentation. 4. We will seek agreements on preliminary, procedural and factual matters, and enter into written stipulations or agreements which will make more effective use of everyone’s time. 5. We will respond promptly to requests for agreements, even when our response is that agreement on a certain issue is not possible. 6. When discussing final stipulations or agreements, we will act promptly to submit proposals for agreement both as to form and content, and will cooperate in assuring that the final documents fairly and accurately reflect the parties’ agreements. 7. When exchanging drafts of agreements, we will draw attention to any changes or suggestions for new language and issues which have not been agreed upon beforehand.

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7(a) When exchanging documents electronically, we will offer “redline” versions, or otherwise call specific attention to all changes we have made. We will also take steps to assure that the final document executed by the parties is the document to which all parties have agreed. 7(b) When exchanging documents electronically, the sender will take responsibility to assure removal of all “metadata” and other information the sender does not intend to share that may be imbedded in the document file, before sending the document file to counsel, parties, or others. 8. We will act promptly to advise the courts and other interested parties of all stipulations and agreements. 9. We will follow through to assure that all details involved in concluding any agreement or transaction are seen to quickly and efficiently. 10. We will not ask for an opinion in any matter that we in a similar situation would be unable to give. 11. We will use plain language and understandable structure in all documents wherever possible. 12. We will not unduly interfere with another attorney’s ability to conduct a conflict check as early in the transaction as possible. 13. When dealing with unrepresented persons, we will encourage them to engage counsel, we will inform them that we do not and cannot represent their interests, and will avoid any appearance or impression that we are providing any unrepresented persons advice as to the transaction or matter. 14. While always keeping our client’s interests paramount, we will also keep in mind that our goal should be the prompt, efficient and fair resolution of disputes, and the prompt, efficient and fair completion of transactions on which we are engaged. SCHEDULING 1. We will endeavor to schedule hearings, depositions, or other matters by agreement with opposing counsel. 2. We will give opposing counsel notice of cancellation of hearings, depositions, and other matters at the earliest possible time. 3. We will not seek extensions or postponements for the purpose of harassment or to prolong, delay, or increase the cost or complexity of any matter. 4. In scheduling matters, including requests for reasonable extensions of time, we will act in a spirit of cooperation and accommodation. We will act with consideration of the need for expediting the litigation or transaction and the professional and personal schedules of others involved. We will raise scheduling conflicts only when they actually exist. 5. When scheduling, we will keep in mind that a reasonable balance between life and work helps promote the efficient and fair administration of justice and effective delivery of legal services. We will not make unreasonable demands on off-hours time when dealing with parties, witnesses, opposing counsel, co-counsel, associates or partners.

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USE OF DATA-TRANSMISSION TECHNOLOGIES 1. We will use data-transmission technologies only as an efficient means of communication and not as a means of obtaining an unfair advantage. The use of such technologies does not require receiving counsel to discontinue other matters to respond. 2. We will honor reasonable requests to retransmit materials or to provide hard copies. DISCLOSURE AND DISCOVERY 1. We will not use any form of discovery or discovery scheduling as a means of harassing anyone or for the purpose of obstructing the prosecution or defense of the case. 2. We will only use definitions and instructions in written discovery that are pertinent, clear, and concise. 3. We will object to disclosure or discovery only when we have a good faith belief in the merit of the objection. 4. We will not lightly seek court sanctions. 5. We will provide disclosures, and respond to written discovery requests reasonably. We will not strain to interpret requests or disclosure requirements in the rules of procedure in an artificially restrictive manner to avoid disclosure of relevant and non-privileged information. We will not produce documents in a manner designed to hide or obscure the existence of particular documents. CONDUCT DURING DEPOSITIONS 1. We will conduct ourselves in depositions with the same courtesy and respect as is expected in court. 2. We will not conduct examinations or engage in other behavior which is purposely offensive, demeaning, harassing, intimidating, or which unnecessarily invades the privacy of anyone. 3. If sensitive or controversial matters are to be inquired into in a deposition, counsel should consider discussing those matters with opposing counsel in advance. When appropriate, we will attempt to engage in meaningful dialogue with opposing counsel for the purpose of exploring agreements regarding the scope of the examination and the use of the information after the deposition. 4. We will attempt to minimize arguments. 5. We will refrain from coaching deponents by objecting, commenting, or otherwise acting in a manner which suggests a particular answer to a question. 7. We will not object for the purpose of disrupting or distracting the questioner or the witness. We will object only in the manner provided by the rules. 8. We will not interrupt the examination for an off-the-record conference with the deponent for the purpose of obstructing the deposition or coaching the witness. 9. We will not intentionally misstate facts or mischaracterize prior statements or testimony.

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MOTIONS AND CONDUCT IN COURT 1. We will scrupulously avoid misleading the court in our presentation of the law, facts, case history or procedure. 2. We will be familiar with the issues to be addressed by the court. 3. We will only make objections which are concise, specific, and have a sound legal basis. 4. We will not impute improper motives to other lawyers or make any statements that impugn their character unless clearly justified by the facts and essential to the resolution of an issue. 5. We will demonstrate courtesy and respect for the court and its staff at all times. When in court, we will stand when the judge and jury enter, when addressing the judge, and when the judge and jury leave, unless the custom and practice of a particular court is different. 6. We will avoid talking at the same time as the court, each other or the witness. 7. We will dress appropriately in court. 8. We will not transmit copies of correspondence to the court unless requested or encouraged by the court or required by extraordinary circumstances. 9. We will not engage the court staff in ex parte communications concerning the merits of a pending case, ask the court staff for an indication of how the judge may rule, or ask the court staff for legal advice. 10. We will respectfully seek permission before continuing to argue after the court has ruled. 11. We will not take positions on litigated or contested matters that are legally or factually unsupportable, and will not use motions or procedural issues to delay the prompt and fair resolution of a matter, or to harass, intimidate, or wear down an opponent.

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BIOGRAPHICAL INFORMATION Moderator & Program Chairs John Palmeri, Esq. is a partner in the Denver office of Gordon & Rees. He received his undergraduate degree form Columbia University and his law degree for the University of Denver, where he was a member of the law review. Mr. Palmeri specializes in complex civil litigation with emphasis on the defense of professional malpractice lawsuits on behalf of physicians, lawyers and accountants. He is a member of the CBA Professional Liability Committee. Mr. Palmeri is a past president of the Colorado Defense Lawyers Association and a recipient of an Exceptional Performance citation from the Defense Research Institute. He has published articles and lecturers on a number of litigation topics. Gerald Pratt, Esq. is Of Counsel with McConaughy & Sarkissian PC. He was admitted to practice law in Colorado in 1981 and is licensed to practice in all Colorado State courts, the United States District Court for the District of Colorado and in the United States Tenth Circuit Court of Appeals. Mr. Pratt received his Juris Doctorate Degree from the University of Denver College of Law in 1981. He received his Bachelor of Science in Civil Engineering from the University of Colorado in 1976 and practiced as an engineer with the US Department of Transportation. Mr. Pratt has been lead counsel in over 80 trials involving professional negligence, products liability, personal injury, premises liability, insurance bad faith, employment law, medical, dental and legal malpractice and criminal defense. He is a prolific contributor to various legal journals including The Colorado Lawyer and the Denver Bar Association. In addition, he has made presentations on such topics as legal ethics, litigation ethics, professionalism and various other legal issues to such diverse groups as the Denver Bar Association, Aurora Mental Health Center, Colorado Trial Lawyers Association, Aurora Humana Hospital and the Rocky Mountain Legal Assistance Association. He has been a member of the Colorado Bar Association Ethics Committee since 1984 and served as chair of that committee in 2002-2003, the Colorado Bar Association’s Lawyers Professional Liability Committee since 2001 and the Metro Volunteer Lawyers (formerly Thursday Night Bar), since 1982. He is a member of the Denver, Colorado and American Bar Associations.

Faculty Lucy A. Aiello is a Director of Underwriting for Lawyers Professional Liability at CNA in Chicago where she has been for the past seven years. She was previously the Vice President of the lawyers department at Euclid Managers Insurance Agency, one of the program administrators for the National Casualty Program for lawyers and paralegals. She was responsible for all phases of program management and marketing. Prior to her agency experience, Lucy was an underwriter at Westport Insurance Company and Shand Morahan in the professional liability divisions since her career began in 1984.


Chris Buckman is an Assistant Vice President of Marsh Affinity Group Services and serves as the Head of Office for Marsh AGS, Denver, CO. He has more than 9 years experience in insurance program management. Immediately following the merger in 1998 of Sedgwick Group PLL and Marsh & McLennan Inc., Chris was appointed Head of Office for the Denver Marsh AGS operations. Throughout his career, Chris has had extensive experience in all facets of insurance program management; program design, marketing, contracts and client executive responsibilities with the sponsoring association client. He has a BAA in Economics and Management from DePaul University, Greencastle, IN, and an MBA from the University of Colorado. Chris is a frequent speaker at Colorado Bar Association Continuing Legal Education Conferences. He is a member of the American Bar Associations Standing Committee on Legal Malpractice. Chris has spoken at various client conferences on professional liability for Charles Schwab – Schwab Institutional Division's annual IMPACT Conference and Raymond James Financial Services FID Educational Conferences. Carolyn Fairless, Esq. is a partner with the law firm of Wheeler Trigg Kennedy LLP, where she advises and represents clients in civil litigation, trials and appeals. Her litigation practice focuses primarily on professional liability, and she has had the privilege of representing numerous attorneys and other professional clients in federal and state court proceedings and arbitrations. Ms. Fairless has been selected for inclusion in the Colorado Corporate Counsel Black Book (Business Litigation) and the Legal 500 United States (Litigation), and is AV rated by Martindale-Hubbell. She is a member of the Federation of Defense & Corporate Counsel, and serves on the professional liability committee of the Defense Research Institute. Ms. Fairless received her bachelor’s degree in computer science, cum laude, with a minor in mathematics, from the Tulane University School of Engineering in 1992. She received her Juris Doctor degree from the University of Colorado School of Law in 1998, where she served as President of the Moot Court Board. Robert Hinds, Esq. has been in practice in Colorado since 1968. He has been listed in Best Lawyers in America since 1980, is listed in Martindale Hubbel's Bar Register of Preeminent Lawyers, and is a member of the American and International Academies of Matrimonial Lawyers. Bob is a nationally and internationally known lecturer in matrimonial law, and is the Co-Author of Colorado Domestic Relations Forms & Practice which has been in publication since 1988, with the sixth edition published in 2000. He authored Child Custody Battle - An Interprofessional Dilemna in 1988. Recent lectures include "Divorcing the Wealthy;" "How To Settle When The Money Is Big, The Risk Is Great, And The Experts Differ." Bob was born in Jamaica, New York in 1940, graduated from Cobleskill College (AS, 1960), Drew University (BA, 1964) and Denver University Law School (JD, 1967). He served on the Colorado Supreme Court Rules Committee (1996) was a member of the Governor's Commission on Child Support and Family Law Matters (1985), a member of Women's Resource Center Advisory Board (1982), Family Law Editor, Colorado Trial Talk (1981) and President, Interdisciplinary Committee on Child Custody, 1978. He is a member of the Arapahoe County Bar Association (Chairman, Ethics Committee, 1975-1976; President, 1978-1979), the Colorado Bar Association, (Chairman, Committee on Child Custody, 1976 and Chairman, 1979, Family Law Section; Member, Board of Governors, 1979-1981) Bar Associations; Colorado Trial Lawyers Association; American Academy of Matrimonial Lawyers (President, Colorado Chapter, 1992-


1993; Member, Board of Governors, 1994-2001). Married with four grown sons, Bob has many personal interests, but particularly sailing and travel. Christopher B. Little, Esq. practices in the field of general civil litigation, emphasizing professional liability defense, representing attorneys, accountants, architects, real estate agents/brokers, and general contractors in malpractice actions before state and federal courts. Mr. Little also represents attorneys before the Colorado Supreme Court and its Attorney Regulation Committee. His practice includes complex commercial litigation and employment law. Mr. Little served as the President for the Denver Bar Association in 2005-2006. He is on the Board of the Colorado Defense Lawyer Association and served as its President in 20052006. Mr. Little is a member of the American Bar Association House of Delegates and the ABA Lawyers Professional Liability Committee appointed in 2006. He also serves on the Colorado Bar Association Professional Liability Committee. Mr. Little regularly lectures and publishes in the area of risk management and the avoidance of lawyers' professional liability claims. David C. Little, Esq. is a founder and senior member of Montgomery Little Soran & Murray PC. After graduating from the University of Denver College of Law, he served as a Deputy District Attorney in Denver for five years. Since that time, he has practiced civil litigation with specialties in professional liability and commercial and insurance litigation. He has been published in national and local legal publications and is a frequent presenter at both local and national legal seminars and conferences. He is currently a member and past chair of the CBA Professional Liability Committee and the CBA Ethics Committee, and has served on a number of other committees dealing with insurance issues pertaining to lawyers’ professional liability. He is currently a member of the Colorado Supreme Court Committee on Rules of Civil Procedure, the Colorado Supreme Court Board of Continuing Legal Education, and the Colorado Supreme Court Standing Committee on Rules of Professional Conduct. He has served on the Board of the Colorado Lawyers Health Program and is a former member of the CBA Board of Governors. He is the author of, "Alternative Lawyer Relationships," in Lawyers' Professional Liability in Colorado (Colorado Bar Association CLE). Brad Levin, Esq. is a shareholder in the law firm of Roberts Levin Rosenberg PC, with emphasis in tort and commercial litigation, especially insurance bad faith and insurance coverage disputes. Mr. Levin received his undergraduate degree from Stanford University, with distinction where he was elected Phi Beta Kappa. He graduated from the University of California, Hastings College of law, and served as editor in chief of the Hastings Constitutional Law Quarterly. In addition to teaching legal writing and research at Hastings College of Law, Mr. Levin has lectured frequently in the areas of insurance coverage and bad faith law. He is a member of the California and Colorado bars and the Denver, Colorado, and American bar associations. He serves on the Colorado Supreme Court Committee on Jury Instruction, the Colorado State Commission on Judicial Performance, and the CBA Appellate subcommittee. Mr. Levin has also served as the chair of the Mountain States Regional Board of the Anti-defamation League of B'nai B'rith. In 2004, Mr. Levin was voted best Denver insurance lawyer by his peers and recognized in the Denver Business Journal. Mr. Levin was also elected by his peers to The Best Lawyer in American for 2005 and honored by the CTLA for the many amicus briefs he has written in the past three years. He has Martindale Hubbell's highest AV rating, as also voted by his peers. He is the author of, "Professional Liability


Insurance," and "The Claim or Lawsuit," in Lawyers' Professional Liability in Colorado (Colorado Bar Association CLE). Michael McConnell, Esq. is a civil trial and appellate lawyer with more than 20 years of courtroom experience. He is a founding shareholder and CEO of McConnell Siderius Fleischner Houghtaling & Craigmile LLC. In October 2000, Mr. McConnell was inducted into the American College of Trial Lawyers, the most selective organization of trial lawyers in North America. He has been selected for 10 years by his peers for inclusion in The Best Lawyers in America. Mr. McConnell handles a broad spectrum of complex civil cases at both the trial and appellate levels. He has defended some of Colorado’s top lawyers and law firms in legal malpractice cases and has represented hospitals and physicians throughout Colorado in medical malpractice cases. From 1980 until 2001, Mr. McConnell practiced with Long & Jaudon PC. In the early 1980s, Mr. McConnell successfully defended John Hinckley’s psychiatrist in the lawsuit arising from the assassination attempt on President Ronald Reagan. He was instrumental in a landmark oil and gas case representing the Southern Ute Tribe and has argued numerous appeals before the US Court of Appeals for the Tenth Circuit, the Colorado Supreme Court, and the Colorado Court of Appeals. A graduate of the University of Denver College of Law and a member of numerous professional organizations, Mr. McConnell lectures frequently to lawyers, health care professionals, and insurance professionals. In his role as a teacher, he shares understanding and expertise in legal ethics, trial tactics and motion practice, legal malpractice prevention, and various health care law issues. Mr. McConnell is the author of The Colorado Lawyer article, “Proximate Causation in Colorado Legal Malpractice Litigation” (Jan. 2002). Mr. McConnell performs pro bono services for Sungate, which helps child abuse victims through the aftermath of abuse. He is the author of, "Trends in Legal Malpractice Litigation," in Lawyers' Professional Liability in Colorado (Colorado Bar Association CLE). Troy Rackham, Esq. is a member of McConnell Siderius Fleischner Houghtaling & Craigmile LLC, where his practice includes employment and civil rights law, legal and medical malpractice, and other forms of complex litigation. He also advises professionals on ethics and employment matters. Mr. Rackham received his JD from William and Mary School of Law. While in law school, he served as the senior articles editor for the William and Mary Law Review and worked as a research assistant for Professor Davison M. Douglas, whose courses focused on constitutional, employment, employment discrimination, and civil rights law. After working with the Denver firm of Long & Jaudon PC, he joined MSFHC as an associate. Mr. Rackham is a member of the American, Colorado, and Denver bar associations. He is a member of the CBA Legal Services Committee, and frequently lectures to other lawyers on ethics and professional malpractice topics. He contributes his time to work on several committees of these associations. He is the co-author of, "Civil Procedure" in Annual Survey of Colorado Law and "Trends in Legal Malpractice," in Lawyers' Professional Liability in Colorado (Colorado Bar Association CLE). Michael J. Rosenberg, Esq. is a shareholder in the Denver law firm of Roberts Levin Rosenberg PC, where he specializes in the areas of insurance coverage, insurance recovery, and insurance bad faith. He dedicates the bulk of his practice to representing policyholders, both corporate and individual, in disputes with their insurers. Through his previous experience counseling insurance companies and defending them in litigation, both locally and abroad, Mr.


Rosenberg has developed a unique understanding and knowledge of the insurance industry in general, and of the inner workings of numerous insurance companies in particular. This knowledge has proven invaluable in Mr. Rosenberg’s insurance recovery practice, allowing him to obtain substantial recoveries on behalf of his clients in cases where, prior to litigation, the insurance companies perceived little or no exposure. Mr. Rosenberg received his BA degree from Washington & Lee University in 1991 and his JD degree from the University of Denver College of Law in 1996. During law school, Mr. Rosenberg served as the Articles Editor of the University of Denver Law Review, was selected to the American Bar Association Trial Team, and graduated in the top 5 percent of his class. After law school, he served as judicial clerk to the Honorable Steven C. Briggs of the Colorado Court of Appeals. Mr. Rosenberg carries Martindale Hubbell’s highest peer rating, AV.


TABLE OF CONTENTS Section 1:

Case Law Update and Recent Developments

Section 2:

Insurance Coverage: What’s in your policy? Part 1 – The Policy Basics ■ The Insurance Application ■ Claims-Made Policies ■ The Parts of Your Policy ■ The Declarations Page ■ The Insuring Agreement ■ The Exclusions, Conditions, and Endorsements

Section 3:

Underwriting ■ Overview of the Lawyers Professional Liability Application & Process ■ Underwriter's Considerations in the Process ■ Factors a Firm Should Consider

Section 4:

Insurance Coverage: What’s in your policy? Part II – Choosing the Right Coverage ■ Liability Limits ■ The Deductible & Defense Costs ■ Policy Coverage Provisions: Professional Legal Services, Insureds, Claims-Made Policies ■ Notice of Loss: Incidents & Claims ■ Prior Acts, Retroactive Dates, and Tail Coverage ■ Leaving a Firm: Going Solo or Lateral Hire ■ Practical Considerations for Retiring or Part-time Lawyers ■ Firm Dissolution

Section 5:

Risk Management & The New Ethics Rules ■ C.R.C.P 265 ■ What is Risk Management? ■ Alternative Lawyer Relationships ■ Ten Commandments to Promote Effective Communication with Your Client & Avoid Malpractice

OGRAM AGENDA: Section 6: Life Cycle of a Malpractice Case: The Perspective of the Insured


Section 1

C O L O R A D O B A R A S S O C I AT I O N CLE CLE in Colorado, Inc. is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association


SECTION 1 Case Law Update and Recent Developments

Presented by Troy Rackham, Esq. McConnell Siderius Fleischner et al Denver, CO Michael McConnell, Esq. McConnell Siderius Fleischner et al

Denver, CO


Notes: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________


Chapter 36

TRENDS IN LEGAL MALPRACTICE LITIGATION Michael T. McConnell, Esq. McConnell Siderius Fleischner Houghtaling & Craigmile, LLC Troy R. Rackham, Esq. McConnell Siderius Fleischner Houghtaling & Craigmile, LLC

SYNOPSIS § 36.1

INTRODUCTION

§ 36.2

COLORADO TRENDS: COLORADO SUPREME COURT — 2007 UPDATE § 36.2.1—Bankruptcy Trustee Lacks Standing To Sue The Debtor’s Lawyer For Aiding And Abetting § 36.2.2—Colorado Supreme Court Narrows Scope Of Malicious Prosecution Claims Against Lawyers § 36.2.3—Colorado Supreme Court Narrows Scope Of Sham Affidavit Doctrine

§ 36.3

COLORADO TRENDS: COLORADO COURT OF APPEALS — 2007 UPDATE § 36.3.1—Certificate Of Review Requirement Is Satisfied By Averments That The Reviewer Was Qualified To Review The Conduct Of The Defendants And Did So Based On The Facts Available § 36.3.2—Offer Of Settlement Of A CCPA Claim Against A Professional Settles The Right To Recover Attorney Fees And Costs If The Language Of The Offer Of Settlement Includes All Claims

§ 36.4

COLORADO TRENDS: COLORADO FEDERAL COURTS § 36.4.1—In In re ms55, Inc. v. Gibson Dunn & Crutcher, LLP, The Doctrine Of In Pari Delicto And The Standing Of A Bankruptcy Trustee To Sue The Debtor’s Lawyers For Aiding And Abetting § 36.4.2—Federal Court Lacks Jurisdiction To Hear A Claim Against Lawyers When The Case Within The Case Has Not Been Decided Because The Malpractice Case Is Not Ripe

(1/08)

36-1


§ 36.1

§ 36.5

Lawyers’ Professional Liability in Colorado

NATIONWIDE TRENDS § 36.5.1—Crime Fraud Exception To Attorney-Client Privilege Does Not Bar Lawyer’s Claim To Opinion Work Product § 36.5.2—Engagement Letter That Limits The Scope Of Engagement Prevented Malpractice Liability § 36.5.3—Tennessee Follows Majority Rule And Concludes That A Criminal Defendant May Sue His Former Lawyer For Malpractice Without First Obtaining PostConviction Relief § 36.5.4—New Jersey Concludes That Lawyer Representing Executrix Of Estate May Owe Duties Of Care To Third Parties § 36.5.5—Montana Upholds $11 Million Judgment Against Law Firm Found Liable For Malicious Prosecution § 36.5.6—Lawyer Did Not Breach Fiduciary Duty Or Improperly Disclose Confidential Information In His Complaint Against His Former Law Firm § 36.5.7—Iowa Concludes That Client Owns Lawyer’s Entire File, Including The Lawyer’s Work Product § 36.5.8—Nevada Concludes That Insurance Defense Counsel Has Attorney-Client Relationship With The Insured And The Insurer § 36.5.9—Litigation Privilege Bars Claims Against Lawyers For Intentional Interference With Contract

§ 36.6

CONCLUSION

§ 36.1 • INTRODUCTION There have been a number of trends that have developed in the past year, both in Colorado and nationwide. This Chapter identifies some of the recent decisions and important trends that have developed last year. It first discusses important new professional liability decisions in Colorado, then addresses some important decisions nationwide.

§ 36.2 • COLORADO TRENDS: COLORADO SUPREME COURT — 2007 UPDATE The Colorado Supreme Court has taken action in three important professional liability cases in 2007. First, in Alexander v. Anstine,1 the Colorado Supreme Court concluded that a bankruptcy trustee does not have standing to sue the debtor’s lawyers for aiding and abetting a breach of fiduciary duty.

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Second, in Hewitt v. Rice,2 the court considered a malicious prosecution case brought against Colorado lawyers. The court held that a lis pendens is not an ex parte action that is exempt from the favorable termination requirement. Rather, the court held that a malicious prosecution claim against a lawyer based on the lawyer’s filing of a lis pendens requires that the claim underlying the lis pendens be terminated favorably on its merits. In Hewitt, the claim underlying the lis pendens claim had been settled and, thus, not terminated favorably on the merits. The claim therefore failed. Third, in Andersen v. Lindenbaum,3 the Colorado Supreme Court reversed the court of appeals’ decision, in which the court of appeals concluded that a trial court properly may reject inconsistent averments in an affidavit under the “sham affidavit” doctrine. Rather, the court held that unless the averments in an affidavit are so clearly and directly contradictory with each other, a trial court may not reject such inconsistent averments and enter summary judgment. Each decision is examined in turn. § 36.2.1—Bankruptcy Trustee Lacks Standing To Sue The Debtor’s Lawyer For Aiding And Abetting The first Colorado Supreme Court decision affecting professional liability claims against lawyers in 2007 was Anstine v. Alexander.4 In Anstine, the Colorado Supreme Court considered whether Colorado law recognizes a fiduciary duty owed by an insolvent debtor’s officer to the debtor’s creditors and, if so, whether 11 U.S.C. § 544(a) and Colorado law permit a bankruptcy trustee, acting as a hypothetical judgment lien creditor, to sue the debtor’s lawyer for aiding and abetting the debtor’s officer breach of this fiduciary duty.5 The court held that a bankruptcy trustee does not have standing, standing in the shoes of a hypothetical judgment lien creditor, to sue the debtor’s lawyer for aiding and abetting the debtor’s officer’s breach of fiduciary duty. In Anstine, the defendant-lawyers were sued by a bankruptcy trustee who was appointed trustee for the defendant-lawyers’ former client, BHW. The trustee alleged claims against the president of BHW for breach of fiduciary duty, among others. The trustee alleged that the defendantlawyers committed legal malpractice in their representation of BHW. He also alleged that the defendant-lawyers aided and abetted the president’s breach of fiduciary duty to BHW. The jury found in the lawyers’ favor on the trustee’s negligence claim. The jury found against the lawyers on the trustee’s aiding and abetting breach of fiduciary duty claim. The jury allocated 1 percent of the fault to the defendant-lawyers and the rest to BHW’s president. After trial, the trial court amended the verdict and made the lawyers and the president jointly liable.6 The trial court also awarded attorney fees to the trustee.7 The defendant lawyers appealed. The court of appeals found that the trustee had standing to pursue a claim against the lawyers for aiding and abetting a breach of fiduciary duty.8 The court of appeals reasoned that under 11 U.S.C. § 544(a)(1), the bankruptcy trustee has the power to bring claims “in place of the debtor’s creditors under one of the trustee’s powers to avoid transfers and obligations of the debtor as a hypothetical lien creditor. . . .”9

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The court of appeals postulated that, in Colorado, a judgment lien creditor has the right to pursue all claims available to a debtor corporation before bankruptcy is declared. The court further reasoned, “[i]n the context of a breach of fiduciary duty claim, the trustee brings the claim under § 544(a) ‘in the name of the corporation for the benefit of all persons entitled to participate in the recovery.’”10 The Colorado Supreme Court reversed the court of appeals.11 It explained that the scope of a bankruptcy trustee’s standing as a hypothetical judgment creditor under 11 U.S.C. § 544 is measured by the scope of rights that a judgment creditor would have under state law. Thus, the Colorado Supreme Court explained that it had to determine “whether judgment lien creditors may sue a corporation’s president for a breach of fiduciary duty under Colorado law.”12 The court then examined the scope of duties that are owed to creditors. The court explained that Colorado law imposes upon directors and officers of a corporation certain statutory and common law duties to the corporation’s creditors. Those duties include “a duty not to vote for shareholder distributions that would preclude payment of corporate debts.”13 The court then examined its earlier decision in Ficor, Inc. v. McHugh.14 It explained that it previously held in Ficor “that creditors, as a group, also may seek relief directly against directors and officers who violate this statutory duty in the name of the corporation.”15 The court clarified, however, that the scope of such claims is limited because the statute that allowed such claims, C.R.S. § 7-5114(3), was limited. The supreme court explained that the “court of appeals erroneously concluded that [its] holding in Ficor means that ‘a judgment lien creditor has the right to pursue all claims available to a debtor corporation before bankruptcy is declared.’”16 The court explained that “Ficor is not broad enough to reach claims brought outside of that statutory realm.” Rather, “Ficor extended a specific statutory right of the corporation to creditors when their claims are precluded by improper distributions to shareholders.” The court clarified that neither Ficor nor any other Colorado case confers “general standing on creditors to bring claims belonging to the insolvent corporation.”17 Addressing the bankruptcy trustee’s argument, the Colorado Supreme Court agreed that “when a corporation becomes insolvent, a duty arises in its directors and officers to the corporation’s creditors” under the common law.18 However, the trustee’s “role with regard to creditors does not encompass the full set of fiduciary duties owed by directors and officers to shareholders of a solvent corporation.”19 Rather, the trustee’s rights encompassed only the officers’ and directors’ “limited duty that requires officers and directors to avoid favoring their own interests over creditors’ claims.”20 The court clarified that it has “never recognized a duty to creditors broader than this and have not defined the duty owed to creditors as fiduciary in the usual sense.” 21 Rather, “[i]n the context of a breach of fiduciary duty claim against a corporate officer, creditor claims are limited to cases where officers or directors have favored their interests over creditors’ claims.”22 In Anstine, the trustee never contended or argued that “the president’s warehousing scheme involved favoring the president’s interests to defeat creditors’ claims. . . .”23 Thus, the court held that the

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trustee lacked standing because he failed to allege or prove that the president breached his limited fiduciary duty to BHW’s creditors. Importantly, before the court of appeals, the lawyer-defendants had argued that, under settled Colorado law, they could not be liable to the client’s creditors as a matter of law since the jury concluded that they properly discharged their obligation to their clients, and no fraud or malice was alleged.24 The court of appeals disagreed. The court of appeals recognized that the settled Colorado law is that an “attorney owes a duty to his client to employ that degree of knowledge, skill, and judgment ordinarily possessed by members of the legal profession in carrying out the services for his client.”25 The court of appeals further noted that “the attorney does not owe such a duty to a non-client.”26 However, the court of appeals concluded that the duty of a lawyer to his or her client is independent of the duty not to knowingly participate in a client’s officer’s breach of fiduciary duty to the corporation’s creditors.27 The court reasoned that “the jury’s finding that the attorneys did not commit legal malpractice does not, as a matter of law, foreclose the possibility that they could be liable for aiding and abetting a breach of fiduciary duty owed to BHW, provided they knowingly participated in the president’s breach.”28 The court reasoned that the “two duties existed independent of one another, and the attorneys could conceivably fulfill their duty to their client . . . while lending assistance to and aiding and abetting the president’s breach of a separate duty to [the client] and third parties.”29 Hence, the court of appeals held that lawyers can be liable to third parties in certain circumstances, even when there is no fraud or malice and even when the lawyers properly discharge their obligations to their client. The Colorado Supreme Court reversed the court of appeals decision.30 It vacated the court of appeals’ decision with respect to the “liability of attorneys for aiding and abetting a breach of fiduciary duty to a non-client.”31 However, given its decision on standing, the Colorado Supreme Court expressly decided not to decide “whether an attorney can ever be liable for aiding and abetting a breach of fiduciary duty to a non-client.”32 That issue is left for another day, in another case. § 36.2.2—Colorado Supreme Court Narrows Scope Of Malicious Prosecution Claims Against Lawyers In Hewitt v. Rice,33 a plaintiff brought a malicious prosecution action against his adversary’s former counsel. The defendant-lawyers moved to dismiss for failure to state a claim upon which relief could be granted. The plaintiff appealed to the court of appeals,34 which held that dismissal was proper because the plaintiff’s act in settling his underlying case could not serve as the basis for his malicious prosecution action.35 In 2007, the Colorado Supreme Court affirmed the court of appeals’ decision.36 It explained that in “Thompson v. Maryland Casualty Co., 84 P.3d 496, 505 (Colo. 2004), [the Colorado Supreme Court] left undecided the question whether a lis pendens filing comes within the ex parte exception to the favorable termination requirement.”37 In Hewitt, the court conclud-

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ed that “a lis pendens is not an ex parte action and is not exempt from the favorable termination requirement.”38 The court also declined to “adopt a totality-of-the-circumstances test to determine whether the proceeding giving rise to the claim of malicious prosecution was favorably terminated when the parties entered a settlement.”39 Rather, the court viewed adoption of a totality of the circumstances test for determining whether the underlying case was terminated favorably would allow settlement to serve as evidence of favorable termination, which the court was unwilling to do. Rather, the court considered and adopted the Restatement (Second) of Torts and authorities from other jurisdictions.40 The court saw no reason to modify the common law or adopt something other than a bright line rule concerning settlement and whether there is a favorable termination in the underlying case. Indeed, the court expressed its clear desire to keep malicious prosecution to its limited contours. The court explained that relaxing the standards applicable to malicious prosecution claims would be problematic for a number of reasons, and “runs the risk of chilling access to the courts and unnecessarily expanding liability,” which the court was unwilling to do.41 § 36.2.3—Colorado Supreme Court Narrows Scope Of Sham Affidavit Doctrine In Luttgen v. Fischer,42 the trial court entered summary judgment in favor of the defendant-lawyer on the client’s claim for legal malpractice. The client appealed. The court of appeals affirmed. Luttgen was notable because the court of appeals adopted the sham affidavit doctrine.43 The court of appeals explained that the “sham affidavit doctrine permits a court under certain circumstances to disregard an affidavit submitted by a party in response to a summary judgment motion where that affidavit contradicts the party’s previous sworn deposition testimony. . . .”44 The court further explained that a deponent should not be allowed to change or contradict his or her testimony simply to survive summary judgment. In Andersen v. Lindenbaum,45 the court of appeals applied the same sham affidavit doctrine in the context of a medical malpractice case. The Colorado Supreme Court agreed to review the case and reversed.46 The Colorado Supreme Court explained that “C.R.C.P. 56(c) provides that summary judgment shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact that the moving party is entitled to a judgment as a matter of law.”47 The court further noted that not any fact dispute is sufficient to avoid summary judgment. Rather, the fact dispute must be genuine and about a fact that is material to the case.48 Considering the standards applicable to a summary judgment motion, the court explained that “a relatively unique problem is presented when a party opposing summary judgment attempts to demonstrate a factual dispute by submitting an affidavit contradicting the affiant’s own prior

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deposition testimony.”49 In the circumstance where the affiant avers positions that “are truly contradictory, he cannot be considered credible by a reasonable jury, in the absence of some plausible explanation why his earlier testimony was inaccurate.”50 In that circumstance, courts properly may apply the sham affidavit doctrine and “treat that affidavit as failing to raise a genuine issue of fact and may grant the motion.”51 However, there may be circumstances where the position taken by the affiant is not directly contradictory to the affiant’s deposition testimony. Moreover, there are certain circumstances where the affiant has a reasonable explanation for the contradiction between the affiant’s affidavit and her deposition. In such circumstances, the court explained that the sham doctrine is not applicable and a trial court may not reject the conflicting affidavit or treat that affidavit as failing to raise a genuine issue of fact and may not grant the motion. Applying its narrower rule to the facts in the case, the court held that the trial court erred in rejecting the plaintiff’s conflicting affidavit and treating the affidavit as failing to raise a genuine issue of fact. The reason the trial court erred was that the plaintiff had a plausible explanation for the conflict between her deposition testimony and her affidavit. The deposition testimony contained typos that were reasonably explained under the totality of the circumstances.

§ 36.3 • COLORADO TRENDS: COLORADO COURT OF APPEALS — 2007 UPDATE There was a paucity of decisions from the Colorado Court of Appeals concerning the professional liability of lawyers in Colorado. The decisions that were announced and published52 are discussed in turn. § 36.3.1—Certificate Of Review Requirement Is Satisfied By Averments That The Reviewer Was Qualified To Review The Conduct Of The Defendants And Did So Based On The Facts Available In RMB Services, Inc. v. Truhlar,53 the plaintiffs brought a legal malpractice and negligence misrepresentation suit against the defendant-lawyer and his law firm. The plaintiffs were RMB and Sage & Vargo. RMB provided collection services to State Farm Mutual Automobile Insurance Company. Sage and Vargo provided legal services on behalf of RMB. In 2001, State Farm terminated the plaintiffs’ services and demanded return of its files. The plaintiffs sought legal advice from the defendant-lawyer. The plaintiffs alleged that the lawyer advised them to immediately return all files, and they claimed they did so, only to discover later that RMB had a right to retain some files under C.R.S. § 12-14-124. The plaintiffs then hired a lawyer, who recovered a settlement from State Farm for work that the plaintiffs had performed. The plaintiffs later sued the defendant-lawyer for malpractice, claiming that as a result of the negligent advice, they lost profits and interest and were forced to incur legal expenses to

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obtain payment for services rendered. The defendant-lawyer and law firm moved to dismiss the plaintiffs’ complaint for failure to comply with the certificate of review statute, C.R.S. § 13-20602. The trial court agreed and dismissed the plaintiffs’ complaint. In the interim, the defendantlawyer also sought summary judgment on the basis that RMB had no right to retain client files under C.R.S. § 12-14-124. The trial court agreed and entered summary judgment in favor of the defendants. The court of appeals reversed.54 The court explained that the certificate of review statute merely requires the plaintiff’s lawyer to declare that he or she has consulted an expert, that the expert reviewed the relevant information and concluded that the plaintiffs’ claim did not lack substantial justification, and that the expert was competent and qualified to so opine. The court disagreed with the defendant-lawyer that the certificate of review statute specifically required the plaintiff’s lawyer to identify with specificity or detail the qualifications of the expert reviewer. The defendant-lawyer also argued that the certificate of review statute required the plaintiff’s lawyer to file a separate certificate of review for each defendant and for each claim.55 The court rejected the defendant-lawyer’s arguments and held that the certificate of review statute merely required one certificate of review because the claims against the firm depended on the negligence of the individual lawyer, and because the negligent misrepresentation claim was simply a species of the negligence claim.56 The court also reversed the trial court’s summary judgment order.57 The court held that the trial court erred in granting summary judgment because the defendants did not show as a matter of law that RMB had no right to retain client files under C.R.S. § 12-14-124. The court’s language in reversing summary judgment appears to turn the ordinary burdens on summary judgment upside down by making the defendants establish the absence of a genuine issue of material fact, instead of requiring the plaintiff to show the existence of a genuine issue of material fact.58 How the language will apply in future cases will be interesting to watch. § 36.3.2—Offer Of Settlement Of A CCPA Claim Against A Professional Settles The Right To Recover Attorney Fees And Costs If The Language Of The Offer Of Settlement Includes All Claims Bumbal v. Smith59 was a case that could impact litigation of professional liability cases in Colorado. Bumbal was not a professional liability case against a lawyer, but instead, a professional liability case against physicians.60 It would be as applicable to claims against lawyers, however. The authors therefore analyze the case here. In Bumbal, a patient sued her dermatologists for medical negligence and deceptive trade practices in violation of the Colorado Consumer Protection Act (CCPA). In her complaint, the patient asserted a claim for attorney fees under the CCPA. She also requested costs and other relief available under the law. The dermatology group made an offer to settle, pursuant to Colorado’s offer of settlement statute, C.R.S. § 13-17-202. The group’s offer of settlement provided that the defendants offered

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to settle “all claims with plaintiff . . . for $495,000.00.”61 The plaintiff timely accepted the offer of settlement and filed the offer of settlement, along with her written notice of acceptance, with the court. The trial court then entered judgment in favor of the plaintiff for the amount of the accepted offer of settlement. After the trial court entered judgment, the plaintiff moved for an award of attorney fees pursuant to the CCPA and an award of costs, in addition to the settlement amount. The trial court denied the plaintiff’s request and held that the dermatologist group’s offer of settlement, by its plain language, included any claims from the plaintiff for attorney fees and costs. The plaintiff appealed. The court of appeals agreed with the trial court and held that the offer of settlement included the plaintiff’s claim for attorney fees because it offered to settle “all claims.”62 The court reviewed cases from other jurisdictions and agreed with the majority of those cases, which held that “an offer of settlement as to ‘all claims’ unambiguously includes attorney fees where the only claim for attorney fees appears in the complaint.”63 With respect to costs, however, the court of appeals also affirmed. The court explained that the plaintiff argued she was entitled to costs for two reasons: first, she argued that she was entitled to costs as the prevailing party under the CCPA; second, she argued that she was entitled to costs pursuant to C.R.C.P. 54(d) and C.R.S. § 13-16-104. The court of appeals disagreed. With respect to the issue of whether the plaintiff was the prevailing party under the CCPA, the court of appeals concluded that she settled her claim for costs under the CCPA by accepting the offer of settlement. Further, the court of appeals declined to decide whether plaintiff was entitled to costs under C.R.C.P. 54(d) and C.R.S. § 13-16-104 because it concluded that the plaintiff did not preserve the issue because she “did not assert these bases to recover costs in either her opening or reply briefs on appeal.”64

§ 36.4 • COLORADO TRENDS: COLORADO FEDERAL COURTS Colorado federal courts have decided several cases in the past year that are likely to have important impacts on Colorado professional liability law as it affects lawyers. Each of the cases is addressed in turn. § 36.4.1—In In re ms55, Inc. v. Gibson Dunn & Crutcher, LLP, The Doctrine Of In Pari Delicto And The Standing Of A Bankruptcy Trustee To Sue The Debtor’s Lawyers For Aiding And Abetting In In re ms55, Inc. v. Gibson Dunn & Crutcher, LLP,65 the U.S. District Court for the District of Colorado considered an appeal of the bankruptcy court’s decision. In the case, the bankruptcy court held that the trustee, in pursuing cause of action against the law firm that represented both the corporate Chapter 11 debtor and its insider, lacked standing.66 The trustee sued the

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law firm, purportedly under § 544 of the Bankruptcy Code, alleging that the law firm aided and abetted the insider’s breach of fiduciary duty to his creditors because the law firm allegedly structured certain bridge loans and other financial transactions in a manner that benefited the insider. The bankruptcy court engaged in a very interesting discussion of the difference between a bankruptcy trustee’s standing under § 541, as opposed to the trustee’s standing under § 544. The court explained that the trustee’s theory in the case was that he was not subject to the in pari delicto defense, to which only § 541 claims are subject, because he brought his claims under his “strong-arm” subrogation powers of § 544(a) of the Bankruptcy Code. Specifically, the trustee argued that under that provision, “he is standing in the shoes of an ideal judgment creditor, who, having not participated in any fashion in wrongful conduct, is not in pari delicto, and not barred from recovery.”67 The court rejected the trustee’s argument. On appeal, the district court reversed the bankruptcy court.68 The trustee argued on appeal that the bankruptcy court erred in holding the doctrine of in pari delicto barred his claims for four reasons. First, the trustee argued that the “controlling law in the Tenth Circuit holds otherwise.”69 Second, the trustee argued that “the doctrine does not apply to claims for self-dealing pursued under section 544(a) of the Bankruptcy Code.”70 Third, he argued that “the doctrine does not bar claims for breaches of the duties of controlling fiduciaries and insiders.”71 Finally, he argued that “the doctrine does not bar claims arising from post-petition conduct of the debtor.”72 The district court addressed only the first two arguments because they were dispositive of the appeal. The district court rejected the trustee’s argument that § 544(a) of the Bankruptcy Code permits the trustee to elect to bring both claims in the shoes of the creditor and in the shoes of debtor. The district court explained that § 541(a) allows a trustee to stand in the shoes of the debtor, while § 544(a) allows the trustee to utilize the avoidance powers of the trustee. The court explained that it is the nature of the claim — and the allegations that support the claim — that dictates whether the trustee has standing pursuant to the debtor’s claims under § 541(a) or the creditor’s avoidance powers under § 544(a). Further, the district court rejected the law firm’s argument that the trustee’s avoidance powers under § 544(a) only permit the trustee to assert contract claims, and not tort claims. The court explained that the language of § 544(a) supports the rule that bankruptcy trustees are endowed with more powers than merely avoidance powers. Rather, a bankruptcy trustee has several powers, including the power to bring a damages action against the debtor corporation’s directors for breach of fiduciary duty to the corporation’s creditors. The court held that, to the extent that the trustee’s claims in that case were based on alleged preferential transfers between corporate insiders, the bankruptcy trustee has standing (indeed, exclusive standing) to assert such claims. Further, the court reviewed the Colorado Supreme Court’s opinion in Anstine and found it instructive.73 The court explained that under Anstine’s limited formulation of duties a corporate insider owes to the corporation’s creditors at the point of insolvency, the Colorado Supreme Court would allow a claim that certain officers achieved preferential transfers to the detriment of the

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corporation’s creditors. Thus, the court found that “under Colorado state law, a judgment lien creditor may bring a claim against Debtor’s corporation’s attorney for aiding and abetting and/or conspiring to breach the limited fiduciary duty an insolvent corporation’s officers and directors owe to such creditor.”74 With respect to the in pari delicto doctrine, the court held that the doctrine and defense is inapplicable to claims brought by the trustee under § 544(a), standing in the shoes of creditors with avoidance powers. Thus, the court found that the bankruptcy court erred as a matter of law in dismissing the trustee’s claims brought through the trustee’s avoidance powers under § 544(a) on the basis of in pari delicto. Given the history of litigation between the parties in the case, it is likely that the case will be further appealed and will be discussed again in next year’s update to this Chapter. § 36.4.2—Federal Court Lacks Jurisdiction To Hear A Claim Against Lawyers When The Case Within The Case Has Not Been Decided Because The Malpractice Case Is Not Ripe In Bristol Company Limited Partnership v. Bosch Rexroth Inc.,75 the plaintiff was a company that allegedly had a patent on certain snow removal equipment. The plaintiff asserted that the defendant, Bosch, was infringing on its patent by “making, using, and selling systems” that infringed on plaintiff’s rights. Bosch denied infringing on the plaintiff’s patents.76 At the same time that plaintiff brought its patent infringement action, the plaintiff brought two claims for relief against the plaintiff’s former lawyers. The defendant-lawyers were the lawyers “who filed the application for the [allegedly infringed] Patent and related patents on [the plaintiff’s] behalf.”77 In its claims against the lawyers, the plaintiff alleged that if the defendant’s products are found not to infringe on the plaintiff’s patents, then it is the lawyers’ fault. Specifically, the plaintiff claimed that if no infringement occurred, it is because the lawyers who prepared and filed the patent application “were negligent in describing the claims of the . . . Patent and in withdrawing claims from a related patent that allegedly would have covered the . . . defendants’ products.”78 The lawyers moved to dismiss the plaintiff’s claims, arguing that the court lacked federal subject matter jurisdiction because the plaintiff’s claims are unripe and because plaintiff lacks standing to pursue them. The district court agreed. It held that the plaintiff’s claims against the lawyers “fail both for lack of standing and on ripeness grounds.”79 The district court explained “the case is justiciable only when the threat is ‘certainly impending,’ or ‘real and immediate.’”80 The court concluded that the plaintiff’s claims against the lawyers did not satisfy the standard for a case and controversy because the case within the case had not been completed yet, so any decision would be advisory in nature. The court explained that the plaintiff alleged only that “if plaintiff’s infringement claims against the Bosch defendants fail, then [the lawyers] are guilty of legal malpractice.”81 The plaintiff’s allegations therefore asserted no more than “a possibility of future harm, which is clearly insufficient to confer Article III standing.”82

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The case may be useful to those practitioners defending lawyers in cases where the case within the case has not yet been resolved. Certainly, the case is useful in federal court in such a circumstance.

§ 36.5 • NATIONWIDE TRENDS There also have been a number of decisions nationwide that may have impact in Colorado. Each decision is discussed in turn. § 36.5.1—Crime Fraud Exception To Attorney-Client Privilege Does Not Bar Lawyer’s Claim To Opinion Work Product In Green Grand Jury Proceedings,83 the government moved to compel production of documents and lawyer’s testimony in a grand jury proceeding. The lawyer represented a client who was the target of an investigation into whether he had received improper payments. The lawyer assisted the client in responding to these accusations. In the course of that representation, the client provided the lawyer with an alternate, non-criminal explanation for his conduct. “The attorney relied upon this explanation in formulating his legal advice and drafted documents that memorialized what the client said had taken place.”84 In the grand jury proceedings, however, the “government contends that the client knowingly lied to the attorney by providing the attorney with a false back-story for the monies the client had allegedly improperly received.”85 The “grand jury issued subpoenas to the client’s attorney and the attorney’s law firm, seeking documents as well as the attorney’s testimony.”86 In response, “the law firm produced a privilege log, identifying 1,604 documents that it claims are protected under the attorney-client or work product privileges.”87 The lawyer later “‘declined to answer the grand jury’s questions, citing attorney-client privilege.”88 After the grand jury indicted the client, “the government moved to compel the production of the documents and the attorney’s testimony.”89 “The government argued that because the client had used his attorney’s services to perpetrate a fraud, the attorney-client and attorney work product privileges were vitiated under the crime-fraud exception to these privileges.”90 The district court held that the although a client who used his lawyer’s assistance to perpetrate a crime or fraud may not assert the work product privilege as to documents generated in furtherance of his crime, the lawyer who does not knowingly participate in the client’s crime or fraud may assert the work product privilege as to his or her opinion work product. The case has a very interesting discussion that may be useful to litigating work product issues in Colorado. § 36.5.2—Engagement Letter That Limits The Scope Of Engagement Prevented Malpractice Liability In New York, a law firm represented a client in a tax dispute with the Internal Revenue Service.91 The law firm specifically limited its engagement of the client only to litigate the amount of tax liability, not who was primarily or secondarily responsible. The plaintiff’s assertion

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that it was not primarily liable for the subject withholding taxes could not support a malpractice claim. Further, the plaintiff failed to produce any evidence that the defendant’s lack of advice was the “but for” cause of a loss reserve remaining on the plaintiff’s financial statements, which allegedly caused it to lose business opportunities and incur monetary damages. The case is a good example of a law firm’s ability to limit its malpractice exposure by thoughtful and limited engagement letters. § 36.5.3—Tennessee Follows Majority Rule And Concludes That A Criminal Defendant May Sue His Former Lawyer For Malpractice Without First Obtaining Post-Conviction Relief In Rantz v. Kaufman,92 the Colorado Supreme Court held that a criminal defendant who sues his criminal defense counsel for malpractice does not have to obtain successful post-conviction relief prior to filing suit against his lawyer for malpractice. In Burnett v. Daryl M. South,93 the Tennessee Court of Appeals agreed with Rantz and the other cases that have held that a convicted criminal-defendant may assert a legal malpractice claim against his or her lawyer even if the defendant has not obtained post-conviction relief. Specifically, the court held that a criminal-defendant who wished to sue his or her lawyer for legal malpractice following a conviction could do so before obtaining relief from the conviction in order to avoid the “Catch-22” situation posed by the one-year statute of limitations for legal malpractice actions. The case may then be stayed to see whether the legal malpractice plaintiff is able to obtain relief from the conviction.94 § 36.5.4—New Jersey Concludes That Lawyer Representing Executrix Of Estate May Owe Duties Of Care To Third Parties In Estate of Albanese v. Lolio,95 the New Jersey appellate counsel considered a case in which an estate, its executrix, and two co-beneficiaries sought to recover for the defendantlawyers’ allegedly negligent advice regarding the payment of federal estate taxes. The plaintiffs alleged that the lawyers’ advice caused the estate’s beneficiaries to incur increased tax liabilities. The court evaluated the lawyers’ engagement agreement with the clients and noted that it left the lawyers’ relationship with their client as “unclear.”96 The court explained that the agreement “created a relationship between defendants, on the one hand, and the client, on the other.”97 However, the agreement defined the client “individually and as executrix” of the estate.98 Moreover, the retainer agreement also obligated the lawyers to advise and counsel as to “[p]ostmortem planning, including, but not limited to, calculating tax needs.”99 Analyzing this language, the court held that the client may have had a reasonable expectation of representation as an “individual” as well as executrix of the estate.100 Thus, because the lawyers did not define their relationship with their client more clearly, even though they had an obligation to do so, the court of appeals reversed the trial court’s award of summary judgment. However, the court agreed that the co-beneficiaries of the estate lacked standing to sue.

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§ 36.5.5

Lawyers’ Professional Liability in Colorado

§ 36.5.5—Montana Upholds $11 Million Judgment Against Law Firm Found Liable For Malicious Prosecution In Seltzer v. Morton,101 the Montana Supreme Court upheld a very large judgment against a Montana lawyer found liable for malicious prosecution. In the case, a lawyer sued the defendant, an art authenticator, because the defendant refused to recant his professional opinion that a painting was not an authentic painting by a renowned artist. However, the lawyer and his firm had very strong, credible grounds in their own right to believe that the painting was not authentic. The underlying case concerning the authenticity of the painting was dismissed because the plaintiff did not have expert opinions to support the plaintiff’s claim. After the underlying case was dismissed, the underlying defendant brought a suit against the lawyer and his firm for malicious prosecution. A judgment was entered in favor of the plaintiff and against the lawyer for malicious prosecution. The trial court awarded the plaintiff a total of $11 million in compensatory damages and punitive damages. On appeal, the Montana Supreme Court affirmed. The court rejected the appellant’s arguments that the plaintiff’s closing argument improperly appealed to jurors’ local sympathies. The court also held that the evidence presented at trial supported the amount of compensatory damages awarded. Further, the court held that Montana’s cap on punitive damages did not apply to the tort claims that accrued before statute’s effective date, so the claims were not capped. Finally, the court concluded that the $9.9 million punitive damage award, while it was almost 10 times the amount of compensatory damages awarded, did not violate substantive due process. The case is an interesting example of the significant exposures that lawyers face when asserting claims that are “on the edge.” § 36.5.6—Lawyer Did Not Breach Fiduciary Duty Or Improperly Disclose Confidential Information In His Complaint Against His Former Law Firm In Charney v. Sullivan & Cromwell,102 a former lawyer with a large New York law firm sued the firm, asserting various causes of action. The defendant-law firm moved to dismiss the plaintiff’s complaint, arguing that the plaintiff improperly disclosed client secrets or confidences, and confidences of the law firm itself, in violation of the ethical rules. After a lengthy discussion of the applicable pleading and ethical rules, the trial court concluded that the plaintiff — a former associate with the law firm — did not breach a fiduciary or ethical duty and did not improperly disclose client confidences in his complaint. However, the court did strike the plaintiff’s complaint for other pleading related reasons, although the court afforded the plaintiff an opportunity to re-plead. § 36.5.7—Iowa Concludes That Client Owns Lawyer’s Entire File, Including The Lawyer’s Work Product In Iowa Supreme Court Attorney Disciplinary Board v. Gottschalk,103 the Iowa Supreme Court suspended a lawyer from the practice of law based upon multiple instances of neglect of client matters, misrepresentations to the court and failure to pursue his clients’ interests. However, in an interesting discussion concerning its reasons for upholding the lawyer’s suspension, the Iowa Supreme Court adopted the “entire file” rule. Specifically, the court concluded that the client owns or is entitled to virtually everything in the file, including attorney work product or notes. The decision may influence other state disciplinary panels or boards in determining who owns portions of the client’s file.

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Trends in Legal Malpractice Litigation

Notes

§ 36.5.8—Nevada Concludes That Insurance Defense Counsel Has Attorney-Client Relationship With The Insured And The Insurer In Nevada Yellow Cab Corp. v. Eight Judicial District,104 the Nevada Supreme Court held that lawyers retained by a liability insurer to defend its insured generally represent both the insurer and the insured. As such, Nevada takes a position different than Colorado and other states that conclude that the lawyer represents only the insured.105 The Nevada court then went on to affirm the trial court’s disqualification of the insurance defense firm that sought to represent the insured in a bad faith action against the insurer arising out of the same personal injury claim it had defended on behalf of both the insured and the insurer.106 § 36.5.9—Litigation Privilege Bars Claims Against Lawyers For Intentional Interference With Contract Finally, in Kahala Royal Corp. v. Goodsill Anderson Quinn & Stifel,107 a limited partnership and a general partner brought a lawsuit against a law firm, the administrative partner’s president, and its director to recover for intentional interference with contractual relations and prospective economic advantage when representing the administrative partner with respect to a request to inspect books and records. The trial court entered judgment in favor of the defendants, finding their acts privileged. The Hawaii appellate court affirmed. The Hawaii court held that that the litigation privilege precludes claims against lawyers for intentional interference with contract and with prospective economic advantage, where there is no allegation that the lawyers acted either outside the scope of the client-lawyer relationship or with actual malice. In so holding, Hawaii followed the rule from Reynolds v. Schrock.108 The Hawaii court explained that the litigation privilege provides for absolute immunity as to wrongful communications or conduct during the course of judicial proceedings, as long as the communication or conduct has some relation to the proceedings.109 However, the court explained that the privilege does not apply to intentional misconduct, such as fraud, that has no legitimate relation to the litigation.

§ 36.6 • CONCLUSION Every year new trends develop. This update to the Chapter has attempted to identify some of the trends and important cases in Colorado and nationwide. This Chapter necessarily cannot include all relevant cases, but has included those that likely will have an important impact upon legal malpractice and professional liability litigation in the next few years.

NOTES 1. Alexander v. Anstine, 152 P.3d 497 (Colo. 2007). 2. Hewitt v. Rice, 154 P.3d 408 (Colo. 2007). 3. Andersen v. Lindenbaum, 160 P.3d 237 (Colo. 2007).

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Notes

Lawyers’ Professional Liability in Colorado

4. Anstine, 152 P.3d 497. 5. Id. at 500, n. 3. 6. Id. at n. 3-4 (the trial court found joint liability proper under C.R.S. § 13-21-111.5(4) (2004) both as a matter of law and as a matter of fact). 7. Id. at n. 4. 8. Anstine v. Alexander, 128 P.3d 249, 253 (Colo. App. 2005). 9. Id. at 253. 10. Id. at 254 (quoting In re Porter McLeod, Inc., 231 B.R. 786, 793 (D. Colo. 1999), quoting Wieboldt Stores, Inc. v. Schottenstein, 131 B.R. 655, 668 (N.D. Ill. 1991)). 11. Anstine, 152 P.3d at 502. 12. Id. 13. Id. at 502-03 (citing C.R.S. § 7-106-401(3)(a) (2006)). 14. Ficor, Inc. v. McHugh, 639 P.2d 385, 393-94 (Colo. 1982). 15. Id. at 392-94. 16. Anstine, 152 P.3d at 502 (quoting the court of appeals’ decision in Anstine, 128 P.3d at 254, citing Ficor, 639 P.2d at 393-94). 17. Id. (citing ms55, Inc. v. Gibson Dunn & Crutcher, LLP (In re ms55), 338 B.R. 883, 896 n.6 (Bankr. D. Colo. 2006)). 18. Id. (citing Crowley v. Green, 365 P.2d 230, 232-33 (Colo. 1961)). 19. Id. 20. Id. 21. Id. (citing New Crawford Valley, Ltd. v. Benedict, 877 P.2d 1363, 1368-69 (Colo. App. 1993); 1 Cathy Stricklin Krendl & James R. Krendl, Colorado Methods of Practice § 1.66, at 177 (6th ed. 2005); and 18B Am. Jur.2d Corporations § 1588 (2004)). 22. Id. 23. Id. 24. Anstine, 128 P.3d at 255 (citing Mehaffy, Rider, Windholz, & Wilson v. Cent. Bank Denver, 892 P.2d 230 (Colo. 1995)). 25. Id. 26. Id. 27. Id. at 256. 28. Id. 29. Id. 30. Anstine, 152 P.3d at 502. 31. Id. 32. Id. 33. Hewitt v. Rice, 154 P.3d 408 (Colo. 2007). 34. Hewitt v. Rice, 119 P.3d 541 (Colo. App. 2004). 35. Id. at 544-45. 36. Hewitt, 154 P.3d at 410. 37. Id. 38. Id. 39. Id. 40. Id. at 415-16 (considering Restatement (Second) of Torts § 674, Cmt. (1977) and other authorities). 41. Id. at 416. 42. Luttgen v. Fischer, 107 P.3d 1152 (Colo. App. 2005). 43. Id. at 1156. 44. Id. 45. Andersen v. Lindenbaum, 131 P.3d 1154 (Colo. App. 2005). 46. Andersen v. Lindenbaum, 160 P.3d 237, 238 (Colo. 2007).

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Notes

47. Id. at 239. 48. Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); see Roberts v. Am. Family Mut. Ins. Co., 144 P.3d 546, 548 (Colo. 2006)). 49. Id. at 240. 50. Id. 51. Id. (citing Cleveland v. Policy Mgmt. Sys. Corp., 526 U.S. 795 (1999); City of St. Joseph v. Sw. Bell Tel., 439 F.3d 468, 476 (8th Cir. 2006); Baer v. Chase, 392 F.3d 609, 624 (3d Cir. 2004); Scamihorn v. Gen. Truck Drivers, 282 F.3d 1078, 1086 (9th Cir. 2002); Doe ex rel. Doe v. Dallas Indep. Sch. Dist., 220 F.3d 380, 386 (5th Cir. 2000); Palazzo & Delmage v. Corio, 232 F.3d 38, 43 (2d Cir. 2000); Colantuoni v. Alfred Calcagni & Sons, Inc., 44 F.3d 1, 4 (1st Cir. 1994); Darnell v. Target Stores, 16 F.3d 174, 177 (7th Cir. 1993); Franks v. Nimmo, 796 F.2d 1230, 1237 (10th Cir. 1986); Tippens v. Celotex Corp., 805 F.2d 949, 954-55 (11th Cir. 1986); Reid v. Sears Roebuck & Co., 790 F.2d 453, 460 (6th Cir. 1986); Barwick v. Celotex Corp., 736 F.2d 946, 960 (4th Cir. 1984)). 52. These authors are aware of a number of unpublished opinions affecting professional liability claims against lawyers in Colorado. However, because of the rules governing citation of unpublished opinions and the agreements required to obtain such unpublished opinions, these authors do not address unpublished opinions for which they were not counsel. 53. RMB Services, Inc. v. Truhlar, 151 P.3d 673, 676 (Colo. App. 2006). 54. Id. at 675. 55. Id. at 676. 56. Id. at 676-77. 57. Id. at 677-78. 58. Id. at 677. 59. Bumbal v. Smith, 165 P.3d 844 (Colo. App. 2007). 60. Id. at 845. 61. Id. 62. Id. at 847. 63. Id. (cited authorities omitted). 64. Id. 65. In re ms55, Inc. v. Gibson Dunn & Crutcher, LLP, __ F. Supp.2d __, Case No. 06-CV-01233EWN, 2007 U.S. Dist. LEXIS 65791 (D. Colo. Sept. 6, 2007), reversing In re ms55, Inc., 338 B.R. 883, 892-93 (Bankr. D. Colo. 2006). 66. In re ms55, Inc., 338 B.R. 883 at 894-96. 67. Id. at 895 (citing In re Porter McLeod, Inc., 231 B.R. 786 (D. Colo. 1999), and Anstine v. Alexander, 128 P.3d 249 (Colo. App. 2005)). 68. In re ms55, Inc., 2007 WL 2669150, at *5. 69. Id. 70. Id. 71. Id. 72. Id. 73. Id. (reviewing Anstine, 152 P.3d at 501-03). 74. Id. 75. Bristol Co. Ltd. Partnership v. Bosch Rexroth Inc., __ F. Supp.2d __, Case No. 06-CV-00011REB, 2006 U.S. Dist. LEXIS 21858 (D. Colo. April 20, 2006). 76. Id. 77. Id. 78. Id. 79. Id. 80. Id. (quoting Nova Health Systems v. Gandy, 416 F.3d 1149, 1155 (10th Cir. 2005)). 81. Id. (emphasis in original). 82. Id.

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Notes

Lawyers’ Professional Liability in Colorado

83. Green Grand Jury Proceedings, 492 F.3d 976, 980-81 (8th Cir. 2007). 84. Id. 85. Id. 86. Id. 87. Id. 88. Id. 89. Id. 90. Id. 91. AmBase Corp. v. Davis Polk & Wardwell, 8 N.Y.3d 428, 834 N.Y.S.2d 705 (N.Y. 2007). 92. Rantz v. Kaufman, 109 P.3d 132 (Colo. 2005); see also Smith v. Truman, 115 P.3d 1279 (Colo. 2005). 93. Burnett v. South, __ S.W.3d __, Case No. M2004-03017-COA-R3-CV, 2007 Tenn. App. LEXIS 277 (Tenn. Ct. App. April 26, 2007). 94. Id. Colorado adopted this same “two track” rule in Morrison v. Goff, 91 P.3d 1050 (Colo. 2004). 95. Estate of Albanese v. Lolio, 393 N.J. Super. 355, 923 A.2d 325 (2007). 96. Id. 97. Id. 98. Id. 99. Id. 100. Id. (citations omitted). 101. Seltzer v. Morton, 154 P.3d 561 (Mt. Sup. Ct. 2007). 102. Charney v. Sullivan & Cromwell, 15 Misc.3d 1128(A), 841 N.Y.S.2d 217 (N.Y. Sup. April 30, 2007) (unpublished). 103. Iowa Sup. Ct. Attorney Disc. Bd. v. Gottschalk, 729 N.W. 2d 812 (Iowa Sup. Ct. 2007). 104. Nevada Yellow Cab Corp. v. Eight Judicial Dist.,152 P.3d 737 (Nev. S. Ct. 2007). 105. See, e.g., Essex Insurance Co. v. Tyler, 309 F. Supp.2d 1270 (D. Colo. 2004). 106. Nevada Yellow Cab Corp., 152 P.3d 737. 107. Kahala Royal Corp. v. Goodsill Anderson Quinn & Stifel, 151 P.3d 732 (Haw. Jan. 11, 2007). 108. Reynolds v. Schrock, 142 P.2d 1062 (Or. 2006). 109. Kahala Royal Corp., 151 P.3d 732.

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Section 2

C O L O R A D O B A R A S S O C I AT I O N CLE CLE in Colorado, Inc. is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association


SECTION 2 Insurance Coverage: What’s in your policy? Part 1 – The Policy Basics

Presented by Brad Levin, Esq. Roberts Levin & Rosenberg PC Denver, CO Michael J. Rosenberg, Esq. Roberts Levin & Rosenberg PC Denver, CO


Notes: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________


Chapter 12

PROFESSIONAL LIABILITY INSURANCE Bradley A. Levin, Esq.* Roberts ❘ Levin ❘ Rosenberg Professional Corporation Michael J. Rosenberg, Esq.* Roberts ❘ Levin ❘ Rosenberg Professional Corporation SYNOPSIS § 12.1

TO INSURE OR NOT TO INSURE § 12.1.1—C.R.C.P. 265

§ 12.2

CHOOSING THE RIGHT INSURANCE COMPANY § 12.2.1—Introduction § 12.2.2—Broker/Agent/Program Administrator § 12.2.3—Insurer’s Rating § 12.2.4—Insurer’s Authority To Conduct Business § 12.2.5—Insurer’s Experience In The Area § 12.2.6—Endorsement By Professional Associations § 12.2.7—Risk Management § 12.2.8—Insurer’s Claims Service § 12.2.9—Claims Against The Insurer

§ 12.3

CHOOSING THE RIGHT COVERAGE § 12.3.1—Introduction § 12.3.2—The Insurance Application § 12.3.3—Liability Limits § 12.3.4—The Deductible § 12.3.5—Policy Coverage Provisions: Professional Legal Services § 12.3.6—Policy Coverage Provisions: The Policy’s Insureds § 12.3.7—Policy Coverage Provisions: Claims-Made Coverage § 12.3.8—Policy Coverage Provisions: Coverage For Prior Acts — Discovery Provisions And Retroactive Dates § 12.3.9—Policy Coverage Provisions: Extended Reporting Periods § 12.3.10—Policy Coverage Provisions: Territorial Limitations On Coverage § 12.3.11—Policy Coverage Provisions: Coverage For “Loss” Or For “Damages” § 12.3.12—The Exclusions

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12-1


§ 12.1

Lawyers’ Professional Liability in Colorado

§ 12.3.13—The Policy Conditions § 12.3.14—The Policy Endorsements § 12.3.15—Other Types Of Coverage § 12.3.16—Coverage For Attorney Disciplinary Proceedings EXHIBIT 12A

SAMPLE LAWYERS PROFESSIONAL LIABILITY POLICY

EXHIBIT 12B

SAMPLE CNA APPLICATION — ATTORNEYS NEW TO THE FIRM

EXHIBIT 12C

SAMPLE CNA APPLICATION — ADDITIONAL LOCATIONS/ PRACTICE STATES SUPPLEMENT

EXHIBIT 12D

SAMPLE FORM — PLAINTIFF PRACTICE/CLASS ACTION SUPPLEMENT

§ 12.1 • TO INSURE OR NOT TO INSURE In Colorado, as is the case in many other states, lawyers have no legal or ethical obligation to purchase professional liability insurance. Through its rule-making authority, however, the Colorado Supreme Court has created an incentive for lawyers practicing in professional organizations to obtain liability insurance. § 12.1.1—C.R.C.P. 265 Rule 265 of the Colorado Rules of Civil Procedure (C.R.C.P.) permits Colorado lawyers to practice as professional corporations, limited liability companies, and other enumerated types of business organizations (“professional companies”) allowed by Colorado law, provided that the professional company is organized and operated in compliance with the rule.1 In determining whether to purchase insurance, which policy to purchase, and the amount of coverage that is needed, lawyers who practice as professional companies will need to consider the provisions of C.R.C.P. 265. C.R.C.P. 265 provides that the shareholders, partners, or members of the professional company must agree that they will be jointly and severally liable, to the extent provided by the rule, for damages caused by any professional act, error, or omission by any shareholder, officer, director, partner, member, manager, or employee of the company, and that this agreement must be set forth in the company’s governing document.2 The rule then limits this liability,3 stating that the governing document may provide that a member who has not directly and actively participated in the act, error, or omission for which liability is claimed shall not be liable if, at the time of the act, error, or omission, the company has professional liability insurance that meets certain minimum standards, which are briefly summarized below: 1) The professional company must be an insured under the policy, and coverage for the company must extend to liability imposed on it arising out of the practice of law by lawyers employed by the company in their capacities as lawyers,4 and to liability imposed on the company by law for damages arising out of professional acts, errors, and omissions of all non-professional employees.5

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Professional Liability Insurance

§ 12.1.1

2) Policy limits must be at least $100,000 per claim, multiplied by the number of lawyers employed by the company. The policy’s aggregate limit cannot be less than $300,000, multiplied by the number of lawyers employed. However, the company need not carry limits in excess of $500,000 per claim/$2 million aggregate.6 3) “The policy may contain reasonable provisions with respect to policy periods, territory, claims, conditions, and other matters.”7 Under C.R.C.P. 265, a complying policy may provide for a deductible or self-insured retention,8 and may also provide for the payment of defense costs or other costs out of the stated policy limits.9 The rule further states that the liability assumed by the members of the professional company will include the amount of any such deductible or retained amount, as well as the amount by which payment of defense costs reduces the insurance remaining for payment of claims below the minimum amount of insurance required by the rule.10 Therefore, members of the professional company will have personal liability for the amount of the policy’s deductible and/or self-insured retention and for defense costs if the defense costs incurred do not leave sufficient limits remaining to pay the amount of a judgment or settlement after such costs are paid. C.R.C.P. 265 also addresses the situation where prior claims under the policy may have exhausted the policy limits. The rule states that an act, error, or omission will be deemed to be covered under the policy if the policy includes such act, error, or omission as a covered activity, regardless of whether claims previously made have exhausted the aggregate limit or whether the individual claimed amount or ultimate liability exceeds either the policy’s per claim or aggregate limit.11 Thus, the protection afforded to an innocent lawyer is not dependent on the injured party’s ability to recover from his or her firm’s insurance policy. Curiously, C.R.C.P. 265, on its face, only requires that a complying policy be in effect at the time of the professional act, error, or omission. There is no requirement that the policy, in fact, cover the loss resulting from the professional act, error, or omission. Because virtually all lawyers professional liability policies today are written on a claims-made basis,12 it is entirely possible that a firm could have a complying policy in effect at the time of the alleged wrongful act but, if coverage is allowed to lapse, would have no policy in effect to cover a claim arising out of that wrongful act. Indeed, in construing a prior version of C.R.C.P. 265, the Colorado Court of Appeals declined to read into the rule a requirement that insurance coverage be available when a claim is made: Further, there is no language in C.R.C.P. 265 to indicate that a professional corporation is in violation of that rule when its insurance policy, properly maintained at the time of the alleged commission of the negligent act of a partnership, is not effective at the time a claim based exclusively on the corporation’s partnership interest is made. And, we decline to read such a requirement into the rule.13 C.R.C.P. 265 is lengthy and complex. The discussion set forth above is intended only as a brief summary of some of its provisions and is not a substitute for a reading of the rule in its entirety. The rule should be carefully reviewed to determine the insurance that must be purchased if a professional company wishes to take advantage of the rule’s provisions regarding limited liability.

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§ 12.2

Lawyers’ Professional Liability in Colorado

§ 12.2 • CHOOSING THE RIGHT INSURANCE COMPANY § 12.2.1—Introduction This section is designed to provide information on choosing the right insurance company when purchasing lawyers professional liability coverage. The focus is on the quality features of an insurance company. These can be difficult to measure if a practitioner is unfamiliar with the industry. There are eight topics discussed: 1) The Broker, Agent, or Program Administrator; 2) Insurer’s Rating; 3) Insurer’s Authority to Conduct Business; 4) Insurer’s Experience in the Area; 5) Endorsement by Professional Associations; 6) Insurer’s Risk Management Services; 7) Insurer’s Claims Service; and 8) Claims Against Insurer. Ultimately, the responsibility for the choice is the lawyer’s. However, this section is intended to help demystify the selection process and assist the lawyer in making an informed decision. § 12.2.2—Broker/Agent/Program Administrator Insurance companies distribute their policies and products through various distribution systems. The frontline organizations with whom the lawyer typically interacts are brokers, agents, and program administrators. At a minimum, an agent, a broker, or a program administrator has a duty to faithfully carry out the instructions of his or her client. To meet this standard, the agent, broker, or program administrator must diligently procure the specific type of coverage sought by the policyholder. Depending on the circumstances, the standard of care may be elevated to the more stringent level of a “fiduciary” duty. The insured’s relationship with the insurance distributor has become increasingly important due to the greater complexity of the insurance industry, the specialized knowledge required to understand the intricacies of constantly evolving legal malpractice exposures, the myriad policy coverages, and the need for proper delivery of service during the policy period. Although the distinction among an agent, a broker, and a program administrator may appear subtle, each person has varying responsibilities, expertise, specialization, and relationships with respect to the insurance company. An agent’s role is to represent one insurance company. As part of that role, the agent may have binding authority, and generally owes his or her duties to the insurance company. A broker, on the other hand, is usually considered a middleman who solicits various insurance companies to obtain coverage on behalf of the insured, and may be held to be a representative of the policyholder. A program administrator has duties to both the policyholder and the insurance company. The program administrator typically has underwriting authority, provides binding and policy issuance services, and utilizes internal resources that are specialized and dedicated to an industry segment. In the event of a coverage dispute, a complex claim situation

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Professional Liability Insurance

§ 12.2.2

that requires specialized coverage, or circumstances requiring legal malpractice prevention services, a program administrator often has great influence with the insurance company. In evaluating the frontline distribution’s role and responsibilities, it is important to note that, pursuant to C.R.S. § 10-2-103, anyone who “solicits, negotiates, effects, procures, delivers, renews, continues, or binds” insurance policies is considered an “insurance producer.” C.R.S. § 10-2-401 provides that “every insurance producer who solicits or negotiates an application for insurance of any kind on behalf of an insurer shall be regarded as representing the insurer and not the insured . . . in any controversy between the insurer and such insured . . . .” The following questions are designed to assist the Colorado lawyer in determining the capabilities of the agent, broker, or program administrator: • Does the broker or program administrator work directly with the insurance company, or is the coverage placement carried out through multiple insurance intermediaries? • Does he or she have authority to quote, bind, and issue coverage? • How long has the agent, broker, or program administrator specialized in lawyers professional liability coverage? • Does the agent, broker, or program administrator have endorsement authority to provide customized coverage to meet the attorneys’ current or future coverage needs or to provide mid-term policy assistance with service issues (e.g., new hire lawyers, departures of lawyers, and firm dissolution)? • Does the agent, broker, or program administrator carry Errors and Omission Insurance coverage? • Does the agent, broker, or program administrator have legal malpractice prevention resources and is he or she knowledgeable about current legal trends and any new areas of exposure? • Is the agent, broker, or program administrator endorsed by the bar association or other professional association? • Does the insurer have significant presence in the state or nationwide, or have other state bar endorsements? • How long has the insurer been in the particular market? The purpose of these questions is clear: to ensure quality. In this context, quality can be defined as: 1) Stability. The person specializes in this business and has been there year after year, even decade after decade, providing a reliable source of coverage. 2) Market knowledge. The person knows the markets, knows the people in the business and the various insurance companies, and is best positioned to select markets that best suit the lawyers’ needs. 3) Product knowledge. The person can answer the lawyers’ questions in a clear, concise, and professional manner. 4) Service. The person can provide quick, accurate, and professional handling of the lawyers’ account.

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§ 12.2.3

Lawyers’ Professional Liability in Colorado

§ 12.2.3—Insurer’s Rating The insurance company’s rating is a measure of how it can satisfy the “trust” of paying a claim under the insurance policy contract. It is critical that the lawyer know the solvency and security of the insurer in today’s changing environment. The two primary rating agencies that set the standards for acceptable financial stability are A.M. Best and Standard & Poor’s. A.M. Best measures the claims-paying ability of all insurance companies that meet specific requirements. Standard & Poor’s evaluates the insurance company’s overall financial status. Both assign a rating following extensive quantitative and qualitative evaluations of a company’s financial condition and operating performance. The quantitative evaluation measures a company’s performance in five critical areas: • Profitability; • Financial leverage; • Liquidity; • Reserve adequacy; and • Reinsurance. The qualitative evaluation of a company involves: • Its spread of risk; • Soundness and appropriateness of reinsurance; • Quality and diversification of assets; • Adequacy of policy reserves; • Adequacy of surplus; • Capital structure; and • Management experience. These rating evaluations represent an independent opinion of a company’s financial strength and ability to meet obligations to policyholders. The ratings are not a warranty of an insurer’s current or future ability to meet obligations; however, they provide some guidance. A.M. Best assigns a financial class code that denotes the financial size of the insurance company. Its ratings are: • A++ and A+ (Superior); • A and A- (Excellent); • B++ and B+ (Very Good); • B and B- (Fair); • C++ and C+ (Marginal); • C and C- (Weak); • D (Poor); • E (Under Regulatory Supervision); • F (In Liquidation); and • S (Rating Suspended). It is recommended that a company have at a minimum an A.M. Best Rating of an A-.

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Professional Liability Insurance

§ 12.2.4

Standard & Poor’s rates the overall insurance company’s financial health and assigns the following letter ratings: • AAA (Extremely Strong); • AA (Very Strong); • BBB (Good); • BB and B (Vulnerable); • CCC (Marginal); • CC (Weak); and • C (Very Weak). The minimum recommended S&P rating is AA (Very Strong). With the “long tail” claim nature of legal malpractice, it may take up to five to seven years to settle a claim; therefore, the financial health of the insurance company is very important. The Standard & Poor’s and A.M. Best ratings should be reviewed together to ascertain the financial viability of the insurance company. The agent, broker, or program administrator should have the A.M. Best and Standard & Poor’s rating profile of the insurance company for disclosure to the insured. In addition, via Internet access, a specific insurance company’s ratings may be searched through its website, or through A.M. Best or Standard & Poor’s Internet services for individual company ratings. § 12.2.4—Insurer’s Authority To Conduct Business Insurers are licensed by the State of Colorado Division of Insurance. The Division of Insurance also acts as a regulatory body for oversight of the insurance companies. In order for an insurance company to conduct business within Colorado, it must be licensed and classified as either admitted or non-admitted. An admitted insurer’s policies have various positive attributes, and they are backed by the state guaranty fund. In addition, policies issued by admitted insurers must have division approval prior to release on the marketplace. Finally, an admitted insurer is required to file financial statements with the division. These statements must meet specific requirements as to the accounting standards and the statement of statutory reserves and admitted assets. These annual financial filing regulations assist the division with the regulation and oversight of an admitted insurance company’s conduct. A non-admitted carrier’s policy is not backed by the guaranty fund, and is subject to a much lower level of regulation. The division requires that an agent, broker, or program administrator file an affidavit with it when placing coverage on a non-admitted policy, and verification that the coverage was denied by three admitted carriers. This is sometimes referred to as a “surplus line placement.” In addition, with a surplus line policy, state taxes are collected separately from the premiums, and paid to the state by the agent or administrator. When evaluating a surplus line policy, a practitioner should proceed with caution. It is recommended that a lawyer try to first secure coverage through an admitted insurance company, since an admitted carrier’s policy has greater regulation and is backed by the state

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§ 12.2.4

Lawyers’ Professional Liability in Colorado

guaranty fund. Although the division requires various reporting criteria when a non-admitted carrier’s surplus lines policy is placed, the division has far more extensive regulatory oversight of admitted insurers. To determine whether a policy comes from an admitted or non-admitted carrier, the lawyer may call the Division of Insurance for information. The agent, broker, or program administrator should disclose whether the policy is admitted or non-admitted, and if there are any additional regulatory issues. The policy itself should also state whether it is from an admitted or nonadmitted (surplus lines) carrier. § 12.2.5—Insurer’s Experience In The Area One of the most important factors in choosing the right insurance company is its experience with lawyers professional liability coverage both nationally and in Colorado. Lawyers’ professional liability insurance is a very specialized niche in the insurance industry. To properly support a lawyers’ professional liability operation, an insurance company should make significant investments in underwriting personnel, specialized claims personnel, computer systems, actuarial rating reports, and product and policy creation. In addition, an insurance company must have an understanding of the legal industry and the unique exposures faced by policyholders. From these variables, a determination can be made of an insurance company’s commitment to the lawyers professional liability marketplace, and ultimately how the insurance company will respond and service a claim on the insured’s behalf. Within the insurance industry, various underwriting cycles have different impacts on the industry’s results and specific insurance companies. The lawyers’ professional liability insurance marketplace has historically attracted new insurance company entrants due to the potential cash flow appeal of the underwriting nature of this coverage. First, an insurance company takes in the premium for the policy period, and since the time period for a claim to ripen is normally three years or longer, the insurance company can “ride” the marketplace to build up insurance premiums on its book before paying out claims dollars. However, at a future point, the actual paid claims dollars could potentially exceed the insurer’s incoming premiums if the insurer was employing “cash flow” strategy to capture market share. The situation then creates financial loss for the insurer and, historically, as a result it withdraws from the marketplace by non-renewing its unprofitable book of business. If a lawyer’s policy is non-renewed, it can create difficulties in securing replacement coverage and can leave an undesired blemish on a policyholder’s past insurance history. Therefore, it is recommended that a lawyer confirm an insurance company’s experience with lawyers professional liability underwriting in Colorado and its operating history. § 12.2.6—Endorsement By Professional Associations Many professional associations endorse insurance products. A practitioner should check with the associations to which he or she belongs and review any endorsed program. The quality and nature of association endorsements vary widely. The most stringent and controlled level is an exclusive endorsement. Under this arrangement, the association may monitor and review the insurance product via a committee. The committee may have oversight responsibility for the insurance product. In addition, the association may have a significant level of input into, and even

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Professional Liability Insurance

§ 12.2.7

control over, the insurance product and the policy’s coverages, and will often work closely with the “distributor” (agent, broker, or program administrator) of the program. However, the association has no responsibility for the decisions made by the insurer with respect to coverage issues. Many times, the professional association and the insurer jointly develop various services to support the insurance program, such as educational seminars, loss prevention materials, and other practice advice that relates to members’ concerns. An endorsed program contains some aspects of an exclusive endorsement arrangement. However, the association typically has less input and control over the quality of the program’s services, and a lower level of involvement in the endorsed program’s direction and services. The next level of affiliation is an approved discount provider. Under this arrangement, the association has reviewed the product and its services and makes an offering to its members with a discount. This arrangement has the least amount of interaction between the association and the provider. The services meet the minimum standards that are normally predicated upon offering the member a discount. These association endorsements generally offer little more than the association’s “Good Housekeeping seal.” The extensive relationship and interaction between the association and an endorsed insurance program is not present between an approved discount provider and the association that selects it. § 12.2.7—Risk Management An increasingly important service of the insurer is to help the policyholder in a proactive manner to prevent claims, understand the emerging exposures, and mitigate a situation before it becomes a full-blown claim. Some insurance companies include loss prevention and risk management services as part of their programs to the policyholder. Historically, law firms with five or fewer lawyers (especially sole practitioners) utilize these risk management services since they possess limited resources. As part of an evaluation of insurers, lawyers should consider the risk management features and programs that the insurer offers. Risk management features include newsletters, bulletins, periodic seminars, and other educational materials. The main purpose of these features is to provide the lawyer with information regarding the current claims environment and how malpractice risks can be minimized. Some insurers provide these services on a national basis with a one-size-fits-all approach. Others are very specific to the local jurisdictions. In addition, some insurance companies will provide “customized” delivery of risk management services on a specific request basis. Many of the seminars also qualify for continuing legal education credits. It is recommended that a practitioner inquire into the risk management services provided by the insurer, and also determine whether the services offered are directed to a particular area of practice. In addition, many insurers offer risk management services termed “loss repair services.” Loss repair services are aimed at resolving incidents before they ripen into actual claims. Typically, the insurer provides consultation through a private hotline or through other methods of assistance. The insurer may bear the expense of the service. Normally, the use of loss repair serv-

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§ 12.2.7

Lawyers’ Professional Liability in Colorado

ices is protected under a client-lawyer relationship to encourage the policyholders to utilize these valuable services before an incident becomes a claim. Since the frequency of legal malpractice claims is increasing, and damage payouts are escalating, the insurer’s risk management services are a critical service to assist lawyers and limit losses. Therefore, a practitioner should inquire into the scope of an insurer’s risk management services and judge them based on his or her practice needs. § 12.2.8—Insurer’s Claims Service When choosing an insurance company, one of the most important factors to consider is the insurer’s claims service (i.e., the assistance that an insurance company will provide in the event of a claim). Lawyers professional liability is a specialized coverage and requires a more sophisticated claims handling approach than is needed in the context of personal lines or business general liability claims. Below is an outline of questions a practitioner should ask to ascertain the insurer’s claims services: • Does the insurer have a dedicated claims staff for lawyers professional liability? • Are the claims specialists lawyers? • Does the insurer have a good reputation for claims handling? • Are the adjusters experienced with Colorado professional liability laws? • Does the claims staff provide no-cost pre-claims assistance to mitigate situations? • Who is on the list of approved defense counsel, and how does the claims staff monitor and interact with them? The agent, broker, or program administrator should be able to assist with a background history of the insurer’s claims resources to assist the practitioner with the evaluation of the insurer’s claims service. It may also be useful to speak with other lawyers who have had experience with the insurer’s claims-handling philosophy and services. § 12.2.9—Claims Against The Insurer Analyzing an insurer’s claims history is another valuable means of determining a suitable insurance company. Claims filed against an insurer include both bad faith claims and regulatory disputes. Bad faith claims are discussed in a later chapter. The lawyer seeking coverage should ask the agent/administrator for the insurer’s claims history, research case law, and inquire with the Colorado Division of Insurance. The underlying basis of a bad faith claim is that the insurance company did not properly handle the policyholder’s claim. If a company has a history of bad faith claims, that may be an indicator of how it might respond if the insured tenders a claim. Most bad faith claims are matters of public record. It is prudent to check an insurance company’s historical legal record. The lawyer should also inquire about regulatory complaints filed with the Colorado Division of Insurance. Again, these complaints are typically matters of public record. A practitioner can contact the division in person or can make a request for documents under the Colorado Open Records Act.

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§ 12.3.2

§ 12.3 • CHOOSING THE RIGHT COVERAGE § 12.3.1—Introduction This section is intended to provide basic, general information regarding lawyers’ professional liability insurance — information that should be helpful in evaluating the various policies that are available in today’s market and in deciding on a particular policy. The policy provisions discussed in this section are typical of those found in lawyers professional liability policies. It is important to be aware, however, that although the basic provisions contained in most lawyers professional liability policies are similar, their wording may vary from insurer to insurer. For this reason, and because the rights and obligations of the parties to an insurance policy are determined in the first instance by the policy language,14 the practitioner should consult the particular policy provisions to determine the actual coverage afforded by the policy. The typical lawyers professional liability policy will consist of four main parts: • The Declarations Page (which contains specific information identifying the named insured, the insurer, the policy limits, the policy period, and a list of all forms and endorsements that comprise the policy); • The Insuring Agreements (which broadly define coverage and set forth the risks that are insured against); • The Exclusions (which remove or limit coverage for certain risks initially encompassed by the policy’s Insuring Agreements); and • The Conditions (which set forth requirements that must be satisfied before the insurer will cover a given loss). The policy may also contain Endorsements that modify provisions set forth in other parts of the policy. In addition, the application may be incorporated into the policy. All parts of the policy must be read and construed together to determine the coverage provided.15 A sample lawyers’ professional liability insurance policy, issued by Continental Casualty Company for Colorado attorneys, is included as Exhibit 12A to this Chapter to illustrate typical policy provisions.16 § 12.3.2—The Insurance Application To obtain the policy, the firm will be required to complete an application form. The application will most likely ask very detailed questions about the firm, the firm’s personnel, the nature of its practice, and its claims history. The application may also inquire into the firm’s other business interests and activities. The most significant questions in the application will concern the firm’s knowledge of any acts or circumstances that could reasonably be expected to give rise to a claim. If the firm has knowledge of any such acts or circumstances, through its partners, members, or shareholders, and fails to report the same in the application, a subsequent claim arising

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§ 12.3.2

Lawyers’ Professional Liability in Colorado

out of those acts or circumstances may not be covered under the insurance policy. This is discussed in greater detail in § 12.3.8, below. Courts are divided as to whether a subjective or objective standard applies in determining the existence of circumstances that could reasonably be expected to result in a claim.17 Under a subjective standard, the question is whether the insured should have disclosed the incident given his or her subjective knowledge of the facts and law. Under an objective standard, the question is simply whether a reasonably prudent lawyer under similar circumstances would have disclosed the incident. The fact that a potential claim may be without merit does not necessarily render it unforeseeable. The firm may, therefore, have an obligation to disclose a potential claim in the application even if it believes the potential claim to be entirely without merit.18 In addition, a failure to report potential incidents may result in a later claim for rescission by the insurance company should the failure to report rise to the level of a misrepresentation,19 even if there is no intent to deceive.20 C.R.S. § 10-1-128(6)(a) provides for the inclusion of language substantially the same as the following on all printed insurance policy applications: It is unlawful to knowingly provide false, incomplete, or misleading facts or information to an insurance company for the purpose of defrauding or attempting to defraud the company. Penalties may include imprisonment, fines, denial of insurance, and civil damages. Any insurance company or agent of an insurance company who knowingly provides false, incomplete, or misleading facts or information to a policyholder or claimant for the purpose of defrauding or attempting to defraud the policyholder or claimant with regard to a settlement or award payable from insurance proceeds shall be reported to the Colorado division of insurance within the department of regulatory agencies. In addition, because most policies now require, as a purported condition precedent to coverage, that no partner or shareholder of the firm have reason to expect a potential claim prior to the inception of the policy under which insurance is sought, the failure to report a potential claim may result in the insurer disclaiming coverage under the policy regardless of whether the insurer can establish the elements necessary to rescind the policy. This result may appear unfair where the lawyer is not aware of his or her negligence and, consequently, has no reason to expect a claim at the time the application is submitted. For instance, a lawyer may unknowingly miss a statute of limitations and not realize the mistake until after he or she applies for and receives a new insurance policy. If a claim is subsequently brought, the insurer could argue that the lawyer “should have known” of the missed statute of limitations at the time it was missed and therefore should have reported the potential claim on the application. In such a circumstance, it would seem that the insurer should cover the claim, as the insured had no reason to expect the claim. Nevertheless, if an objective standard is utilized in interpreting the policy — i.e., should a reasonably prudent insured have realized that he or she had missed the statute of limitations — it is possible that the insurer could attempt to avoid coverage for the claim on the basis that the insured should have

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§ 12.3.4

realized its mistake prior to the inception of the policy. For this reason as well, the importance of thoroughly investigating the firm’s members’ knowledge of circumstances that lead to a claim, and reporting potential claims, cannot be overstated. § 12.3.3—Liability Limits The policy limits will be stated on the Declarations page and will typically be described as “aggregate” and/or “per claim.” The aggregate limit is the maximum that the insurer will pay for all claims under the policy; the per-claim limit is the maximum that the insurer will pay for any one claim. The policy will most likely provide that two or more claims that arise out of a single act, error, or omission or a series of related acts, errors, or omissions will be treated as a single claim.21 Therefore, if multiple claims are asserted against an insured, those claims may be subject to a single “per-claim” limit if they involve related conduct.22 Some policies provide that defense costs are included within the policy limits.23 Such policies are often referred to as “Pac-man” or “wasting” policies because their limits are reduced as defense costs are incurred. As money is spent in defending the claim, the amount of money available to pay a judgment or settlement is reduced. For a slightly larger premium, it is usually possible to purchase a policy that provides coverage for defense costs in addition to the stated policy limits. In determining what limits of coverage a firm should purchase, a number of factors should be considered, such as the firm’s size, its assets, the nature of its practice, and the risks and financial exposure of the firm. The firm will also want to be sure that the limits are high enough to protect its members’ personal assets. Premium cost is another factor to be considered. Consideration may also need to be given to the requirements of C.R.C.P. 265, discussed in § 12.1 of this Chapter.24 An experienced broker may be of considerable help in evaluating the firm’s needs and determining sufficient limits to cover the firm’s potential exposure. § 12.3.4—The Deductible The term “deductible” refers to the portion of an insured loss that the insured must pay before the insurer’s obligation to pay is triggered.25 Policy deductibles take many forms, and it is essential that the language of the particular policy be examined to determine the exact contents of its deductible provisions. In a professional liability policy, the deductible will typically apply on a per-claim basis, although there are policies in which the deductible will apply on an aggregate basis. Depending upon the policy language, the deductible may apply to defense costs as well as to loss (i.e., a judgment or settlement) or may be applicable only to loss. In the latter situation, the insured will have no liability for a deductible if the claim does not result in a judgment or settlement. The deductible amount will typically be stated on the policy’s Declarations page. A higher deductible may be required for a firm that practices in areas considered by the insurer to present greater exposure, such as securities offerings, environmental, intellectual property, and plaintiff’s personal injury. It may be possible to negotiate with the insurer for a higher deductible in exchange for lower premiums.

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§ 12.3.4

Lawyers’ Professional Liability in Colorado

As an alternative to a deductible, the policy may provide that it is excess to a self-insured retention. A self-insured retention is similar to a deductible, but differs in that coverage is in excess of the retained amount, even if the policy provides for a duty to defend. The insurer’s defense obligations will not be triggered until the policy’s retained amount has been exhausted.26 Self-insured retentions are generally for very substantial amounts and, therefore, may not be a practical alternative for sole practitioners or small firms. The amount of the self-insured retention will typically be stated on the Declarations page. If the policy is being purchased to comply with the insurance requirements of C.R.C.P. 265, consideration will need to be given to that rule’s provisions regarding deductibles and retained amounts, discussed in § 12.1 of this Chapter. § 12.3.5—Policy Coverage Provisions: Professional Legal Services Coverage will be limited to claims that involve professional legal services. This limitation is most often seen in the policy’s Insuring Agreement provisions, which may reference the “rendering or failing to render professional services for others in the Insured’s capacity as a lawyer . . . .”27 Alternatively, or in addition, this limitation on coverage may be seen in the policy’s definitions, which may define a covered “claim” to mean “a demand received by the Insured for money or services arising out of an act or omission, including personal injury, in the rendering of or failing to render legal services.”28 Based on such policy language, the policy may not provide coverage for claims involving matters such as business and investment advice,29 the lawyer’s business expenses,30 or alleged sexual misconduct.31 Coverage may also be precluded where a lawyer acts in a personal rather than in a professional capacity, even though legal services are involved.32 Although the policy will provide that coverage is limited to professional legal services, it may expressly provide coverage for claims resulting from a lawyer’s work in other capacities, such as a notary, arbitrator, executor, guardian, or trustee.33 A lawyer who works in such other capacities should confirm with the insurer and the broker or agent that coverage will be available in the event he or she is sued in one of these capacities. § 12.3.6—Policy Coverage Provisions: The Policy’s Insureds The policy will contain specific provisions setting forth the persons and entities qualifying as “insureds” under the policy.34 The named insured will typically be identified as such in the policy declarations. In the case of a law firm, the firm itself is typically given “named insured” status. By endorsement, the individual lawyers in the firm are usually named as “additional insureds.”35 Typically, the policy will designate as an insured any lawyer who is a past or present partner, officer, director, shareholder, or employee of the insured firm, but only with respect to work done at the insured firm. The policy’s definition of insured may include retired lawyers and may also include the heirs, executors, administrators, and legal representatives of any deceased, incapacitated, or bankrupt insureds. Under some policies, lawyers who join the firm after the policy’s inception will be covered only if written notice is given to the insurer within a specified period of time (usually 30 or 60 days) after the new lawyer joins the firm.

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Professional Liability Insurance

§ 12.3.7

Contract lawyers can present a significant problem with respect to insurance coverage, as they may not be encompassed by the policy’s definition of “insured.” It may be possible, however, to purchase an endorsement that will provide coverage for lawyers who work for the firm on a contract basis. Alternatively, the lawyer or firm may want to verify that the contract lawyer carries his or her own professional liability insurance. Lawyers who join the firm after having practiced with other firms — i.e., “lateral hires” — will generally be included as insureds under the policy, but not for acts or omissions that occurred prior to joining the insured firm. It may be possible to purchase an endorsement that will provide coverage for such past acts or omissions, if such coverage is desired. If the policy is being purchased to comply with the insurance requirements of C.R.C.P. 265, the policy must “insure the professional company against liability imposed upon it arising out of the practice of law by attorneys employed by the professional company as attorneys” and must also “insure the professional company against liability imposed upon it by law for damages arising out of the professional acts, errors and omissions of all non-professional employees.”36 There is great variation among insurance companies as to the wording of the provisions that designate the policy’s insureds. It is essential that the policy language be carefully reviewed to confirm that all parties for whom coverage is desired are, in fact, designated as insureds.37 § 12.3.7—Policy Coverage Provisions: Claims-Made Coverage “Claims-Made” Versus “Occurrence” Policies Liability insurance policies are generally written on either an “occurrence” or a “claimsmade” basis. Occurrence policies are written to provide coverage for accidents or for injury or damage that occurs during the policy period, regardless of when a claim or suit is brought. Automobile and homeowner’s policies are typically written on an occurrence basis. In contrast, claims-made policies, with certain exceptions, provide coverage for claims that are made against the insured during the policy period, regardless of when the events giving rise to the claim occurred.38 Today, virtually all lawyers professional liability policies are written on a claims-made basis. The purported justification for the use of claims-made policies is that they allow the insurer to assess more realistic premiums and set more accurate reserves because the insurer is not placed in the position of predicting losses for claims that may not be made for a number of years after the lawyer’s wrongful conduct has occurred.39 In addition, with a claims-made policy, the insured is not placed in the position of seeking coverage under a policy that may have been issued years earlier and that may have limits of liability too low to respond to current costs of defense and indemnity. A claims-made policy may require only that the claim be made during the policy period (a “pure” claims-made policy) or, more typically, may require that the claim be made against the insured and reported to the insurer during the policy period (a “claims-made and reported” policy). There is also a “hybrid” policy, which requires that both the wrongful act and the resulting

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§ 12.3.7

Lawyers’ Professional Liability in Colorado

claim occur during the policy period. This type of policy has been found to violate public policy in some jurisdictions, under certain circumstances.40 While claims-made policies have been held to be valid and enforceable under Colorado they are nevertheless regulated to a large extent by C.R.S. § 10-4-419 and 3 C.C.R. 702-5. C.R.S. § 10-4-419 mandates, among other things, that: law,41

(2) A claims-made policy shall not be delivered or issued for delivery to any person in this state unless: (a) The insurer defines the nature of the risks or exposures to be insured on the claims-made policy; (b)(I) The policy contains clear and adequate disclosure and alerts the insured to the fact that the policy is a claims-made policy and explains the unique features distinguishing it from an occurrence policy and relating to renewal, extended reporting periods, and coverage of occurrences with long periods of exposure . . . . *** (d) The policy offers, at the insured’s option, the purchase of an extended reporting period of at least one year for claims not filed during the policy period . . . . *** (II) A policy provision that, in the event of cancellation or nonrenewal for any reason, the policy guarantees the insured the right of a sixty-day period to purchase coverage for an extended reporting period as provided in subparagraph (III) of this paragraph (a); or (III) A policy provision that, at the insured’s option, the insured may purchase coverage for an extended reporting period of at least the length of time of exposure under the applicable statute of limitation. The Meaning of the Term “Claim” Policy definitions of the term “claim” are not uniform, and it is necessary to look to the specific policy language to determine what will constitute a claim under a particular policy. Insurers have defined the term in various ways, including the following: • “[A] demand made upon any insured for loss . . . including, but not limited to, service of suit or institution of arbitration proceedings or administrative proceedings against any insured”;42

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§ 12.3.8

• “[A] demand received by the insured for money or services, including the service of suit or institution of arbitration proceedings against the Insured”;43 and • “[A] demand in which damages are alleged.”44 Not all policies contain a definition of the term. In the absence of a policy definition, the term claim has been construed by the Colorado Supreme Court as “a demand made to enforce a right.”45 Courts have generally held that a mere request for information does not constitute a “claim”46 and have also recognized that what constitutes a claim may be a question of fact.47 Claims “Made” and “Reported” During the Policy Period Most lawyers’ professional liability insurance policies are now written on a “claims made and reported” basis. In order to trigger the insurer’s obligations under the policy, the insured must establish that the claim was both made48 and reported during the insurer’s policy period, or within a specified number of days thereafter.49 The courts have strictly enforced such requirements and have generally refused to excuse a failure to report a claim within the time prescribed in the policy.50 Indeed, under the language of most modern policies, the making and reporting of a claim during the policy period is a condition precedent to coverage. § 12.3.8—Policy Coverage Provisions: Coverage For Prior Acts — Discovery Provisions And Retroactive Dates As noted, a claims-made and reported policy typically covers an insured’s negligent acts, errors, and omissions regardless of when they occur provided the claim is first made and reported during the policy period. However, there are limitations on coverage for prior acts of negligence. For instance, most policies contain “discovery” language that limits prior acts coverage. This language may be found in the insuring agreement itself or, more typically, in the exclusions section of the policy. While the language varies from policy to policy, in general a claim arising from a prior act will only be covered if the insured did not know or have reason to know, as of the policy’s effective date, that he or she had committed a wrongful act, or could not have reasonably foreseen, as of that same time, that a claim might be made.51 At first blush, it may appear that these discovery provisions constitute a significant limitation on the coverage afforded by the policy. However, language contained in most claims-made and reported policies counterbalances the apparent harshness. The typical policy will allow an insured to “bank” a potential claim by providing the insurer with notice of facts that may give rise to a claim.52 For instance, if a lawyer knows that he has filed suit beyond the statute of limitations, he or she can advise the insurer accordingly and “bank” the claim under the policy then in effect; the lawyer does not have to wait, and indeed should not wait, to see whether a claim will actually be made. If the insured “banks” the claim under the policy in existence when the insured realizes that he or she committed the wrongful act, the insurer on the risk at that time will be responsible for covering the claim regardless of when it is actually made. This results because most policies provide that a claim will be deemed made and reported at the time the insured provides the insurer with notice of facts from which it can be reasonably expected that a claim might arise.

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§ 12.3.8

Lawyers’ Professional Liability in Colorado

By contrast, if an insured is aware of facts that might give rise to a claim and fails to report the same to the insurer under the policy then in effect, the insured may be told that a later claim arising out of the wrongful act is not covered under its existing policy despite the fact that the claim is made and reported during that policy term. Instead, the insured will be advised that the claim should have been reported as a potential claim under a prior policy and reported to the insurer on the risk at that time. Should the insured then seek coverage under the expired policy, he or she will likely be informed that no coverage exists because the claim was not reported during the policy term of the expired policy. In essence, the insured will confront a classic “Catch-22” situation. While this may seem unfair, in that the insured finds itself with no coverage despite the fact that it was insured both at the time it committed the wrongful act and at the time the claim was made and reported, the insurer’s position is that it should not be made to cover claims that are certain or highly likely to occur when the potential claim was known to the insured and the insured did not disclose it on the application. Thus, prior to the expiration of a claims-made policy, it is extremely important that an inquiry be made of all the firm’s lawyers as to whether they are aware of any issues that could give rise to a claim. If so, notice of the potential claim should be given to the insurer under the expiring policy and also provided in the application for the new policy. While providing the notice may potentially result in a higher premium for the new policy, the alternative is far less attractive, as the insured may find itself facing a large, uncovered exposure. However, notice was ineffective when, in an apparent effort to indefinitely extend the policy’s coverage, the insured gave notice to the insurer of every matter that the insured law firm had ever worked on.53 Coverage for prior acts is further limited through the insertion of a retroactive date54 in the policy that limits coverage to only those negligent acts that occur after the retroactive date.55 The retroactive date is usually the effective date of the first professional liability policy issued by the insurer to the insured. Assuming the insured has maintained continuing claims-made coverage, some insurers may be willing to offer the insured a retroactive date going back to the date the insured first purchased professional liability coverage, even if it was purchased through a different insurer. § 12.3.9—Policy Coverage Provisions: Extended Reporting Periods The main disadvantage to the claims-made policy, from the insured’s point of view, is that it affords no coverage for claims that are made after the policy expires. Lawyers who leave the practice of law and do not continue to renew their professional liability insurance may, therefore, find themselves without insurance coverage for a claim that is subsequently made against them, even though the alleged wrongful act may have occurred while their insurance was in effect. Most insurers, however, will offer the option of purchasing an extended reporting period (also known as “tail” coverage), which will cover future claims based on wrongful acts occurring prior to the expiration of the policy.56 C.R.S. § 10-4-419(2)(d) provides that Colorado claims-made policies must allow the insured to purchase an extended reporting period of at least one year for claims not made during the policy period, and that the premium for a one-year extended reporting period may generally not exceed 200 percent of the expiring policy premium.57

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§ 12.3.12

§ 12.3.10—Policy Coverage Provisions: Territorial Limitations On Coverage The policy will also contain language that limits the geographic area in which coverage is provided. Typically, the policy will state that coverage is worldwide in scope, if the claim or suit is brought in the United States, its territories and possessions, or Canada.58 Some policies, however, may contain more restrictive territorial limitations. The lawyer whose practice is international in scope and, therefore, presents potential exposure to claims and suits brought outside the United States, should pay particular attention to any territorial restrictions in the policy and should consult with his or her broker to obtain the appropriate coverage. Some insurers will, upon request (and possibly for an additional premium), add an endorsement to the policy that extends its geographic coverage. § 12.3.11—Policy Coverage Provisions: Coverage For “Loss” Or For “Damages” Typically, the policy’s Insuring Agreement provisions will state that the insurer will pay, on the insured’s behalf, all “loss” or “damages” that the insured becomes legally obligated to pay.59 The policy may define the terms “loss” or “damages”60 and may also contain exclusions that preclude coverage for certain types of relief, such as fines, penalties, and punitive damages. Based on such policy language, coverage may not be available for certain types of relief that may be awarded against the insured, including the following: declaratory, injunctive and other types of equitable relief;61 relief that is restitutionary in nature;62 the return of legal fees;63 sanctions imposed under C.R.C.P. 11;64 and punitive or exemplary damages.65 Under Colorado law, insurance coverage for exemplary damages is also prohibited by public policy.66 § 12.3.12—The Exclusions An insurer has the right to decide what it will and will not insure and may include in the policy virtually any exclusion it wishes, provided that the exclusion does not violate public policy.67 Certain exclusions, such as those for fraudulent or criminal acts and for bodily injury and property damage, are standard in virtually all lawyers professional liability policies. Other exclusions, however, such as those for securities-related claims, are not. The policy exclusions should be reviewed in light of the nature of the firm’s practice and the exposures it presents. In the event that coverage is needed for an excluded area of exposure, it may be possible to obtain an endorsement that deletes the exclusion. Alternatively, the firm may need to consult with its broker to obtain a policy that does not contain the unwanted exclusion. Some exclusions that are typically found in professional liability policies are briefly discussed in the subsections below. Dishonest/Fraudulent Acts Virtually all lawyers professional liability policies contain exclusions for dishonest or fraudulent acts.68 The wording of these exclusions will vary from insurer to insurer, and the cases interpreting such exclusions have varied in their holdings. Courts have generally held, however, that acts of mere negligence, incompetence, or error are not within the scope of such exclusions69 and that these exclusions require the element of wrongful intent.70 The dishonest/fraudulent acts exclusion will usually require a judgment or other adjudication establishing that the insured committed acts or omissions of the nature described in the exclusion.71 Therefore, even if the complaint expressly alleges some fraudulent or dishonest conduct or

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§ 12.3.12

Lawyers’ Professional Liability in Colorado

conduct otherwise encompassed by the exclusion, the insurer should not be relieved of its duty to provide a defense. If there is an adjudication establishing the described conduct, the insurer may have no duty to indemnify. Bodily Injury/Property Damage The policy will also most likely exclude coverage for claims for bodily injury and property damage.72 There may be a single exclusion that references both bodily injury and property damage, or there may be a separate exclusion for each type of injury or damage.73 The scope of such exclusions will depend, in part, on the policy’s definitions of the terms “bodily injury” and “property damage” and on case law construing such definitions.74 Coverage for these types of claims can be obtained by purchasing commercial general liability insurance. Securities Because of the potentially high exposure presented by claims involving securities, some insurers will expressly exclude such claims from coverage. Securities exclusions are worded in various ways. For example, the exclusion may reference claims arising out of violations of state or federal securities laws, or may reference specific statutes, such as the Securities Exchange Act of 1934 and the Securities Act of 1933. Some insurers will delete a securities exclusion from the policy, by endorsement, in exchange for payment of a higher premium. However, to the extent that fraud is an element of a securities claim, the dishonest/fraudulent acts exclusion, discussed above, may preclude coverage. Business Pursuits Exclusions The policy will also most likely contain one or more exclusions that eliminate coverage for claims involving a lawyer’s outside business activities. Such exclusions are intended to remove business risks from the coverage of the professional liability policy, and to thereby prevent a lawyer from shifting his or her business losses onto his or her malpractice carrier.75 The wording and scope of these “business pursuits” exclusions vary from insurer to insurer. By way of example, the policy may exclude coverage for claims involving “any insured’s activities as an officer, director, partner, manager or employee of any company, corporation, operation, organization, partnership or association other than the named insured or prior firm,”76 for claims involving “the performance of professional services for a business enterprise not named in this policy . . . which is controlled, managed or operated by an insured or their spouse,”77 or for claims “made by or against or in connection with any business enterprise . . . not named in the Declarations, which is owned by any insured or in which any insured is a partner or employee or which is directly or indirectly controlled, operated or managed by any insured . . . .”78 Courts have varied in their interpretations of such “business pursuits” exclusions, depending upon the policy language and the facts and circumstances involved.79 While the professional liability policy may not cover these risks, other liability policies will cover them and the insured should consult its broker or agent to arrange for such coverage as needed.

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Professional Liability Insurance

§ 12.3.13

Additional Exclusions The policy may also contain exclusions for a number of additional types of claims, including: • Claims asserted by one insured against another; • Claims covered by prior insurance; • Claims for the return or restitution of legal fees; • Claims for libel and slander; • Claims for discrimination; • Claims for fines, penalties, and punitive damages; and • Claims for sexual misconduct. In regard to the latter, pursuant to C.R.S. § 10-4-110.3, a professional liability policy may not attempt to nullify or limit its stated liability with regard to claims not relating to sexual misconduct in cases where: (a) there is an allegation or proof of a claim of sexual misconduct by the insured; and (b) the policy requires aggregation of all damages under the liability limit for sexual misconduct. § 12.3.13—The Policy Conditions The policy will contain provisions that impose certain duties and obligations on the insured or that limit the insurer’s obligations under the policy. These provisions will usually, but not always, be set forth in a separate section of the policy captioned “Conditions.” Some of the more significant conditions typically seen in lawyers professional liability policies are discussed below: Notice In addition to requiring that a claim be reported to the insurer within the policy period, or within a specified number of days thereafter, the policy may also contain language requiring that notice of the claim be given to the insurer “immediately,” “promptly,” or “as soon as practicable.” These terms have been interpreted by the Colorado courts as requiring notice within a reasonable amount of time under the facts and circumstances of each particular case. The purpose of this notice requirement is to allow the insurer adequate opportunity to investigate the claim and prepare a defense. In 2005, the Colorado Supreme Court joined the majority of jurisdictions in holding that an insured’s failure to provide timely notice of claim under a liability policy will only void coverage where the insurer can establish that it was prejudiced by the late notice.80 However, where the insured fails to give notice until after the disposition of the liability case, a rebuttable presumption of prejudice arises.81 Accordingly, a prudent insured should provide immediate notice of a claim or lawsuit to the insurer. Cooperation The policy will also most likely contain a provision requiring the insured’s cooperation in the investigation and defense of a claim or suit.82 Although such policy language has been found

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§ 12.3.13

Lawyers’ Professional Liability in Colorado

to be valid and enforceable by the Colorado Supreme Court,83 recovery under an insurance policy may be forfeited for non-cooperation only if “material and substantial disadvantage to the insurer is proved.”84 Voluntary Payments A provision that states that the insured shall not, except at its own cost, voluntarily make any payment, assume any obligation, incur any expense, or enter into any settlement without the insurer’s consent will also typically be contained in the policy. Such language has been found valid and enforceable by the Colorado courts85 and is generally consistent with the contractual relationship between the insured and insurer under a liability policy under which the insurer has the exclusive right to conduct a defense and settle a claim or suit.86 An insured may, therefore, be precluded from recovery under his or her professional liability policy for any payments made without the insurer’s consent. However, consistent with the Colorado Supreme Court’s 2005 decision, it may be necessary for the insurer to establish prejudice before it can invoke the “voluntary payments” condition.87 “Other Insurance” Clauses The policy will also most likely contain some type of “other insurance” provision that provides for either a reduction or elimination of coverage if there is other insurance that applies to the claim. The policy may provide that: 1) It is excess over any other applicable insurance (an “excess” clause); 2) It will respond to only a portion of the loss (a “pro rata” clause); or 3) The policy will not cover any loss that is also covered by another policy (an “escape” clause).88 If two or more policies of the same type each contains an excess clause and the clauses cannot be reconciled, each insurer will be required to contribute to the loss, on an equal basis, up to the applicable policy limits.89 § 12.3.14—The Policy Endorsements An endorsement — or, as it is sometimes called, a rider — is an attachment to the policy that affects or changes the provisions of some other part of the policy (i.e., the Declarations, the Insuring Agreements, the Exclusions, or the Conditions). By way of example, an endorsement may be added to the policy to increase or decrease the policy limits, define a term used in the policy, or add or delete an exclusion. Endorsements that are part of the policy when issued will typically be listed on the Declarations page. If properly issued, an endorsement becomes part of the policy and must be read together with all other parts of the policy to determine the respective rights and obligations of the parties to the insurance contract.90 Endorsements may substantially alter provisions in the body of the policy and must be considered when evaluating the coverage that will be provided under a particular policy.

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Professional Liability Insurance

§ 12.3.15

In general, an endorsement is the parties’ last expression of intent and, therefore, will prevail if a conflict rises between the provisions contained in the body of the policy and those contained in the endorsement.91 The Colorado Supreme Court, however, declined to apply this rule in a case where the body of the policy and the endorsement were presented to the insured as a single package of insurance coverage, where the endorsement contained no separate signature, and where there were no allegations that the endorsement had been separately negotiated.92 A professional liability policy issued to a Colorado lawyer will most likely include an endorsement that contains certain provisions required by Colorado law. This endorsement may be captioned “Colorado Endorsement” or “Colorado Changes” and will typically replace provisions in the body of the policy pertaining to cancellation and non-renewal. This endorsement will also most likely include provisions required under Colorado law regarding claims-made policies, including provisions regarding the availability of an optional extended reporting period and the insurer’s obligation to furnish information to the insured regarding prior claims and wrongful acts by the insured.93 § 12.3.15—Other Types Of Coverage The operation of a law office carries with it the risk of claims or suits that do not involve professional legal services and that are, therefore, not within the coverage of a lawyer’s professional liability policy. Similar to other businesses, law firms face exposure to claims for bodily injury, property damage, defamation, and other torts. A law firm should obtain a general business liability policy to provide coverage for such claims. A law firm should obtain first-party property insurance, such as fire and theft insurance, that covers loss due to damage to the insured’s property.94 In addition, because professional liability policies will typically not provide coverage for claims arising out of the use of a motor vehicle, a lawyer or firm may need to carry a liability insurance policy with provisions extending coverage to business-related use of the vehicle. Law firms, like all employers, are required to pay workers’ compensation insurance to provide coverage for work-related injuries to the firm’s employees. Coverage for other types of liability arising out of the employer-employee relationship, such as employment discrimination and ADA violations, will most likely not be covered by a lawyer’s professional liability policy, but may be available, as an additional coverage and for an additional premium, in connection with that policy or in connection with the firm’s general business liability policy. Insurance is also available to cover losses caused by employee dishonesty, such as forgery or theft. Many lawyers serve as officers or directors of corporations, either for profit or nonprofit. A lawyer who holds such a position should be sure that he or she is covered under a directors and officers (D&O) policy, either carried by the organization for its directors and officers, or under his or her own policy. Public officials’ liability coverage may be purchased for lawyers who serve as employees or officials of government bodies or agencies. Likewise, lawyers who work as real estate agents or title insurance agents will need to obtain insurance to cover claims that arise out of work done in those capacities. An experienced broker should be able to evaluate the firm’s insurance needs and provide advice as to what additional types of coverage should be purchased.

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§ 12.3.16

Lawyers’ Professional Liability in Colorado

§ 12.3.16—Coverage For Attorney Disciplinary Proceedings Lawyers professional liability policies have traditionally not provided coverage for the costs and expenses associated with attorney disciplinary proceedings. In recent years, however, some insurers have added language to their policies that expressly provides coverage for grievances and disciplinary actions.95 A separate (usually very low) limit will most likely apply to such coverage, and coverage will typically be provided only for grievances that are first made during the policy period and that are reported to the insurer within the time specified in the policy. The coverage is generally for the cost of defense and not for indemnity.

* Updating a chapter originally written in 1999 by Christine Van Coney, Law Office of Gary S. Cohen; Christopher Buckman, Sedgwick of Colorado.

NOTES 1. United States v. Empey, 406 F.2d 157, 158 (10th Cir. 1969); Gutrich v. LaPlante, 942 P.2d 1266, 1269 (Colo. App. 1996), aff’d sub nom Gutrich v. Cogswell & Wehrle, 961 P.2d 1115 (Colo. 1998). 2. C.R.C.P. 265 I.A.4. 3. Id. 4. C.R.C.P. 265 I.A.4(a). 5. C.R.C.P. 265 I.A.4(b). 6. C.R.C.P. 265 I.A.4(d). 7. C.R.C.P. 265 I.A.4(c). 8. C.R.C.P. 265 I.A.4(e); see also the discussion of deductibles and self-insured retentions in § 12.3 of this Chapter. 9. C.R.C.P. 265 I.A.4(e). 10. Id. 11. C.R.C.P. 265 I.A.4(f). 12. Under a claims-made policy, coverage is provided by the policy that is in effect at the time a claim is made against the insured. This will not necessarily be the policy in effect at the time of the alleged wrongful act. See the discussion of claims-made policies in § 12.3 of this Chapter. 13. Gutrich, 942 P.2d at 1270. 14. E.g., Simon v. Shelter General Ins. Co., 842 P.2d 236, 239 (Colo. 1992). 15. Id. 16. Exhibit 12A. The reader should review his or her own policy to determine what coverage is afforded under the same. 17. E.g., Citizens Bank of Jonesboro v. Western Employers Ins. Co., 865 F.2d 964 (8th Cir. 1989); Ratcliffe v. International Surplus Lines Ins. Co., 550 N.E.2d 1052 (Ill. App. 1990). 18. See Tewell, Thorpe & Findlay, Inc. v. Continental Cas. Co., 825 P.2d 724, 728 (Wash. App. 1992). 19. Hollinger v. Mutual Benefit Life Ins. Co., 560 P.2d 824 (Colo. 1977); Wade v. Olinger Life Ins. Co., 560 P.2d 446 (Colo. 1977). 20. Hollinger, id; Wade, id. 21. See Section II.D, “Multiple insureds, claims and claimants,” in Exhibit 12A. 22. E.g., Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 21 Cal. Rptr.2d 691 (Cal. 1993); Gregory v. Home Ins. Co., 876 F.2d 602 (7th Cir. 1989). 23. See Section II, “Limits of Liability and Deductible,” in Exhibit 12A.

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Professional Liability Insurance

Notes

24. For a further discussion of C.R.C.P. 265 and the organizations of practice, see § 29.2 of this handbook. 25. Ambrose v. Blue Cross & Blue Shield of Va., 891 F. Supp. 1153, 1155 (E.D. Va. 1995), aff’d 95 F.3d 41 (4th Cir. 1996). 26. Nat’l Union Fire Ins. Co. v. Lawyers’ Mut. Ins. Co., 885 F. Supp. 202, 206 (S.D. Cal. 1995). 27. See, e.g., Cohen v. Empire Cas. Co., 771 P.2d 29, 30 (Colo. App. 1989). 28. See Definition B in Section III, Definitions, in the Lawyers Professional Liability Coverage Unit of the Sample Policy — Exhibit 12A (emphasis added). 29. E.g., General Accident Ins. Co. v. Namesnik, 790 F.2d 1397 (9th Cir. 1986). 30. Cohen v. Empire Cas. Co., 771 P.2d 29 (Colo. App. 1989). 31. Bertagnolli v. Ass’n of Trial Lawyers Assurance, 934 P.2d 916 (Colo. App. 1997). 32. Mendelsohn v. CNA Ins. Co., 451 N.E.2d 919 (Ill. App. 1983). 33. See Definition H. in Section III, “Definitions,” in Exhibit 12A. 34. See State Farm Mut. Auto. Ins. Co. v. Lindsey, 885 P.2d 144, 148 n. 4 (Ariz. App. 1994), vacated on other grounds 897 P.2d 631 (Ariz. 1995); Indus. Chem. & Fiberglass Corp. v. N. River Ins. Co., 908 F.2d 825, 830 (11th Cir. 1990). 35. See Definitions G. and I. in Section III, “Definitions,” in Exhibit 12A. 36. C.R.C.P. 265 I.A.4(a) and (b). 37. See generally Gen’l Ins. Co. of Am. v. Smith, 874 P.2d 412, 414 (Colo. App. 1993). 38. Ballow v. Phico Ins. Co., 875 P.2d 1354, 1357 (Colo. 1993); St. Paul Fire & Marine Ins. Co. v. Estate of Hunt, 811 P.2d 432, 434 (Colo. App. 1991). 39. Ballow, 875 P.2d at 1367 (Erickson, J., concurring). 40. Id. at n. 2. 41. James J. Brogger & Assocs., Inc. v. Am. Motorists Ins. Co., 595 P.2d 1063 (Colo. App. 1979). 42. See Definition B. in Section III, “Definitions,” in Exhibit 12A. 43. Chalk v. Trans Power Mfg., Inc., 451 N.W.2d 770, 772 (Wis. App. 1989). 44. Berry v. St. Paul Fire & Marine Ins. Co., 70 F.3d 981, 982 (8th Cir. 1995). 45. Nat’l Cas. Co. v. Great Southwest Fire Ins. Co., 833 P.2d 741, 745 (Colo. 1992). 46. Id. at 744. 47. Ins. Corp. of Am. v. Dillon, Hardamon & Cohen, 725 F. Supp. 1461, 1478 (N.D. Ind. 1988). 48. E.g., U.S. v. A.C. Strip, 868 F.2d 181, 189-90 (6th Cir. 1989). 49. See Section I, “Insuring Agreement,” in Exhibit 12A. 50. E.g., Estate of Hunt, 811 P.2d at 435; Esmailzadeh v. Johnson & Speakman, 869 F.2d 422 (8th Cir. 1989); U.S. v. A.C. Strip, 868 F.2d 181, (6th Cir. 1989). 51. See Exclusions A. and B. in Section IV, “Exclusions,” in Exhibit 12A; see also Ballow, 875 P.2d at 1366. 52. See Section VI, “Extended Reporting Periods,” in Exhibit 12A. 53. Home Ins. Co. v. Cooper & Cooper, Ltd., 889 F.2d 746, 750 (7th Cir. 1989). However, in a case where notice was given to the insurer of every matter the insured law firm had ever worked on, in an apparent attempt to indefinitely extend the policy’s coverage, notice was found to be ineffective. 54. See Paragraph A of Section I, “Insuring Agreements,” in Exhibit 12A. 55. Ballow, 875 P.2d at 1366. 56. Id. at 1357. 57. For an example of an extended reporting period option, see Section VI, “Extended Reporting Periods,” in Exhibit 12A. 58. See Section V.D., “Conditions,” in Exhibit 12A for “Territory.” 59. See Paragraph A of Section I, “Insuring Agreement,” in Exhibit 12A. 60. See Definition E. in Section III, Definitions, in the Lawyers Professional Liability Coverage Unit of the Sample Policy — Exhibit 12A. 61. See, e.g., Bd. of County Commr’s v. Guar. Ins. Co., 90 F.R.D. 405 (D. Colo. 1981); but see, e.g., Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1212-16 (Ill. 1992).

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Notes

Lawyers’ Professional Liability in Colorado

62. E.g., Jaffe v. Cranford Ins. Co., 214 Cal. Rptr. 567, 570 (Cal. App. 1985). 63. E.g., Republic Western Ins. Co. v. Spierer, Woodward, et al., 68 F.3d 347 (9th Cir. 1995); but see, e.g., Perl v. St. Paul Fire & Marine Ins. Co., 345 N.W.2d 209 (Minn. 1984). 64. Wellcome v. Home Ins. Co., 849 P.2d 190 (Mont. 1993); but see Figari & Davenport, L.L.P. v. Continental Cas. Co., 846 F. Supp. 513 (N.D. Tex. 1994), dism’d and vacated 864 F.Supp. 11 (N.D. Tex. 1994). 65. E.g., Union Ins. Co. v. Kjeldjaard, 775 P.2d 55 (Colo. App. 1988). 66. Lira v. Shelter Ins. Co., 913 P.2d 514, 517 (Colo. 1996). 67. Nat’l Ins. Underwriters v. Mark, 704 F. Supp. 1033, 1034 (D. Colo. 1989). 68. See Exclusion A. in Section IV, “Exclusions,” in Exhibit 12A. 69. See, e.g., St. Paul Fire & Marine Ins. Co. v. Starr, 651 S.W.2d. 517, 519-520 (Mo. App. 1983); Home Indem. Co. v. Reynolds & Co., 187 N.E.2d. 274, 282 (Ill. App. 1962). 70. E.g., Brooks, Tarlton, Gilbert, Douglas & Kressler v. United States Fire Ins. Co., 832 F.2d 1358, 1370 (5th Cir. 1987). 71. E.g., Atlantic Permanent Fed. Sav. & Loan Ass’n v. Am. Cas. Co., 839 F.2d 212, 216-217 (4th Cir. 1988); PepsiCo, Inc. v. Continental Cas. Co., 640 F. Supp. 656, 660 (S.D.N.Y. 1986). 72. See McAlear v. St. Paul Ins. Co., 493 P.2d 331, 335 (Mont. 1972). 73. See Exclusions B. and F. in Section IV, “Exclusions,” in Exhibit 12A. 74. See Lamar Truck Plaza, Inc. v. Sentry Ins. Co., 757 P.2d 1143 (Colo. App. 1988) (construing policy definition of property damage); Nat’l Cas. Co. v. Great Southwest Fire Ins. Co., 833 P.2d 741 (Colo. 1992) (construing policy definition of bodily injury). 75. Niagara Fire Ins. Co. v. Pepicelli, 821 F.2d 216, 220-21 (3rd Cir. 1987). 76. Exclusion F. in Section VI, “Exclusions,” in Exhibit 12A. 77. See Morris v. Valley Forge Ins. Co., 805 S.W.2d 948, 952 (Ark. 1991). 78. See Pepicelli, 821 F.2d at 218. 79. See, e.g., id.; Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15 (1st Cir. 1997); Clauder v. Home Ins. Co., 790 F. Supp. 162 (S.D. Ohio 1992); Senger v. Minn. Lawyers Mut. Ins. Co., 415 N.W.2d 364 (Minn. App. 1987); Morris v. Valley Forge Ins. Co., 805 S.W.2d 948 (Ark. 1991). 80. Friedland v. Travelers Indem. Co., 105 P.3d 639, 648 (Colo. 2005); see also Clementi v. Nationwide Mut. Fire Ins. Co., 16 P.3d 223, 226 (Colo. 2001) (applying notice-prejudice rule in first-party underinsured motorist context). 81. Friedland, id. 82. See Section V.G, “Conditions,” in Exhibit 12A for “cooperation of the insureds.” 83. Farmers Auto. Inter-Insurance Exch. v. Konugres, 119 Colo. 268, 202 P.2d 959 (1949). 84. Hansen v. Barmore, 779 P.2d 1360, 1364 (Colo. App. 1989). 85. See Kesinger v. Commercial Standard Ins. Co., 101 Colo. 109, 70 P.2d 776 (1937). 86. See Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo. 1984). 87. Friedland v. Travelers Indem., Co., 105 P.3d 639 (Colo. 2005). 88. Allstate Ins. Co. v. Frank B. Hall, 770 P.2d 1342, 1345 (Colo. App. 1989). 89. Allstate Ins. Co. v. Avis Rent-A-Car System, Inc., 947 P.2d 341, 347 (Colo. 1997). 90. Martinez v. Hawkeye-Security Ins. Co., 576 P.2d 1017, 1019 (Colo. 1978). 91. Id. 92. Simon v. Shelter Gen. Ins. Co., 842 P.2d 236, 241-242 (Colo. 1992). 93. See C.R.S. § 10-4-419. 94. Chu v. Canadian Indem. Co., 224 Cal. App.3d 86 (Cal. App. 1990). 95. See Paragraph E. of Section I, “Insuring Agreement,” in Exhibit 12A.

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Professional Liability Insurance

Exhibit 12A

EXHIBIT 12A • SAMPLE LAWYERS PROFESSIONAL LIABILITY POLICY

CONTINENTAL CASUALTY COMPANY CNA PLAZA CHICAGO, ILLINOIS 60685

LAWYERS PROFESSIONAL LIABILITY POLICY

Words and phrases that appear in bold are defined in the Definitions section of this Policy.

THIS IS A CLAIMS MADE AND REPORTED POLICY. IT APPLIES ONLY TO THOSE CLAIMS THAT ARE BOTH FIRST MADE AGAINST THE INSURED AND REPORTED IN WRITING TO THE COMPANY DURING THE POLICY PERIOD. PLEASE REVIEW THIS POLICY CAREFULLY AND DISCUSS THIS COVERAGE WITH YOUR INSURANCE AGENT OR BROKER. I.

INSURING AGREEMENT A.

Coverage The Company agrees to pay on behalf of the Insured all sums in excess of the deductible that the Insured shall become legally obligated to pay as damages and claim expenses because of a claim that is both first made against the Insured and reported in writing to the Company during the policy period by reason of an act or omission in the performance of legal services by the Insured or by any person for whom the Insured is legally liable, provided that: 1. the Insured did not give notice to a prior insurer of such claim or a related claim; 2. the Insured did not give notice to a prior insurer of any such act or omission or related act or omission; 3. prior to: a. the inception date of the first policy issued by the Company or any subsidiary or affiliate of the Company, if continuously renewed; or, b. the date the Insured first became a member or employee of the Named Insured or predecessor firm, whichever is later, no Insured had a basis to believe that any such act or omission, or related act or omission, might reasonably be expected to be the basis of a claim; 4. there is no other policy, whether primary, contributory, excess, contingent or otherwise, which provides insurance to any Insured for the claim based on or arising out of an act or omission in the performance of legal services by such Insured or by any person for whom the Insured is legally liable while affiliated with a firm other than the Named Insured.

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Exhibit 12A

B.

Lawyers’ Professional Liability in Colorado

Defense The Company shall have the right and duty to defend in the Insured's name and on the Insured's behalf a claim covered by this Policy even if any of the allegations of the claim are groundless, false or fraudulent. The Company shall have the right to appoint counsel and to make such investigation and defense of a claim as is deemed necessary by the Company. If a claim shall be subject to arbitration or mediation, the Company shall be entitled to exercise all of the Insured's rights in the choice of arbitrators or mediators and in the conduct of an arbitration or mediation proceeding.

C.

Settlement The Company shall not settle a claim without the written consent of the Named Insured. If the Named Insured refuses to consent to a settlement or compromise recommended by the Company and acceptable to the claimant, then the Company's limit of liability under this Policy shall be reduced to the amount for which the claim could have been settled plus all claim expenses incurred up to the time the Company made its recommendation, which amount shall not exceed the remainder of the limit of liability specified in Section II.A.

D.

Exhaustion of limits The Company is not obligated to investigate, defend, pay or settle, or continue to investigate, defend, pay or settle a claim after the applicable limit of the Company's liability has been exhausted by payment of damages or claim expenses or by any combination thereof or after the Company has deposited the remaining available limits of liability into a court of competent jurisdiction. In such case, the Company shall have the right to withdraw from the further investigation, defense, payment or settlement of such claim by tendering control of said investigation, defense or settlement of the claim to the Insured.

II.

LIMITS OF LIABILITY AND DEDUCTIBLE A.

Limit of liability - each claim Subject to paragraph B. below, the limit of liability of the Company for damages and claim expenses for each claim first made against the Insured and reported to the Company during the policy period shall not exceed the amount stated in the Declarations for each claim.

B.

Limit of liability - in the aggregate

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Professional Liability Insurance

Exhibit 12A

The limit of liability of the Company for damages and claim expenses for all claims first made against the Insured and reported to the Company during the policy period shall not exceed the amount stated in the Declarations as the aggregate. C.

Deductible The deductible amount stated in the Declarations is the total amount of the Insured’s liability for all claims and applies to the payment of damages and claim expenses for claims first made and reported to the Company in writing during the policy period. The deductible shall be paid by the Named Insured, or upon the Named Insured’s failure to pay, jointly and severally by all Insureds. The limits of liability set forth in the Declarations are in addition to and in excess of the deductible.

D.

Multiple insureds, claims and claimants The limits of liability shown in the Declarations and subject to the provisions of this Policy is the amount the Company will pay as damages and claim expenses regardless of the number of Insureds, claims made or persons or entities making claims. If related claims are subsequently made against the Insured and reported to the Company, all such related claims, whenever made, shall be considered a single claim first made and reported to the Company within the policy period in which the earliest of the related claims was first made and reported to the Company.

E.

Supplementary payments Although not Damages, the Company will pay, in addition to the applicable limit of liability: 1.

up to $500.00 for loss of earnings to each Insured for each day or part of a day of such Insured’s attendance, at the Company’s request, at a trial, hearing or arbitration proceeding involving a claim against such Insured, but in no event shall the amount payable hereunder exceed $10,000.00 per Insured despite the number of days the Insured is in attendance, or the number of trials, hearings or arbitration proceedings that the Insured is required to attend. In no event shall the amount payable hereunder exceed $10,000.00 despite the number of Insureds hereunder or the number of such proceedings.

2.

up to $10,000.00 for any Insured and in the aggregate, for attorney fees and other reasonable costs, expenses or fees (the “Disciplinary Fees”)resulting from a Disciplinary Proceeding incurred as the result of

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Exhibit 12A

Lawyers’ Professional Liability in Colorado

a notice of such Disciplinary Proceeding both first received by the Insured and reported to the Company during the policy period, arising out of an act or omission in the rendering of legal services by such Insured. Except as set forth below, the amount payable hereunder shall not exceed $10,000.00 despite the number of Insureds hereunder or the number of such proceedings. In the event of a determination of No Liability of the Insured against whom the Disciplinary Proceeding has been brought, the Company shall reimburse such Insured for Disciplinary Fees, including those in excess of the $10,000 cap set forth above, up to $100,000. In no event shall the amount payable hereunder exceed $100,000 despite the number of Insureds hereunder or the number of such proceedings. F.

Risk Management Incentives 1.

Mediation If mediation of a claim takes place either without institution of arbitration proceeding or service of suit or within 60 days of the institution of such proceedings or service of suit, and such claim is ultimately resolved for an amount acceptable to the Insured and the Company by the process of mediation, the Insured’s deductible, applying to the claim, will be reduced by 50%. In no event shall the amount of the deductible waived hereunder exceed $25,000.

2.

Subpoena Assistance In the event the Insured receives a subpoena for documents or testimony arising out of legal services rendered by the Insured and the Insured would like the Company's assistance in responding to the subpoena, the Insured may provide the Company with a copy of the subpoena and the Company will retain an attorney to provide advice regarding the production of documents, to prepare the Insured for sworn testimony, and to represent the Insured at the Insured's depositions, provided that: a. the subpoena arises out of a lawsuit to which the Insured is not a party; and b. the Insured has not been engaged to provide advice or testimony in connection with the lawsuit, nor has the Insured provided such advice or testimony in the past. Such legal counsel's fees incurred under this provision are in addition to the limits of liability and are not applicable to the deductible. Any notice the Insured gives the Company of such subpoena shall be deemed notification of a potential claim under Section V.A. of this Policy.

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Professional Liability Insurance

III.

Exhibit 12A

DEFINITIONS Wherever used in this Policy: A.

"Bodily injury" means injury to the body, sickness or disease sustained by any person, including death resulting from such injuries; or mental injury, mental anguish, mental tension, emotional distress, pain or suffering or shock sustained by any person whether or not resulting from injury to the body, sickness, disease or death of any person.

B.

"Claim" means a demand received by the Insured for money or services arising out of an act or omission, including personal injury, in the rendering of or failure to render legal services. A demand shall include the service of suit or the institution of an arbitration proceeding against the Insured.

C.

"Claim expenses" mean: 1. fees charged by attorneys designated by the Company or by the Insured with the Company's written consent; and 2. all other reasonable and necessary fees, costs and expenses resulting from the investigation, adjustment, defense and appeal of a claim if incurred by the Company, or by the Insured with the written consent of the Company, including, but not limited to, premiums for any appeal bond, attachment bond or similar bond but without any obligation of the Company to apply for or furnish any such bond. Claim expenses with respect to a claim will be paid first and payment will reduce the amount available to pay damages. Claim expenses shall not include fees, costs or expenses of employees or officers of the Company. Nor shall claim expenses include salaries, loss of earnings or other remuneration by or to any Insured.

D.

"Company" means the insurance company named in the Declarations.

E.

"Damages" mean judgments, awards and settlements, provided any settlement is negotiated with the assistance and approval of the Company. Damages do not include: 1. legal fees, costs and expenses paid or incurred or charged by the Insured, no matter whether claimed as restitution of specific funds, forfeiture, financial loss, set-off or otherwise, and injuries that are a consequence of any of the foregoing; 2. civil or criminal fines, sanctions, penalties or forfeitures, whether pursuant to law, statute, regulation or court rule, including but not limited to awards under 18 U.S.C. ยง1961, et. seq., Federal Rules of Civil Procedure 11 or 28 U.S.C. ยง1927 and state statutes, regulations, rules or

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Exhibit 12A

Lawyers’ Professional Liability in Colorado

3. 4. 5. 6.

law so providing, and injuries that are a consequence of any of the foregoing; punitive or exemplary amounts; the multiplied portion of multiplied awards; injunctive or declaratory relief; amounts for which the Insured is not financially liable or that are without legal recourse to the Insured.

F.

“Disciplinary Proceeding” means any proceeding before a state or federal licensing board or a peer review committee to investigate charges alleging professional misconduct.

G.

"Insured" means the Named Insured, predecessor firm and the persons or entities described below: 1. any lawyer, partnership, professional corporation, professional association, limited liability corporation or limited liability partnership who is or becomes a partner, officer, director, stockholder-employee, associate, manager, member or salaried employee of the Named Insured during the policy period shown in the Declarations. 2. any lawyer previously affiliated with the Named Insured or a predecessor firm as a partner, officer, director, stockholder-employee, associate, manager, member or salaried employee but only for legal services performed on behalf of the Named Insured or a predecessor firm at the time of such affiliation. The term “previously affiliated” as used herein does not include a lawyer who, during the policy period and while affiliated with the Named Insured: a) voluntarily ceases, permanently and totally, the private practice of law; or b) dies or becomes totally and permanently disabled. Such an lawyer will be deemed to be an Insured under paragraph one above; 3. any lawyer, law firm, partnership, professional corporation, professional association, limited liability corporation or limited liability partnership who acts as Of Counsel to the Named Insured or any non-employee independent contractor attorney to the Named Insured, but only for legal services rendered on behalf of the Named Insured and only if a fee inured to the Named Insured except that no fee need inure to the Named Insured where eleemosynary (pro bono) legal services are rendered by such Of Counsel Insured where at the time of retention, there was approval by the appropriate committee or lawyer within the Named Insured as a matter that would be handled without compensation. Any lawyer, law firm, partnership, professional corporation, professional association, limited liability corporation or limited liability partnership who acts as Of Counsel to the Named Insured, who previously qualified as an Insured under paragraph 1 above, but left the full time practice of law to practice exclusively as Of Counsel to the Named Insured, will be deemed to be an Insured under paragraph 1 above.

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Professional Liability Insurance

4.

5.

any person who is a former or current employee, other than an employed lawyer, of the Named Insured or any predecessor firm, but solely for services performed by such person within the course and scope of their employment by the Named Insured or any predecessor firm and provided that the services in dispute are legal services of the Named Insured or any predecessor firm; the estate, heirs, executors, administrators, assigns and legal representatives of an Insured in the event of such Insured's death, incapacity, insolvency or bankruptcy, but only to the extent that such Insured would have been provided coverage under this Policy.

H.

"Legal services" mean: 1. those services performed by an Insured for others as a lawyer, arbitrator, mediator, title agent or as a notary public. Any title agency or company, on whose behalf the Insured acts as title agent or designated issuing attorney, is not an Insured under this Policy; 2. those services performed by an Insured as an administrator, conservator, receiver, executor, guardian, trustee or in any other fiduciary capacity and any investment advice given in connection with such services.

I.

"Named Insured" means the persons and entities designated in the Declarations.

J.

“No Liability” means a final determination of no liability in favor of the Insured who is the subject of a Disciplinary Proceeding. In no event shall the term “No Liability” apply to a Disciplinary Proceeding for which a settlement has occurred, a determination of no further action is made, or the matter is abandoned by the disciplinary authority.

K.

“Personal injury” is an injury resulting from an act or omission arising out of: false arrest, detention, or imprisonment; wrongful entry, or eviction, or other invasion of the right of private occupancy; libel, slander, or other disparaging or defamatory materials; a writing or saying in violation of an individual’s right to privacy; malicious prosecution or abuse of process.

L.

"Policy period" means the period of time between the inception date and time shown in the Declarations and the date and time of termination, expiration or cancellation of this Policy.

M.

"Predecessor firm" means any entity which has undergone dissolution and is named as such on the Declarations.

N.

"Prior insurer" means an insurer, including the Company and any

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Exhibit 12A

12-33


Exhibit 12A

Lawyers’ Professional Liability in Colorado

subsidiary or affiliate of the Company, who has issued a lawyers professional liability insurance policy that is applicable to a claim, such policy having an inception date prior to the policy period.

IV.

O.

"Related acts or omissions" mean all acts or omissions in the rendering of legal services that are temporally, logically or causally connected by any common fact, circumstance, situation, transaction, event, advice or decision.

P.

"Related claims" mean all claims arising out of a single act or omission or arising out of related acts or omissions in the rendering of legal services.

Q.

"Totally and permanently disabled" means that an Insured is so disabled as to be wholly prevented from rendering legal services provided that such disability: 1. has existed continuously for not less than six (6) months; and 2. is reasonably expected to be continuous and permanent.

EXCLUSIONS This Policy does not apply: A.

to any claim based on or arising out of any dishonest, fraudulent, criminal or malicious act or omission by an Insured except that this exclusion shall not apply to personal injury. The Company shall provide the Insured with a defense of such claim unless or until the dishonest, fraudulent, criminal or malicious act or omission has been determined by any trial verdict, court ruling, regulatory ruling or legal admission, whether appealed or not. Such defense will not waive any of the Company’s rights under this Policy. Criminal proceedings are not covered under this Policy regardless of the allegations made against the Insured;

B.

to any claim for bodily injury, or injury to, or destruction of, any tangible property, including the loss of use resulting therefrom except that the exclusion of bodily injury does not apply to mental injury, mental anguish, mental tension, or emotional distress caused by personal injury;

C.

to any loss sustained by an Insured or claim made against an Insured as beneficiary or distributee of any trust or estate;

D.

to any claim based on or arising out of the Insured's alleged liability under any oral or written contract or agreement, unless such liability would have attached to the Insured in the absence of such agreement;

E.

to any claim by or on behalf of an Insured under this Policy against any other

G-118011-A Ed.7/01 8

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Professional Liability Insurance

Exhibit 12A

Insured hereunder unless such claim arises out of legal services by an Insured rendered to such other Insured as a client;

V.

F.

to any claim based on or arising out of an Insured's capacity as: 1. a former, existing or prospective officer, director, shareholder, partner or manager of a business enterprise or charitable organization (if the above are not named in the Declarations); or 2. a former, existing or prospective officer, director, shareholder, partner manager, or trustee of a fund or trust which is a pension, welfare, profit-sharing, mutual or investment fund or trust; or 3. a fiduciary under the Employee Retirement Income Security Act of 1974 and its amendments or any regulation or order issued pursuant thereto or any other similar state or local law; except that this exclusion shall not apply to a claim based on or arising out of an Insured’s capacity as a member, director or officer of any professional legal association, its governing board or any of its committees.

G.

to any claim based on or arising out of an Insured's capacity as a public official or an employee or representative of a governmental body, subdivision or agency unless the Insured is deemed as a matter of law to be a public official or employee or representative of such entity solely by virtue of rendering legal services to it;

H.

to any claim based on or arising out of legal services performed for any existing or prospective partnership, organization, corporation, company or other business enterprise (including the ownership, maintenance or care of any property in connection therewith), not named in the Declarations, if at the time of the act or omission giving rise to such claim: 1. any Insured controlled, operated or managed or intended to control, operate or manage such enterprise; or 2. any Insured was : a. a partner or employee of such enterprise, or b. more than a 10% shareholder or a sole proprietor of such enterprise, or 3. Insureds cumulatively were more than a 10% shareholder of such enterprise, except that this exclusion shall not apply to any claim based on or arising out of legal services to any professional legal association, its governing board or any of its committees. As used in this exclusion, the word “partner� shall be deemed to include members of limited liability companies or limited liability partnerships;

CONDITIONS A.

Notice of claims and potential claims

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Exhibit 12A

B.

Lawyers’ Professional Liability in Colorado

1.

The Insured, as a condition precedent to the obligations of the Company under this Policy, shall immediately give written notice to the Company during the policy period: a. of any claim made against the Insured; b. of the Insured's receipt of any notice, advice or threat, whether written or verbal, that any person or organization intends to hold the Insured responsible for any alleged breach of duty.

2.

If during the policy period the Insured shall become aware of any act or omission that may reasonably be expected to be the basis of a claim against the Insured and gives written notice to the Company of such act or omission and the reasons for anticipating a claim, with full particulars, including but not limited to: a. the specific act or omission; b. the dates and persons involved; c. the identity of anticipated or possible claimants; d. the circumstances by which the Insured first became aware of the possible claim, then any such claim that is subsequently made against the Insured and reported to the Company shall be deemed to have been made at the time such written notice was given to the Company.

Innocent Insured Whenever coverage under this Policy would be excluded, suspended or lost because of any exclusion relating to criminal, dishonest, fraudulent, or malicious conduct by any person insured hereunder, the Company agrees that such insurance, as would otherwise be afforded under this Policy, shall be applicable with respect to an Insured who did not personally participate or personally acquiesce in or remain passive (including failure to give timely notice) after having knowledge of such conduct. The Company’s obligation to pay damages under this Condition B will be excess of the full extent of the assets of any Insured involved in such criminal, dishonest, fraudulent, or malicious conduct.

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Professional Liability Insurance

C.

Exhibit 12A

Reimbursement of the Company If the Company, in the exercise of its discretion and without any obligation to do so, pays any amount in excess of the applicable limits of liability or within the amount of the deductible, the Named Insured, or upon the Named Insured's failure to pay, the Insureds, jointly and severally, shall be liable to the Company for any and all such amounts and, upon demand, shall pay such amounts to the Company.

D.

Territory This Policy applies to an act or omission taking place anywhere in the world, provided that the claim is made and suit is brought against the Insured within the United States of America, including its territories, possessions, Puerto Rico or Canada.

E.

Alternative dispute resolution After the final adjudication or settlement of a claim, any dispute concerning allegations of bad faith or tort against the Company regarding the appropriateness or value of any settlement or final disposition of any claim that exceeds the deductible may be submitted to any form of alternative dispute resolution acceptable to the Company and the Insured. Should the Company and the Insured be unable to agree on the form of alternative dispute resolution, then such dispute shall be submitted to binding arbitration. Except as set forth below, the rules of the American Arbitration Association shall apply. The arbitration panel shall consist of one arbitrator selected by the Company, one arbitrator selected by the Insured, and one arbitrator selected by the first two arbitrators. If the two arbitrators selected cannot agree on a third arbitrator, then the American Arbitration Association shall appoint an arbitrator.

F.

Other insurance If there is other insurance that applies to the claim: 1. on a claims made basis, this insurance shall be excess over such other valid and collectible insurance whether such insurance is stated to be primary, contributory, excess, contingent or otherwise. This does not apply to insurance that is purchased by the Named Insured specifically to apply in excess of this insurance. 2. on an occurrence basis, this insurance shall be available in the amount by which the limit of liability for this Policy exceeds the applicable limit of liability of such other valid and collectible insurance. The difference shall be the maximum the Company shall pay under this Policy with respect to a claim. If the applicable limit of liability of such other valid

G-118011-A Ed.7/01 11

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12-37


Exhibit 12A

Lawyers’ Professional Liability in Colorado

and collectible insurance is equal to or greater than the maximum payable under this Policy, then this Policy shall not afford any insurance with respect to such claim. G.

Assistance and cooperation of the Insured 1.

2. 3.

H.

The Insured shall cooperate with the Company and, upon the Company's request, shall attend hearings and trials and shall assist in effecting settlements, securing and giving of evidence, obtaining the attendance of witnesses, and the conduct of suits and proceedings in connection with a claim. The Insured shall assist in the enforcement of any right of contribution or indemnity against any person or organization who or which may be liable to any Insured in connection with a claim. The Insured shall not, except at its own cost, voluntarily make any payment, assume or admit any liability or incur any expense without the consent of the Company.

Action against the Company No action shall lie against the Company unless, as a condition precedent thereto: 1. there shall have been full compliance with all the terms of this Policy; and 2. the Insured's obligation to pay shall have been finally determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant and the Company. Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this Policy to the extent of the insurance afforded by this Policy. No person or organization shall have any right under this Policy to join the Company as a party to any action against an Insured, nor shall the Company be impleaded by the Insured or his legal representative. Bankruptcy or insolvency of the Insured or of the Insured's estate shall not relieve the Company of any of its obligations hereunder.

I.

Subrogation In the event of any payment under this Policy, the Company shall be subrogated to all the Insured's rights of recovery thereof against any person or organization, including any rights such Insured may have against any other Insured involved in dishonest, fraudulent, criminal, malicious or intentional conduct. The Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure and collect upon such rights. The Insured shall do nothing to prejudice such rights.

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Professional Liability Insurance

J.

Exhibit 12A

Changes Notice to any of the Company's agents or knowledge possessed by any such agent or any other person shall not act as a waiver or change in any part of this Policy. It also will not prevent the Company from asserting any rights under the provisions of this Policy. None of the provisions of this Policy will be waived, changed or modified except by written endorsement, signed by the Company, issued to form a part of this Policy.

K.

Assignment No assignment of interest of the Insured under this Policy shall be valid, unless the written consent of the Company is endorsed hereon.

L.

Cancellation/ Nonrenewal 1.

2.

3.

4. M.

This Policy may be canceled by the Named Insured by returning it to the Company. The Named Insured may also cancel this Policy by written notice to the Company stating at what future date cancellation is to be effective. The Company may cancel or non-renew this Policy by written notice to the Named Insured at the address last known to the Company. The Company will provide written notice at least sixty (60) days before cancellation or non-renewal is to be effective. If the Company cancels this Policy because the Insured has failed to pay a premium when due or has failed to pay amounts in excess of the limit of the Company's liability or within the amount of the deductible, this Policy may be canceled by the Company by mailing to the Named Insured written notice stating when, not less than ten (10) days thereafter, such cancellation shall be effective. The time of surrender of this Policy or the effective date and hour of cancellation stated in the notice shall become the end of the policy period. Delivery (where permitted by law) of such written notice either by the Named Insured or by the Company shall be equivalent to mailing. If the Company cancels this Policy, the earned premium shall be computed pro rata. If the Named Insured cancels this Policy, the Company shall retain the customary short rate proportion of the premium. Premium adjustment may be made either at the time cancellation is effected or as soon as practicable after cancellation becomes effective, but payment or tender of unearned premium is not a condition of cancellation. The offering of terms and conditions different from the expiring terms and conditions shall not constitute a refusal to renew.

Entire contract

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12-39


Exhibit 12A

Lawyers’ Professional Liability in Colorado

By acceptance of this Policy the Insured agrees that: 1. all of the information and statements provided to the Company by the Insured are true, accurate and complete and shall be deemed to constitute material representations made by all of the Insureds; 2. this Policy is issued in reliance upon the Insured's representations; 3. this Policy, endorsements thereto, together with the completed and signed application and any and all supplementary information and statements provided by the Insured to the Company (all of which are deemed to be incorporated herein) embody all of the agreements existing between the Insured and the Company and shall constitute the entire contract between the Insured and the Company; and 4. the misrepresentation of any material matter by the Insured or the Insured's agent will render this Policy null and void and relieve the Company from all liability herein. N.

Named Insured sole agent The Named Insured shall be the sole agent of all Insureds hereunder for the purpose of effecting or accepting any notices hereunder, any amendments to or cancellation of this Policy, for the completing of any applications and the making of any statements, representations and warranties, for the payment of any premium and the receipt of any return premium that may become due under this Policy, and the exercising or declining to exercise any right under this Policy.

O.

Liberalization If the Company adopts any revision that would broaden coverage under this policy form G-118011-A without additional premium at any time during the policy period, the broadened coverage will immediately apply to this Policy except that it will not apply to claims that were first made against the Insured prior to the effective date of such revision.

P.

Notices Any notices required to be given by an Insured shall be submitted in writing to the Company or its authorized representative. If mailed, the date of mailing of such notice shall be deemed to be the date such notice was given and proof of mailing shall be sufficient proof of notice.

VI.

EXTENDED REPORTING PERIODS As used herein, "extended reporting period" means the period of time after the end of the policy period for reporting claims by reason of an act or omission that occurred prior to the end of the policy period and is otherwise covered by this Policy.

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Professional Liability Insurance

A.

Exhibit 12A

Automatic extended reporting period If this Policy is canceled or non-renewed by either the Company or by the Named Insured, the Company will provide to the Named Insured an automatic, non-cancelable extended reporting period starting at the termination of the policy period if the Named Insured has not obtained another policy of lawyers professional liability insurance within sixty (60) days of the termination of this Policy. This automatic extended reporting period will terminate after sixty (60) days.

B.

Optional extended reporting period 1.

2.

C.

If this Policy is canceled or non-renewed by either the Company or by the Named Insured, then the Named Insured shall have the right to purchase an optional extended reporting period. Such right must be exercised by the Named Insured within sixty (60) days of the termination of the policy period by providing: a. written notice to the Company; and b. with the written notice, the amount of additional premium described below. The additional premium for the optional extended reporting period shall be based upon the rates for such coverage in effect on the date this Policy was issued or last renewed and shall be for one (1) year at 100% of such premium; two (2) years at $150% of such premium; three (3) years at 175% of such premium; six (6) years at 225% of such premium; or, for an unlimited period at 250% of such premium.

Death or disability extended reporting period 1.

If an Insured dies or becomes totally and permanently disabled during the policy period, then upon the latter of the expiration of: the policy period; any renewal or successive renewal of this Policy; or any automatic or optional extended reporting period, such Insured shall be provided with a death or disability extended reporting period as provided below. a. In the event of death, such Insured's estate, heirs, executors or administrators must, within sixty (60) days of the expiration of the policy period, provide the Company with written proof of the date of death. This extended reporting period is provided to the estate, heirs, executors and administrators of such Insured. b. If an Insured becomes totally and permanently disabled, such Insured or Insured's legal guardian must, within sixty (60) days of the expiration of the policy period, provide the Company with written proof that such Insured is totally and permanently disabled, including the date the disability commenced, certified by

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12-41


Exhibit 12A

Lawyers’ Professional Liability in Colorado

the Insured's physician. The Company retains the right to contest the certification made by the Insured's physician, and it is a condition precedent to this coverage that the Insured agree to submit to medical examinations by any physician designated by the Company. This extended reporting period is provided until such Insured shall no longer be totally or permanently disabled or until the death of such Insured in which case subparagraph a. hereof shall apply. 2. D.

Non-practicing extended reporting period 1.

2. 3. E.

No additional premium will be charged for any death or disability extended reporting period.

If an Insured retires or otherwise voluntarily ceases, permanently and totally, the private practice of law during the policy period and has been continuously insured by the Company for at least three consecutive years, then such Insured shall be provided with an extended reporting period commencing upon the latter of the expiration of: the policy period; any renewal or successive renewal of this Policy; or any automatic or optional extended reporting period. This extended reporting period is provided until the death of such Insured in which case subparagraph C.1. hereof shall apply or, until such Insured shall resume the practice of law. No additional premium will be charged for any non-practicing extended reporting period.

Extended reporting periods limits of liability 1.

Automatic and optional extended reporting periods limits of liability a.

b.

Where the Company has the right to nonrenew or cancel this Policy and it exercises that right, then the Company's liability for all claims reported during the automatic and optional extended reporting periods shall be part of and not in addition to the limits of liability for the policy period as set forth in the Declarations and Section II, Limits of Liability of this Policy. If this Policy is canceled by the Named Insured or if the Company offers to renew this Policy, and the Named Insured refuses such renewal offer, then the Company’s liability for all claims reported during the automatic and optional extended reporting periods shall be reinstated to the limits of liability applicable to this Policy as set forth in Section II.A. and B. hereof.

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Professional Liability Insurance

2.

Exhibit 12A

Separate death or disability and non-practicing extended reporting period limits of liability a.

Limit of Liability - Each “Claim”

Subject to paragraph B. below, the Company’s limit of liability for each claim first made against the Insured, and reported to the Company during the death or disability extended reporting period or non-practicing extended reporting period, shall not exceed the amount stated in the declarations as the “Each Claim Death or Disability and Non-Practicing extended reporting period limit of liability”. b. Limit of Liability - In the Aggregate The limit of liability of the Company for all claims first made against the Insured, and reported to the Company during the death or disability extended reporting period or non-practicing extended reporting period, shall not exceed the amount stated in the Declarations as the “Aggregate Death or Disability and Non-Practicing extended reporting period limit of liability”. F.

Elimination of right to any extended reporting period There is no right to any extended reporting period: 1. if the Company shall cancel or refuse to renew this Policy due to: a. non-payment of premiums; or b. non-compliance by an Insured with any of the terms and conditions of this Policy; or c. any misrepresentation or omission in the application for this Policy; or, 2. if at the time this right could be exercised by an Insured, such Insured's right to practice law has been revoked, suspended or surrendered at the request of any regulatory authority for reasons other than that the Insured is totally and permanently disabled.

G.

Extended reporting period not a new policy It is understood and agreed that the extended reporting period shall not be construed to be a new policy and any claim submitted during such period shall otherwise be governed by this Policy.

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12-43


Exhibit 12A

Lawyers’ Professional Liability in Colorado

IN WITNESS WHEREOF, the Company has caused this Policy to be executed by its Chairman and Secretary, but this Policy shall not be binding upon the Company unless completed by the attachment of the Declarations and signed by a duly authorized representative of the Company. Secretary

Chairman of the Board

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Professional Liability Insurance

Exhibit 12B

EXHIBIT 12B • SAMPLE CNA APPLICATION — ATTORNEYS NEW TO THE FIRM

Page 1 of 2

APPLICATION FOR LAWYERS PROFESSIONAL LIABILITY INSURANCE

SUPPLEMENT FOR ATTORNEYS NEW TO THE FIRM Firm Name: Policy Number: Effective Date:

I.

Attorney Information Differences between the date an attorney began practicing law for other than a corporate or governmental entity and the date the attorney was admitted to the Bar must be explained on a separate sheet of paper following the same format. Attorney Name

Social Security #

Designation *

Average # of hours per week 1 – 10

11 - 25

States licensed to practice law

26 +

Designations: A CC D E IC MEM MGR

Associate Co-counsel Director Employee Independent Contractor Member of Firm Manager

Does the OC, STC, CC, SPC or IC have his/her own individual LPL policy? If yes, please provide a copy Yes

II.

Date Admitted to Bar

O OC OF SP SPC STC SHH STH

Owner Of Counsel Officer Solo Practicioner Special Counsel Staff Counsel Shareholder Stockholder

Date Started Private Practice

Date Joined Firm

Partner Designations: EP Equity Partner NP Non-equity Partner P Partner LLP Limited Liability Partner RP Retired Partner

Prior acts date

CNA Risk Mgmt Seminar Date

Bar Member?

No

Yes

No

Attorney Insurance Information Has this attorney been continuously insured for the past 5 years?

Yes

No

If yes, please complete the following insurance history: Prior Insurance History

Insurance Carrier

Limit Per Claim/Aggregate

Current Year Previous Year 1 Previous Year 2 Previous Year 3 Previous Year 4

Supplement for Attorneys New to the Firm 8/02

(10/05)

12-45

Policy Term From/To mm/dd/yy

Employer / Previous Firm


Exhibit 12B

Lawyers’ Professional Liability in Colorado

Page 2 of 2

APPLICATION FOR LAWYERS PROFESSIONAL LIABILITY INSURANCE

SUPPLEMENT FOR ATTORNEYS NEW TO THE FIRM III.

Please answer all questions completely. 1.

During the past 5 years, has any insurer canceled or refused to renew this lawyer’s professional liability policy? If yes, please provide details on a separate sheet.

Yes

No

2.

Is this lawyer aware of any professional liability claim made against him/her in the past 5 years, or any incident, act, or omission which might reasonably be expected to be the basis of a claim or suit, arising out of the performance of professional services for others? If yes, the Supplemental Claim information form must be completed for each claim or incident.

Yes

No

3.

Has this lawyer ever been disbarred, suspended, formally reprimanded or subject to any disciplinary inquiry, complaint or proceeding for any reason other than nonpayment of dues? If yes, or if such is in process, provide details on a separate sheet.

Yes

No

4.

Is this lawyer a director, officer, or employee of or hold an equity interest in a firm or entity which is a client of either your firm or such lawyer? If yes, please provide us with the client’s name and business; attorney’s position and/or amount of equity interest and management role as well as the annual amount of billings.

Yes

No

5.

Please indicate the type of prior acts coverage desired for this new lawyer. Note, this is subject to underwriting approval and continuous professional liability insurance coverage. a.

Career Coverage: The firm desires to extend coverage for all services rendered back to the Date Admitted to Bar, subject to any coverage limitations currently for this firm.

a.

b.

Exclusion of Prior Acts: The firm desires to exclude from coverage services performed prior to the date of hire; therefore, the date of hire will be the Named Individual Retroactive Date for this attorney.

b.

c.

Lateral Hire Exclusion: The firm desires to limit coverage to services rendered only on behalf of the firm; therefore, the Specific Lateral Hire Exclusion will apply to this attorney.

c.

6.

Please circle all the measures taken by the firm – before extending an offer to this attorney to protect itself from claims arising from acts, errors or omissions committed by the attorney while at another firm: a) verification of bar admission(s), b) investigation of outside interests, c) investigation of possible and actual conflicts of interest, d) require the purchase of an extended reporting period endorsement, if available, e) disclosure of past and potential claims, f) warranty letter regarding no known claims or potential claims, g) other _____________

7.

Please circle all the measures taken by the firm to protect itself from possible claims made against this attorney and the firm after the attorney is employed by or joins the firm: a) training in office procedures, b) integration into the firm culture, c) periodic review of clients, matters and performance, d) other___________________________________

Signature of new attorney_________________________________________ Date___________________________ Signature of principal_____________________________________________ Date___________________________ Supplement for Attorneys New to the Firm 8/02

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Professional Liability Insurance

Exhibit 12C

EXHIBIT 12C • SAMPLE CNA APPLICATION — ADDITIONAL LOCATIONS/PRACTICE STATES SUPPLEMENT

Page 1 of 1

APPLICATION FOR LAWYERS PROFESSIONAL LIABILITY INSURANCE

ADDITIONAL LOCATIONS / PRACTICE STATES SUPPLEMENT Firm Name: Policy Number: Effective Date: 1.

List additional locations: Address

City

County

Zip Code

# of attorneys

# of employees

1 2 3 4 5 6

2.

Complete the following for all states that the firm practices in: State

3.

4.

% of Total Billable Hours

# of Attorneys

a.

If the firm practices from more than one office, does responsibility for the firm’s other offices rest with management at the principal location?

b.

If “no”, please describe how the branch office operates and is managed.

a.

% of Total Billable Hours

# of Attorneys

Yes

No

Is there a centralized conflict of interest cross-checking system utilized by all Lawyers in all branches?

Yes

No

b.

Does the branch office(s) maintain a docket/diary linked to the main office?

Yes

No

c.

If “no” to a. or b. above, please describe the system(s) used.

Additional Locations Supplement 8/02

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State

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Professional Liability Insurance

Exhibit 12D

EXHIBIT 12D • SAMPLE FORM — PLAINTIFF PRACTICE/ CLASS ACTION SUPPLEMENT

PLAINTIFF PRACTICE / CLASS ACTION SUPPLEMENT

1. Describe the types of cases handled (e.g. asbestos, bodily injury, medical malpractice, personal injury, products liability, tobacco, etc) and if possible put a % into each category. ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 2. What is the firm's average litigation case-load per year? ________________________________________________________________________________ ________________________________________________________________________________ 3. Of the firm's litigated cases: What percentage are settled before trial?

__________

What percentage are handled on a contingency fee basis?

__________

What is estimated average $ size of judgments, awards, settlements?

__________

4. How many and what types of cases does the firm refer to other law firms? ________________________________________________________________________________ ________________________________________________________________________________ 5. How many and what types of cases does the firm take as referrals from other law firms? ________________________________________________________________________________ ________________________________________________________________________________ 6. How many and what type of cases does the firm co-counsel with? ________________________________________________________________________________ ________________________________________________________________________________ 7. Does the firm assure that any firm they co-counsel, refer or accept as referrals with carries LPL coverage of at least 500,000 limits? _______________________________________________ 8. What type of written agreements does the firm enter into with respect to referrals (both to the firm & those referred out) and with co-counsels? ________________________________________________________________________________ ________________________________________________________________________________ 9. In what states has the firm worked?____________________________________________________ 10. Describe the class action cases the firm has been involved in over the past five years - including type of case, injury/loss involved and number of plaintiffs. ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 11. What is the revenue (actually or anticipated) generated by the firm for the following years: Last Year _______________________________________________ Current Year_____________________________________________ Anticipated Next Year______________________________________

Signature of Officer or Partner of Firm ____________________________________ Date__________

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Chapter 27

THE CLAIM OR LAWSUIT Bradley A. Levin, Esq.* Roberts ❘ Levin ❘ Rosenberg Professional Corporation Michael J. Rosenberg, Esq.* Roberts ❘ Levin ❘ Rosenberg Professional Corporation

SYNOPSIS § 27.1

RELATIONSHIP BETWEEN INSURED AND INSURER § 27.1.1—Introduction § 27.1.2—Presuit Responsibilities § 27.1.3—Duty To Notify Insurer § 27.1.4—Reservation Of Rights Letter § 27.1.5—Choice Of Defense Counsel § 27.1.6—Multiple Parties And Policies § 27.1.7—Consent To Settlement § 27.1.8—Remedies Of Insurer And Insured

§ 27.2

LITIGATION ISSUES § 27.2.1—Introduction § 27.2.2—Determination Of Lawyer’s Status In Litigation § 27.2.3—Notice § 27.2.4—Attorney-Client Privilege § 27.2.5—Lawyer Work Product Privilege

§ 27.3

REPORTING REQUIREMENTS § 27.3.1—Introduction § 27.3.2—Colorado Supreme Court § 27.3.3—U.S. District Court For The District Of Colorado

(1/08)

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§ 27.1

Lawyers’ Professional Liability in Colorado

§ 27.1 • RELATIONSHIP BETWEEN INSURED AND INSURER The relationship between the lawyer-insured and the insurer is in many ways similar to the relationship between a lay-insured and the insurer. While few Colorado opinions deal expressly with professional liability matters, the decisions involving health, automobile, business, and other forms of insurance are instructive for disputes arising from lawyer professional liability policies. § 27.1.1—Introduction The relationship between the lawyer and the professional liability carrier is founded on, and defined by, the contract of insurance. The parties are bound by the express terms and conditions of the insurance policy. Either party’s failure to adhere to the policy’s material provisions will create significant rights for the non-breaching party. The relationship between insured and insurer also implicates important duties that are derived from the insurance contract, but are not expressly set forth in the contract. Indeed, Colorado has long recognized that every contract, including insurance agreements, contains an implied covenant of good faith and fair dealing.1 That covenant provides that neither party will do anything to deprive the other party of the benefits of the contract.2 The Colorado appellate courts have also acknowledged that, in contrast to a party who seeks to secure commercial advantage in the context of a business contract, an insured who enters into a contract of insurance seeks to obtain “financial security and protection against calamity.”3 The insurer’s refusal to pay valid claims without justification “defeats the expectations of the insured and the purposes of the insurance contract.”4 Therefore, the Colorado Supreme Court has held that the insurer is obligated to deal with its insured in good faith; a violation of this legal duty will subject the insurance company to liability in tort.5 In adopting these principles, the Colorado high court recognized that when the insured suffers a loss, it becomes particularly vulnerable to the insurer.6 The court observed in Decker v. Browning-Ferris Industries of Colorado, Inc.:7 [A]n insured whose valid claim for coverage has been denied in bad faith has no recourse in the marketplace . . . . No other insurance company will assume responsibility for the insured’s losses . . . . It is also noteworthy that the interests of insureds and insurers may conflict . . . . An insurer has an incentive to delay payment of a valid claim in the hope of settling for an amount less than the sum owed pursuant to the policy.8 The inequitable circumstances surrounding the transaction between insurer and insured place the insurer in a “quasi-fiduciary” relationship with its insured.9 As such, in Farmers Group, Inc. v. Trimble, the Colorado Supreme Court held that, in the context of a claim against the insured by a third party, “the standard of conduct of an insurer in relation to its insured . . . must be characterized by general principles of negligence.”10 This standard is to be analyzed in terms

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The Claim or Lawsuit

§ 27.1.2

of reasonableness under the circumstances, i.e., “would a reasonable insurer under the circumstances have denied or delayed payment of the claim under the facts and circumstances.”11 The insured, under Trimble, does not have to show intentional misconduct, fraud, dishonesty, or concealment on the part of the insurer in order to establish a bad faith breach of the insurance contract. Rather, it is the insurer’s unreasonable conduct in handling a claim against the insured that forms the basis for liability.12 Importantly, however, in Bernhard v. Farmers Insurance Exchange,13 the Colorado Supreme Court “refrain[ed] from characterizing the insurer/insured relationship as quasi-fiduciary for all purposes,” and instead limited that appellation “to areas in which the insurer exercises a strong degree of control over the insured’s interests.”14 More recently, in Goodson v. American Standard Insurance Company, the Colorado Supreme Court found that there is no quasi-fiduciary duty in the first-party context because “the insured has not ceded to the insurer the right to represent his or her interests. . . .”15 Accordingly, in addition to proving that the insurer acted unreasonably under the circumstances, “a first-party claimant must prove that the insurer either knowingly or recklessly disregarded the validity of the insured’s claim” in order to make out a claim for bad faith against the insurer.16 Prior to Goodson, the Colorado Court of Appeals had held that a dispute between the insured and the insurer in the context of a first-party claim by the insured — e.g., a claim for property, health, disability, or life insurance benefits — could not give rise to a cause of action for breach of fiduciary duties. For instance, in Bailey v. Allstate Insurance Company,17 the court of appeals found that first-party actions are adversarial in nature. In contrast to an insurer handling a third-party claim against its insured, the insurer in a first-party context has parallel duties under the insurance contract to protect its interests along with those of its insured.18 To be sure, even where a third-party liability claim is involved, if the insured is highly sophisticated — e.g., a lawyer with specialized knowledge of rights and obligations under contracts — the court or jury may well take this into consideration in addressing issues arising under the policy. Yet, a lawyer has definitive rights under the implied covenant of good faith and fair dealing contained in the professional liability contract. If the insurer violates that covenant, the insured has a claim for bad faith breach of the insurance agreement. § 27.1.2—Presuit Responsibilities Usually, the lawyer is made aware of a claim or a potential claim of professional malpractice long before a lawsuit is filed. What rights and duties are triggered by this knowledge? The answer often depends on what facts are available to the insured, and again lies in the express and implied terms of the insurance contract. Of paramount importance is the insured’s obligation to immediately give notice of the claim or potential claim to the insurance company. This matter is discussed further below. Once the insurer has been notified of the possible claim, other duties come into play, e.g., the parties’ mutual obligations to communicate respecting matters pertinent to the claim; the insured’s requirement to assist and cooperate in the adjustment of the claim; and the insurer’s duties to promptly acknowledge the claim, to undertake a timely and thorough investigation of it, and to attempt to fairly and reasonably settle the claim.

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§ 27.1.2

Lawyers’ Professional Liability in Colorado

The Colorado Supreme Court has underscored that the nature of the relationship created by the insurance contract “permeates all of the dealings of the parties.”19 Further, the Colorado General Assembly has declared that persons providing insurance services to the public “be at all times actuated by good faith in everything pertaining thereto . . . .”20 This mandate, according to the court, “is a broad and wide-ranging one.”21 In this regard, the Colorado legislature has delineated various prohibited claims settlement practices in accordance with a Model Act established by the National Association of Insurance Commissioners. C.R.S. § 10-3-1104(h) precludes an insurer, inter alia, from (1) willfully or with such frequency as to indicate a tendency to engage in a general business practice; (2) “[f]ailing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;”22 (3) “failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;”23 (4) “refusing to pay claims without conducting a reasonable investigation based upon all available information;”24 and (5) “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”25 Although a violation of this statute does not give rise to a private cause of action,26 an insurer’s failure to adhere to the act’s strictures may be admitted as evidence of bad faith conduct in a lawsuit against the insurance company.27 Concomitant with the insurance company’s good faith obligations is the requirement that the insured assist and cooperate in the handling of the claim. This duty of cooperation is usually an express condition in the insurance agreement. The insured may forfeit any right to recover under the policy when, in violation of this provision, the insured fails to cooperate with the insurer “in some material and substantial respect.”28 The court of appeals has pointed out, however, that “an insured cannot fail to cooperate unless the insurer has in good faith requested his assistance.”29 Furthermore, courts will find non-cooperation to be a breach of the insurance contract “only if material and substantial disadvantage to the insurer is proved,”30 and, according to the court, “‘any formal, inconsequential, or collusive lack of cooperation will be immaterial.’”31 § 27.1.3—Duty To Notify Insurer The professional liability policy will contain a notice provision directing the insured to notify the insurer of a claim or potential claim pending against it. While the language of the policy may vary somewhat, in general the insured will be required to give prompt notice to the insurance company as soon as it has been advised that a claim has been made or learns of facts that may well give rise to a claim. The Colorado lawyer must treat this notification requirement very seriously. To begin, “claims-made” insurance policies specify that coverage is available only for claims reported to the insurer while the policy is in effect and, according to the Colorado Court of Appeals, this condition will not be excused.32 In addition, and independent of the insured’s obligation to report claims during the policy period in order to trigger coverage under a claims-made policy, the insured’s failure to provide timely notice of a claim may constitute a breach of the policy’s conditions and result in a finding of no coverage if the insurer can establish that it was prejudiced by the late notice.

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The Claim or Lawsuit

§ 27.1.4

Today, virtually all lawyers’ professional liability policies are written on a “claims-made” basis. Colorado courts have sustained the validity of such policies.33 In St. Paul Fire & Marine Insurance Company v. Estate of Hunt,34 the court of appeals considered the scope of an insured’s duty to provide notice under such a policy. There, the insured’s estate argued that, due to the insured’s mental incapacity, his failure to give notice of a claim until after the policy had expired was excused. In analyzing this issue, the appellate court contrasted a “claims-made” insurance policy with a traditional “occurrence” policy. It found that, unlike an “occurrence” policy, “the event that invokes coverage under a ‘claims-made’ policy is the transmittal of notice of the claim to the insurance carrier.”35 Hence, the court found, the notice provision gives the carrier a date certain by which it knows it is no longer liable under the policy, allowing it to more accurately fix its reserves for future liability and to determine premiums with greater accuracy.36 Accordingly, the court rejected application of “the traditional rule” that the failure to give timely notice does not relieve the insurer of liability under the contract if the insured has a justifiable excuse, and instead concluded that “the unique rule of notice in a ‘claims-made’ policy” means that mental capacity, or any other form of impracticability, cannot serve as an excuse for the non-occurrence of a material condition of the contract.37 In addition to requiring that a claim be reported to the insurer within the policy period, or within a specified number of days thereafter, the policy may also contain language requiring that notice of the claim be given to the insurer “immediately,” “promptly,” or “as soon as practicable.”38 These terms have been interpreted by the Colorado courts as requiring notice within a reasonable amount of time under the facts and circumstances of each particular case. The purpose of this notice requirement is to allow the insurer adequate opportunity to investigate the claim and prepare a defense. In 2005, the Colorado Supreme Court joined the majority of jurisdictions in holding that an insured’s failure to provide timely notice of claim under a liability policy will void coverage only where the insurer can establish that it was prejudiced by the late notice.39 However, where the insured fails to give notice until after the disposition of the liability case, a rebuttable presumption of prejudice arises.40 In sum, the Colorado courts’ message is clear: upon learning of a claim or potential claim, the insured should immediately notify its professional liability carrier and forward all pertinent documentation to the company, or risk a potential loss of coverage. § 27.1.4—Reservation Of Rights Letter When presented with a claim, the insurer may endeavor to secure a non-waiver agreement from the insured. In this document, the parties agree that by undertaking an investigation and conducting other activities regarding the claim, the insurer is not waiving any rights to later disclaim coverage under the insurance policy. Alternatively, the carrier may send the insured a reservation of rights letter. Such letters are recognized by the Colorado courts as an appropriate means for the insurance company to preserve its rights to later disclaim coverage, to withdraw a defense, and/or to seek reimbursement of defense costs and indemnity payments.41 Indeed, in Hecla Mining Company v. New Hampshire Insurance Company,42 the Colorado Supreme Court carefully circumscribed the instances under

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27-5


§ 27.1.4

Lawyers’ Professional Liability in Colorado

which a liability carrier can refuse to provide a defense under a liability insurance policy: if the complaint against an insured alleges any facts that might fall within the coverage of the policy, the insurer’s duty to defend arises.43 The court stated: [W]here the insurer’s duty to defend is not apparent from the pleadings in the case against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense of the claim.44 Further, the court held that, where the insurer has doubts as to whether it is obliged to provide a defense, it should defend the insured under a reservation of rights to seek reimbursement of its expenses in the event the facts at the underlying trial prove that the incident was not covered under the policy.45 The Colorado Supreme Court recently reaffirmed these principles in Cotter Corporation v. American Empire Surplus Lines Insurance Company.46 As the purpose of a reservation of rights letter is to provide notice to the insured, the document should be clear and specific, setting forth all potential grounds for denial of a defense or coverage. Preferably, the letter should cite to specific policy provisions and relate them to the allegations in the complaint that are arguably precluded from coverage. A failure to either timely or explicitly reserve rights under the policy may result in a finding that the insurer has waived policy defenses.47 This is particularly true with respect to policy conditions, e.g., the notice provisions.48 Also, some courts have held that where the insurer defends under a reservation of rights, it has an enhanced duty of good faith and fair dealing toward its insured.49 § 27.1.5—Choice Of Defense Counsel In general, the insurance carrier retains the right to select and pay for counsel to defend its professional insured.50 This right — one of the aspects of the insurer’s ability to control the defense of a claim51 — is an important component of the company’s obligations of good faith and fair dealing toward its insured. It is incumbent upon the insurer to use due care to select skilled trial counsel to represent the insured.52 Indeed, as the Colorado appellate courts have indicated, an insurer can be held liable for bad faith breach of contract based on the acts of its agents and independent adjusters;53 consequently, an insured may well have a right of action against the liability carrier due to the wrongful conduct of retained counsel.54 In Colorado, a lawyer hired by the insurance carrier to defend its insured represents only the insured, and not the insurer. As such, the lawyer cannot ethically take a position that is potentially disadvantageous to the insured, even though that position may be advantageous to the carrier.55 What if an actual conflict of interest arises between the insured and its carrier? In some states, such as California, the courts have determined that when the insurance company defends under a reservation of rights to later disclaim coverage, the insured may hire its own independent counsel to represent its interests at the insurance company’s expense.56 Colorado has not yet

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The Claim or Lawsuit

§ 27.1.6

adopted this approach. Accordingly, while the professional liability carrier may allow its insured to use counsel of its own choosing in place of the company’s normal panel counsel,57 absent such approval, the insured will need to pay for separate counsel at its own expense.58 In Bernhard v. Farmers Insurance Exchange,59 the supreme court found that the ability of the insured to hire its own lawyer renders the relationship between it and the insurer more “arm’s length” than a fiduciary relationship, as the insured is thereby able to “regain some control over her defense by retaining independent counsel, either at her own cost and expense or by later suing the insurer for collection of those fees.”60 § 27.1.6—Multiple Parties And Policies Of course, the defense of a claim may be complicated by the presence of multiple parties and/or the existence of multiple insurance policies. The options that may be appropriate for a carrier who, for instance, insures more than one named defendant (e.g., a lawyer, his or her present firm, and his or her former firm) is a highly fact-specific inquiry. As a general rule, the company must ensure that it takes all steps necessary to avoid any conflicts of interest and to afford diligent, uncompromised representation to each person and entity to whom it owes coverage responsibilities — such as hiring separate counsel, creating a “confidentiality wall” within the insurance company, or other mechanisms to protect an insured. Likewise, the allegations in a suit may well implicate multiple liability policies. There are numerous instances where this may occur: partners and associates may have moved between firms; the claims may span two or more insurers’ periods of coverage; or the charges may fall within the coverage of other types of insurance, including homeowners, business, and umbrella policies. Which carrier or carriers must answer for the claims, and to what extent, will depend on the policy’s respective provisions as well as the nature of the complaint’s allegations. As an example, a claim that a lawyer made slanderous comments about his or her client may be combined with other allegations that the lawyer provided inadequate legal services. These claims could trigger coverage under the lawyer’s professional liability policy as well as a personal umbrella policy.61 In that situation, it is incumbent upon the carriers to coordinate a defense with their mutual insured. Further, the length of time that the respective insurers will need to continue to defend, and whether they will be obliged to make payment on the claims will often be dictated by whether the remaining claims are potentially covered by the policies and the relative strength of the claims. Similar considerations arise where multiple professional liability coverages are involved. The insurance companies’ rights and obligations regarding payment of defense and indemnity costs will depend on the language of the respective policies, most notably their “Other Insurance” clauses. Often, these provisions are “competing,” i.e., they contain similar language.62 Under such circumstances, the Colorado courts have indicated that expenses should be borne among the carriers on a pro-rata basis in relation to the respective limits of the applicable policies.63 The Colorado Supreme Court has held that a carrier that voluntarily pays more than its appropriate share of the defense costs may seek contribution from other insurers obliged to provide coverage on a primary basis.64 At the same time, where policies are considered to provide excess coverage,

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§ 27.1.6

Lawyers’ Professional Liability in Colorado

either because they are expressly written in that manner or due to application of an excess insurance clause, the carrier is generally not obligated to provide either a defense or indemnity until the limits of the underlying primary policies have been exhausted through settlement or judgment.65 Also, some excess policies omit any defense obligations whatsoever. § 27.1.7—Consent To Settlement Another potential source of conflict between an insured and its professional liability carrier concerns settlement. This problem can be particularly acute for lawyers. For instance, while the insurance company may believe that a settlement demand is too high, the lawyer or law firm may want to avoid the publicity of a lawsuit or trial, may be concerned about the amount of time that will be required to defend a proceeding, or may be worried about the possibility of an excess judgment. On the other hand, the insurance company may be pushing for a settlement, while the lawyer may believe that a settlement could damage his or her reputation, encourage other suits in the future, affect premium rates, or even impact his or her ability to secure coverage in the future. Usually, these differences will be trumped by the insurance policy language. Often, professional liability policies require the insured’s consent before the insurer can agree to a settlement. Other policies provide for a neutral arbiter or peer review panel to decide any disputes between the carrier and the insured. A third possibility is that the insurer retains the exclusive right to control settlement.66 Regardless of which party has the power of settlement, however, that authority must be exercised consistent with the obligations of good faith and fair dealing.67 For instance, if the policy calls for the insured’s consent prior to settlement and the insured will not agree to a settlement within policy limits, the insured will be unable to seek recovery on an excess judgment from the liability carrier and, further, the contract may restrict the insurer’s liability to the amount of the plaintiff’s demand.68 § 27.1.8—Remedies Of Insurer And Insured As already discussed, the liability insurer’s duty of good faith requires that it work cooperatively with the insured throughout the handling of a claim, treating the insured’s interests equal to its own.69 Thus, an insurer may be liable for bad faith conduct when, for example, it: 1) Fails to timely respond to a claim; 2) Refuses to provide a defense to claims arguably covered by the policy; 3) Conducts an untimely or inadequate investigation; and/or 4) Fails to effectuate a reasonable settlement within policy limits when it has the opportunity to do so. How should the carrier respond to a demand to defend or indemnify a claim against its insured that the insurer believes is not within the scope of the policy? As discussed earlier, through its decisions in Hecla Mining70 and Cotter Corporation,71 the Colorado Supreme Court has delineated an insurer’s responsibility to provide a defense under a liability insurance policy. Pursuant to these decisions:

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The Claim or Lawsuit

§ 27.1.8

[t]he appropriate course of action for an insurer who believes that it is under no obligation to defend, is to provide a defense to the insured under a reservation of rights to seek reimbursement should the facts at trial prove that the incident resulting in liability was not covered by the policy, or to file a declaratory judgment action after the underlying case has been adjudicated.72 Defending under a reservation of rights preserves the insurer’s defenses.73 Hecla Mining and Cotter Corporation thus provide the Colorado insurer with a blueprint as to how to respond appropriately to an insured’s claims of coverage when the company (the Colorado insurer) disputes those claims. Although Hecla Mining suggests that a declaratory judgment action to determine an insurer’s duty to defend should not be filed until after the underlying action has been adjudicated, a subsequent decision, Constitution Associates v. New Hampshire Insurance Company,74 permits the filing, under certain circumstances, of an “anticipatory declaratory judgment action” — i.e., an action for declaratory relief filed by an insurer to determine its coverage obligations before any judgment has been entered against the insured in the underlying case. In Constitution Associates, the court indicated that a judgment against the insured is not a prerequisite to the filing of a declaratory judgment action to determine coverage.75 Such anticipatory declaratory judgment actions may be appropriate if the issues are “independent and separable” from the underlying case.76 This is most likely where the allegations in the underlying complaint do not even give rise to a duty to defend.77 In addition, the court held that the injured party in the underlying action may properly defend against an anticipatory declaratory judgment action brought by the insurance company.78 This does not mean that, absent the filing of a declaratory judgment action, the carrier is under an absolute duty to defend. Indeed, in clear cases, the insurer may choose to simply advise the insured that no defense is available for the allegations in the complaint.79 However, the insurer takes this course at its own peril and, if it is wrong, will be precluded from later contesting issues of its insured’s liability and damages.80 What avenues of recourse, then, are available to an insured who believes that its liability carrier has wrongfully refused to provide a defense, mishandled settlement negotiations, or otherwise engaged in bad faith conduct? In Northland Insurance Company v. Bashor,81 the Colorado Supreme Court approved an arrangement between the party injured in an automobile accident and the tortfeasor/insured, under which both parties would potentially benefit from the insured’s bad faith breach of contract action against his automobile insurer. The insurer had refused to settle a lawsuit against the insured within policy limits. The lawsuit resulted in a judgment in excess of the policy limits. Under the subsequent agreement, the insured made partial payment on the judgment, and would receive reimbursement of that payment on a sliding scale, depending upon the extent to which the bad faith claim was successful. The supreme court held that the contract was not champertous, illegal, void, or contrary to public policy.82 Trial and appellate courts in Colorado and elsewhere have upheld these types of prophylactic agreements, including agreements involving a pretrial settlement.83

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§ 27.2

Lawyers’ Professional Liability in Colorado

§ 27.2 • LITIGATION ISSUES § 27.2.1—Introduction A number of litigation-related issues arise when a claim is made against a lawyer, a lawyer is designated as a non-party tortfeasor, or a lawyer is called upon to testify or produce documents regarding legal services that he or she has performed on behalf of a current or former client. This section covers some of the issues that may arise and how to address them, whether the issues are raised by a current or former client, or by a third party. § 27.2.2—Determination Of Lawyer’s Status In Litigation Before a lawyer can determine what issues he or she must address or how to address them, the lawyer should first determine his or her status in a threatened claim or pending litigation. Generally, a lawyer can readily determine if a claim has been made against him or her, as the lawyer will be served with a summons and complaint or receive some other demand or allegation of wrongdoing from or on behalf of the client. Determining whether a lawyer has been designated as a non-party tortfeasor or whether his or her professional competence has been called into question in another context may be more difficult. While the lawyer likely has no duty to affirmatively investigate such possibilities, if the lawyer learns that his or her professional competence has been called into question in any legal proceedings, the lawyer should immediately notify his or her professional liability insurer. § 27.2.3—Notice General When a lawyer is served with a complaint, designated as a non-party tortfeasor, or subpoenaed to produce documents or testify regarding legal services he or she has provided, the lawyer should provide notice to all relevant persons. The “relevant persons” to whom notice should be given are discussed below. As used in this section, the word “claim” is broad. A “claim” may be the lawyer’s knowledge of information that may give rise to an action, a threat of litigation, or an actual filed lawsuit where the lawyer is named as a party or there are allegations questioning his or her professional competence. The word “notice” is also used broadly. It covers not only providing information of the existence of a claim, non-party designation, or receipt of a subpoena, but also providing other information relevant to the response to the claim, non-party designation, or subpoena. Notice to Insurers Lawyer as Fact Witness If a lawyer has been subpoenaed to produce documents and testify as a fact witness about a client, and there are no allegations of professional misconduct on the part of the lawyer, he or she may not need to notify his or her insurer. However, the lawyer may nonetheless wish to notify the insurer. Although no claim is made or threatened against the lawyer, the lawyer may wish to obtain legal advice on how to respond to the subpoena.

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The Claim or Lawsuit

§ 27.2.3

An insurer may, but is not required to, provide assistance to the lawyer. The assistance may simply be access to a hotline. A hotline is a service that some insurers provide through which an insured lawyer may speak to another lawyer to obtain assistance free of charge to the insured lawyer. The hotline lawyer may be the in-house counsel of the insurer or other counsel appointed by the insurer. Depending on the issues raised, the lawyer may need more assistance than a hotline can provide. If so, the lawyer may need to retain counsel to provide assistance and advice. Claim or Designation of Non-Party Against Lawyer If a claim is made against a lawyer or the lawyer is designated as a non-party tortfeasor, he or she should immediately obtain and review all potentially applicable liability insurance policies under which the lawyer may be covered and provide notice to all relevant insurers.84 This includes not only the lawyer’s insurer under his or her lawyers’ professional liability (LPL) policy, but also insurers providing potentially applicable coverages. For example, if the lawyer has directors’ and officers’ (D&O) liability coverage, which is not included in the LPL policy,85 and the claim relates to activities associated with the lawyer’s role as an officer or a director, notice to the directors’ and officers’ liability insurer should also be given. Similarly, if the lawyer has a personal blanket, excess, or umbrella insurance policy, the terms of that policy may be broad enough to provide coverage. If the lawyer is in doubt as to whether a policy of insurance may provide coverage, the lawyer should give notice or consult a coverage lawyer. Generally, when a potentially covered claim is made against the lawyer, the insurer will assign defense counsel to represent the insured in the litigation. The assistance provided by the defense lawyer will depend on the nature of the claim and the insurer. For example, some insurers have a claim repair service, where the defense lawyer will review the matter, determine whether an error can be remedied, and perform services necessary to rectify a correctable error. In other instances, such as where the insured is named in a lawsuit, defense counsel’s role will necessarily be much larger. When the lawyer is designated as a non-party tortfeasor, the extent of services provided may depend on the insurer and the terms of the LPL policy. Some insurers may assign a defense lawyer to assist the insured, while others may take the position that the designation of an insured as a non-party does not constitute a claim or loss under the policy of insurance and, therefore, may not assign defense counsel.86 If defense counsel is not provided and the lawyer needs more assistance than the insurer is willing or able to provide, the lawyer should consider whether to retain his or her own counsel. Notice to Lawyer’s Client Client Is Complaining Party When the complaining party is the lawyer’s client, the lawyer obviously does not need to give notice to the client. However, depending on the nature of the complaining party’s claims, the lawyer may be required to advise other clients who might potentially be impacted by the outcome of the case.

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§ 27.2.3

Lawyers’ Professional Liability in Colorado

Third Party Is Complaining When a non-client makes allegations of professional misconduct against a lawyer arising out of the lawyer’s handling of a matter on behalf of his or her client, the lawyer should notify the client of the allegations, preferably in writing. Of course, the lawyer should also provide notice of the allegations to insurers under any potentially applicable liability insurance policies. Lawyer as Fact Witness If a lawyer is subpoenaed, he or she should always provide notice to the client to whom the subpoena relates. For example, if the subpoena requests documents relating to a real estate transaction with ABC Corporation, then ABC Corporation should be notified so that it can determine what actions it wishes to take. The lawyer can then determine whether he or she should invoke any appropriate privileges in response to the subpoena. Notice — Other Issues The lawyer should determine whether there may be other persons or entities to whom notice should be given. For example, if the allegations against the lawyer arise from his or her activity as a director of an organization, the organization’s bylaws may provide for indemnification. Where appropriate, the lawyer should provide notice of the claim to the organization and request indemnification. Another notice issue may arise from the documents contained in the lawyer’s files. The documents may be subject to contractual limitations on disclosure or a protective order. If such limitations exist and the lawyer believes that he or she may need to disclose such documents to defend against the claim or non-party designation, the lawyer should notify the appropriate persons to obtain any required consent to disclosure or obtain such orders from the court as are necessary. § 27.2.4—Attorney-Client Privilege87 General In Colorado, the common law attorney-client privilege has been codified and exists for the personal benefit and protection of the client.88 The privilege extends to confidential communications made by or to the client in the course of gaining counsel, advice, or direction with respect to the client’s rights or obligations.89 As codified, and subject to certain exceptions, the privilege prevents a lawyer from being examined without the consent of his or her client as to any communication made by the client to the lawyer, or as to the lawyer’s advice to the client given in the course of the lawyer’s professional employment.90 The privilege applies to statements made in circumstances giving rise to a reasonable expectation that the statements will be treated as confidential.91 This may be established, for instance, where the client seeks professional advice from the lawyer.92 The privilege generally does not protect communications made to a lawyer with the intent that they be communicated to third persons.93 The privilege exists for the benefit of the client and it may be asserted by the client or by the client’s lawyer on the client’s behalf.94 The burden of proving that a privilege applies is on the person asserting the privilege.95

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Rule 1.6 of the Colorado Rules of Professional Conduct also addresses the attorney-client privilege, and states in pertinent part as follows: (a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraphs (b) and (c). *** (c) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceedings concerning the lawyer’s representation of the client. (d) A lawyer shall exercise reasonable care to prevent the lawyer’s employees, associates, and others whose services are utilized by the lawyer from disclosing or using such information, except that a lawyer may reveal information allowed by paragraphs (b) and (c) through such persons. The Comment to Colo. RPC 1.6 provides, in relevant part, “The confidentiality rule applies not merely to matters communicated in confidence by the client but also to all information relating to the representation, whatever its source.” The Comment further provides, “The attorneyclient privilege is more limited than the ethical obligation of a lawyer to guard confidential information of the client. This ethical precept, unlike the evidentiary privilege, exists without regard to the nature or source of information or the fact that others share the knowledge.” Limited Disclosure of Attorney-Client Privileged Information This subsection covers a lawyer’s ability to disclose communications that are otherwise confidential and privileged in order to defend against allegations of professional misconduct. This requires a two-part analysis: the determination of whether disclosures may be made and, just as importantly, the method and manner of such disclosures. It is beyond the scope of this subsection to cover other exceptions to the attorney-client privilege, such as the crime or fraud exception or a client’s waiver of such privilege where the client places the confidential communications in issue.96 Disclosure Where Client Files Claim When a client files an action against his or her lawyer alleging legal malpractice or other wrongful conduct, the lawyer may disclose privileged information as reasonably necessary to defend against the allegations.97 Where the lawyer has represented the client in connection with other matters that are not implicated in the malpractice action, it is more difficult to determine whether it is appropriate to disclose privileged information known by the lawyer as a result of having represented the client in connection with those other matters.

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§ 27.2.4

Lawyers’ Professional Liability in Colorado

Neither Colo. RPC 1.6(c) nor any reported Colorado appellate decision expressly addresses this issue. The only pertinent limitation under Colo. RPC 1.6(c) is that the disclosure must be of matters that the lawyer “reasonably believes necessary” to his or her defense.98 Colo. RPC 1.6 does not place a limitation on the source of the information. If there is any question about whether the information may be disclosed, the lawyer should seek authorization from the court prior to making the disclosure. Disclosure Where Third Party Files Claim Colo. RPC 1.6(c) allows limited disclosure of confidential information not only in controversies between the client and lawyer but also “to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceedings concerning the lawyer’s representation of the client.” Further, the Comment to Colo. RPC 1.6(c) expressly provides, in relevant part: Dispute Concerning a Lawyer’s Conduct Where a legal claim or disciplinary charge alleges complicity of the lawyer in a client’s conduct or other misconduct of the lawyer involving representation of the client, the lawyer may respond to the extent the lawyer reasonably believes necessary to establish a defense. The same is true with respect to a claim involving the conduct or representation of a former client . . . . Thus, Colo. RPC 1.6 is not restricted to proceedings initiated by allegations from the It also covers proceedings initiated by third parties.100 Therefore, the lawyer may be permitted to disclose privileged and confidential information that a lawyer reasonably deems necessary to respond to a third party’s claim concerning the lawyer’s representation of the client. client.99

Before the lawyer makes any disclosures, however, the lawyer must notify the client or former client of the lawyer’s intent to make the disclosures. If the client consents to the disclosures, the lawyer should obtain the client’s consent in writing. If the client objects to the disclosures, the lawyer should seek authorization from the court prior to making the disclosure. Disclosure Where Lawyer Is Designated Non-Party Tortfeasor The issue of whether privileged information may be disclosed when the lawyer is designated as a non-party has not been decided in Colorado. Colo. RPC 1.6(c) appears, however, to countenance such disclosure, as it provides for a limited disclosure of confidential communications in order to respond “to allegations in any proceedings concerning the lawyer’s representation of the client.” Further, the Comment to Colo. RPC 1.6(c) provides, in pertinent part:

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Dispute Concerning a Lawyer’s Conduct *** The lawyer’s right to respond arises when an assertion of such complicity has been made. Paragraph (c) does not require the lawyer to await the commencement of an action or proceeding that charges such complicity, so that the defense may be established by responding directly to a third party who has made such an assertion. The right to defend, of course, applies where a proceeding has commenced. There are several reasons why limited disclosure should be allowed when the lawyer is a designated non-party.101 First, a designated non-party may be added as a named party to the action, and what the lawyer discloses or fails to disclose may affect whether he or she is added as a named party. Second, while the apportionment of liability to the lawyer as a non-party will not establish the lawyer’s liability in subsequent proceedings involving the lawyer,102 any testimony that he or she may give at a deposition or trial can be used in later proceedings involving the lawyer.103 Because a non-party designation has the potential to impact the lawyer in subsequent proceedings, it would seem fair that the lawyer be allowed to disclose privileged information to the extent necessary to protect against any such future contingencies. Again, before the lawyer makes any disclosures, the lawyer must notify the client or former client of the lawyer’s intent to make the disclosures. Disclosure Where Lawyer Is a Fact Witness Where a lawyer is a fact witness and there are no allegations of professional misconduct raised in the litigation or directed against the lawyer, the lawyer is not defending against any allegations of improper conduct. In the absence of the applicability of any other exception to the attorney-client privilege, such as the crime-fraud exception, the lawyer may not disclose confidential or privileged information. Method of Disclosure As previously discussed, in other than a professional liability action asserted by a lawyer’s client or former client, the lawyer must inform the client or former client of the lawyer’s intent to disclose confidential or privileged information. In a situation where the client or former client objects to the disclosure, or where the lawyer is uncertain whether or not any disclosure is permitted, but believes that disclosure is necessary to defend against allegations of wrongdoing, the lawyer should apply to the court for permission to make the disclosures. Because the disclosure of some confidential communications may result in a waiver or inadvertent disclosure of other confidential communications, the lawyer should also seek guidance from the court concerning the scope of any disclosure of confidential communications. As appropriate, the lawyer should file applications to the court under seal, accompanied by a request for in camera review. In this regard, the Comment to Colo. RPC 1.6 provides that “the disclosure should be made in a manner which limits access to the information to the tribunal or other persons having a need to know it, and appropriate protective orders or other arrangements should be sought by the lawyer to the fullest extent practicable.”

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§ 27.2.4

Lawyers’ Professional Liability in Colorado

Upon application, the court can decide to what extent any confidential communications may be disclosed in light of the allegations or claims made against the lawyer, and enter such orders as are appropriate to protect privileged communications from wider disclosure. With a court order, the lawyer has assurance that he or she has complied with the requirements of the attorney-client privilege and Colo. RPC 1.6. § 27.2.5—Lawyer Work Product Privilege General Evidentiary privileges have typically focused on relationships in which the public interest is served by promoting and encouraging openness: marital relationships, client-lawyer relationships, doctor-patient relationships, clergy-confessor relationships, etc.104 By contrast, the work product doctrine, sometimes referred to as the “work product privilege,”105 generally applies to documents and tangible things prepared in anticipation of litigation or for trial, and its goal is to ensure and protect the privacy of the lawyer’s trial preparation work from opposing parties and counsel.106 The work product privilege is “personal” to the lawyer107 and, as such, can be waived, expressly or impliedly, by the lawyer.108 In order for the work product privilege to apply, the person asserting the privilege must establish that the materials were prepared in anticipation of litigation or for trial.109 The purpose of the privilege is to protect a party’s lawyer from unnecessary intrusion by opposing parties and counsel.110 The materials enjoy only a qualified immunity from discovery because they may be discoverable upon a showing of substantial need and an inability without undue hardship to obtain their substantial equivalent by other means.111 When a court orders the discovery of trial or litigation preparation materials, however, it should protect the mental impressions, conclusions, opinions, or legal theories of the lawyer.112 The Colorado appellate courts have not decided whether the work product privilege continues to apply when the proceeding or matter to which the privilege relates is completed. The federal courts have generally concluded that the privilege does continue even when the underlying proceeding has ended.113 “Waiver” of Privilege Client Asserts Claim or Raises Issue Although the work product privilege is personal to the lawyer, when a lawyer’s client sues him or her for malpractice, the lawyer’s files relating to the malpractice action are generally discoverable by the client. As such, the privilege may not apply. Colorado’s appellate courts have not yet addressed the issue of when, if ever, a lawyer may withhold otherwise relevant information from his or her client or former client, on the basis of the work product privilege, where such client has asserted a professional liability action against the lawyer. There may be situations where the lawyer’s alleged professional misconduct is raised not by a client’s direct claim, but rather by the client’s assertion of the defense of advice of counsel or

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§ 27.3.3

ineffective assistance of counsel. A third party may wish to obtain the lawyer’s files and records as a result of these actions by the client. If the lawyer desires to maintain the work product privilege, he or she should consider whether doing so would be consistent with his or her professional obligations to the client and, further, seek appropriate relief from the court.

§ 27.3 • REPORTING REQUIREMENTS § 27.3.1—Introduction This section identifies and discusses the Colorado lawyer’s self-reporting requirements.114 This section does not address reporting requirements imposed upon Colorado lawyers pertaining to the actions of other lawyers. Nor does this section attempt to identify all crimes or actions that could trigger a duty to report. The lawyer must make that determination based on the facts of his or her case, preferably with the assistance and advice of outside counsel. § 27.3.2—Colorado Supreme Court Generally speaking, a lawyer who has been named as a party in a professional liability action, or whose professional conduct has been called into question in a civil proceeding, has no duty to report such matters to the Attorney Regulation Counsel. Similarly, the fact that an adverse judgment has been entered against a lawyer in a professional liability action does not trigger a duty to report. Pursuant to Rule 251.20(b) of the Colorado Rules of Procedure Regarding Attorney Discipline and Disability Proceedings, Colorado Attorneys’ Fund for Client Protection, and Mandatory Continuing Legal Education and Judicial Education, however, a lawyer convicted of a crime, “except those misdemeanor traffic offenses or traffic ordinance violations, not including the use of alcohol or drugs,” must notify the Regulation Counsel in writing within 10 days after the date of the conviction. The word “conviction” is defined under Rule 251.20(h) and includes, among other matters, deferred judgments.115 Further, Rule 251.21(b) provides that a lawyer must notify the Attorney Regulation Counsel of any form of public discipline imposed by the authorities of another jurisdiction, or of the voluntary surrender of the lawyer’s license to practice law in connection with disciplinary proceedings in another jurisdiction.116 This notice must also be provided in writing within 10 days of such public discipline or voluntary surrender of the lawyer’s license.117 § 27.3.3—U.S. District Court For The District Of Colorado Pursuant to D.C. Colo. L.R. 83.4, the Rules of Professional Conduct adopted by the Colorado Supreme Court are also adopted as standards of professional responsibility applicable to the U.S. District Court for the District of Colorado. If a lawyer admitted to practice before the U.S. District Court is charged in “any court with a criminal offense that may subject the attorney to discipline” in the U.S. District Court, the lawyer must notify the clerk of the court in writing within 10 days after the charge is filed.118

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§ 27.3.3

Lawyers’ Professional Liability in Colorado

Similarly, pursuant to D.C. Colo. L.R. 83.3(E), a lawyer admitted to practice before the U.S. District Court “must remain in good standing in all courts where admitted.” If the lawyer is formally disciplined “by any court,” the lawyer must give “immediate written notice to the clerk of [the] court of the date and terms of discipline, the name and address of the court imposing the discipline and the date of that court’s action.” In addition, D.C. Colo. L.R. 83.5(P) provides that any “member of this court’s bar who resigns from the bar of any other federal or state court while an investigation into allegations of misconduct is pending shall cease to be a member of this court’s bar.” While the rule does not discuss reporting, there is little question but that the lawyer is under an obligation to advise the U.S. District Court of any such resignation.

* Updating a Chapter originally written in 1999 by Bradley A. Levin, Roberts Levin & Patterson PC; Robin L. Beattie, Law Office of Robin L. Beattie; and Jesús M. Vázquez, Jr., Hall & Evans, LLC.

NOTES 1. See Amoco v. Ervin, 908 P.2d 493, 498 (Colo. 1995); Aetna Cas. & Sur. Co. v. Kornbluth, 471 P.2d 609, 611 (Colo. App. 1970). 2. See Comunale v. Traders & General Ins. Co., 328 P.2d 198, 200 (1958). 3. Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo. 1984). 4. Id. 5. Id. 6. Id. See, e.g., Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1273 (Colo. 1985). In Savio, the supreme court adopted the following standard of conduct required to prove a first-party claim, i.e., a claim arising from the failure to pay benefits owed directly to the insured: (1) the insurer’s conduct was unreasonable and (2) the insurer knew the conduct was unreasonable or recklessly disregarded the fact that the conduct was unreasonable. Id. at 1274. 7. Decker v. Browning-Ferris Indus. of Colo. Inc., 931 P.2d 436 (Colo. 1997). 8. Id. at 444, citing Savio, 706 P.2d at 1273 (other citations deleted). In Decker, the Colorado Supreme Court rejected the plaintiff’s suggestion that an employer-employee relationship possesses many of the characteristics found in the insurer-insured relationship. Although Decker addresses an employee’s wrongful discharge claim, the opinion contains a cogent analysis of the relationship between the insurer and its insured. See Decker, 931 P.2d at 443-45. 9. Trimble, 691 P.2d at 1142. 10. Id. 11. Id. 12. Id. 13. Bernhard v. Farmers Ins. Exchange, 915 P.2d 1285 (Colo. 1996). 14. Id. at 1289. 15. Goodson v. American Standard Ins. Co., 89 P.3d 409, 415 (Colo. 2004). 16. Id. 17. Bailey v. Allstate Ins. Co., 844 P.2d 1336 (Colo. App. 1993). 18. Id. at 1339; see also Herod v. Colo. Farm Bureau Mut. Ins. Co., 928 P.2d 834, 835 (Colo. App. 1996). But see State Farm Mut. Auto. Ins. Co. v. Brekke, 105 P.3d 177, 188-189 (Colo. 2004) (“Because of

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Notes

the special nature of uninsured motorists coverage, we have held the contract creates a relationship between the insurer and the insured that we have described as quasi-fiduciary.”). 19. Ballow v. Phico Ins. Co., 875 P.2d 1354, 1363 (Colo. 1993) (citing Travelers Ins. Co. v. Savio, 706 P.2d 1258 (Colo. 1985)) (emphasis in original). 20. C.R.S. § 10-1-101. 21. Ballow v. Phico Ins. Co., 875 P.2d 1354, 1363 (Colo. 1993) 22. C.R.S. § 10-3-1104(1)(h)(II). 23. C.R.S. § 10-3-1104(1)(h)(III). 24. C.R.S. § 10-3-1104(1)(h)(IV). 25. C.R.S. § 10-3-1104(1)(h)(VI). 26. C.R.S. § 10-3-1114 (“Nothing in this part 11 shall be construed to create a private cause of action based on alleged violations of this part 11 or to abrogate any common law contract or tort cause of action.”); Showpiece Homes Corp. v. Assurance Co. of Am., 38 P.3d 47, 51 (Colo. 2001); Farmers Group, Inc. v. Trimble, 658 P.2d 1370, 1377-78 (Colo. App. 1982). 27. C.R.S. § 10-3-1113(d)(4); Peiffer v. State Farm Mut. Auto. Ins. Co., 940 P.2d 967, 971 (Colo. App. 1996), aff’d on other grounds 955 P.2d 1008 (Colo. 1998). 28. Hansen v. Barmore, 779 P.2d 1360, 1364 (Colo. App. 1989) (quoting Farmers Auto. InterInsurance Exch. v. Konugres, 202 P.2d 959 (Colo. 1949)). 29. Id. 30. Id. 31. Id. (quoting Konugres, 202 P.2d 959 (Colo. 1949)). 32. St. Paul Fire & Marine Ins. Co. v. Estate of Hunt, 811 P.2d 432 (Colo. App. 1991). 33. See James J. Brogger & Assocs., Inc. v. Am. Motorists Ins. Co., 595 P.2d 1063, 1064-1065 (Colo. App. 1979); see also Ballow, 875 P.2d at 1357. 34. St. Paul Fire & Marine Ins. Co. v. Estate of Hunt, 811 P.2d 432 (Colo. App. 1991). 35. Id. at 434. 36. Id. at 435. 37. Id. 38. Certified Indem. Co. v. Thun, 439 P.2d 28, 30 (Colo. 1968); see also Clementi v. Nationwide Mut. Fire Ins. Co., 16 P.3d 223, 226 (Colo. 2001). 39. Friedland v. Travelers Indem. Co., 105 P.3d 639, 648 (Colo. 2005); see also Clementi, 16 P.3d at 226 (applying notice-prejudice rule in first-party underinsured motorist context). 40. Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005). 41. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083 (Colo. 1991); Hartford Ins. Group v. District Court, 625 P.2d 1013, 1015 n. 2 (Colo. 1981). 42. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083 (Colo. 1991). 43. Id. at 1089. 44. Id. (quoting City of Willoughby Hills v. Cincinnati Ins. Co., 459 N.E.2d. 555, 558 (1984)). 45. See id. 46. Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814 (Colo. 2004). 47. See U.S.F.G. v. Budget Rent-A-Car Sys., Inc., 842 P.2d 208, 210 n. 3 (Colo. 1992); 7C Appleman, Insurance Law and Practice § 4692 (1979). But see Hartford Live Stock Ins. Co. v. Phillips, 372 P.2d 740 (Colo. 1962). 48. See Colard v. Am. Fam. Mut. Ins. Co., 709 P.2d 11, 15 (Colo. App. 1985). 49. See, e.g., Colonial Life & Acc. Ins. Co. v. Hartford Fire Ins. Co., 358 F.3d 1306, 1309 (11th Cir. 2004); Finley v. Home Ins. Co., 975 P.2d 1145, 1156-57 (Hawaii 1998); L & S Roofing Supply Co. v. St. Paul Fire & Marine Ins. Co., 521 So.2d 1298, 1303-04 (Ala. 1987); Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133, 1137 (Wash. 1986). 50. For example, Standard Form 1 published by the Insurance Services Office (ISO) contains the following language: “The company shall have the right and duty to defend any suit against the insured seeking damages for claims to which this insurance applies . . . .”

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Notes

Lawyers’ Professional Liability in Colorado

51. See Kornbluth, 471 P.2d at 611. 52. See 7C Appleman, Insurance Law and Practice § 4687 at 181-82: “[The carrier] must select skilled trial counsel — not the lowest priced member of the bar — and that individual, so selected by it, may bind the insurer by his derelictions.” 53. See Scott Wetzel Servs., Inc. v. Johnson, 821 P.2d 804 (Colo. 1991); Gorab v. Equity Gen’l Agents, Inc., 661 P.2d 1196, 1199 (Colo. App. 1983); cf. Cary v. United of Omaha Life Ins. Co., 68 P.3d 462, 464 (Colo. 2003) (allowing bad faith claim against third-party administrator of insurance policy where the administrator “had primary control over benefit determinations, assumed some of the insurance risk of loss, undertook many of the obligations and risks of an insurer, and had the power, motive, and opportunity to act unscrupulously in the investigation and servicing of the insurance claims”). 54. See, e.g., Nat’l Farmers Union Prop. & Cas. Co. v. O’Daniel, 329 F.2d 60, 64-65 (9th Cir. 1964) (regarding a bad faith claim for a failure to settle, lawyer’s knowledge and conduct can be imputed to the insurer, but not to the insured); Smoot v. State Farm Mut. Ins. Co., 299 F.2d 525, 530 (5th Cir. 1962) (“Those whom the Insurer selects to execute its promises, whether attorneys, physicians, no less than company-employed adjusters, are its agents for whom it has customary legal liability.”); see also Mazer v. Sec. Ins. Co., 53 F.R.D. 617 (D. Pa. 1971); Peterson v. Farmers Casualty Co., 226 N.W.2d 226 (Iowa 1975). 55. See CBA Ethics Committee Formal Opinion 43 (Feb. 13, 1969); CBA Ethics Committee Formal Opinion 91 (Jan. 16, 1993). 56. See San Diego Navy Fed. Credit Union v. Cumis Ins. Society, 208 Cal. Rptr. 494 (1984). 57. This is a matter that usually can, and should, be discussed and negotiated at the time of the purchase of the liability policy. 58. See Van Winkle v. Transamerica Title Ins. Co., 697 P.2d 784, 786 (Colo. App. 1984) (where insured elected to retain counsel of his own choice, rather than counsel selected by the insurer, the insured was not entitled to reimbursement of its attorney fees). 59. Bernhard, 915 P.2d at 1285. 60. Id. at 1289. The court, however, did not address the issues of whether and under what circumstances the insurance company may be held responsible for payment of the insured’s expenses incurred in hiring independent counsel. 61. A typical form of personal liability umbrella policy includes coverage for losses due to “personal injury,” which is defined to include “injury arising out of . . . humiliation, slander, defamation of character or invasion of privacy.” 62. Typical language appears in ISO Standard Form 9, Amended Condition 6, which reads as follows: “[T]he company shall not be liable under this [insurance] for a greater proportion of such loss and claim expenses than the applicable limit of liability stated in the declarations bears to the total applicable limit of liability of all valid and collectible insurance . . . .” 63. See Empire Cas. v. St. Paul Fire & Marine Ins. Co., 764 P.2d 1191, 1199 (Colo. 1988). 64. See Nat’l Cas. Co. v. Great Southwest Fire Ins. Co., 833 P.2d 741, 747 (Colo. 1992). 65. See Colo. Farm Bureau Mut. Ins. Co. v. North American Reinsurance Corp., 802 P.2d 1196, 1198 (Colo. App. 1990). 66. For example, ISO Standard Form 1 provides, “The company may make such investigation and settlement of any claim or suit as it deems expedient.” 67. See Kornbluth, 471 P.2d at 611 (insurance company’s possession of the right to settlement “necessarily imposes a correlative duty on the part of the insurance company” to discharge that duty in a reasonable manner); see also Sloan v. State Farm Mut. Auto. Ins. Co., 360 F.3d 1220, 1225 (10th Cir. 2004) (applying New Mexico law). 68. See Eklund v. Safeco Ins. Co. of Am., 579 P.2d 1185 (Colo. App. 1978) (insurer not liable for excess verdict where insureds opposed settlement offers within policy limits). This is sometimes referred to colloquially as the “Hammer Clause.” 69. See Crisci v. Sec. Ins. Co., 426 P.2d 173, 176 (Cal. 1967). This is sometimes referred to as the “Equal Treatment Doctrine.” 70. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083 (Colo. 1991).

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71. Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814 (Colo. 2004). 72. Hecla Mining, 811 P.2d at 1089. 73. See, e.g., Nikolai v. Farmers Alliance Mut. Ins. Co., 830 P.2d 1070 (Colo. App. 1991) (insurer did not waive its policy defenses when it settled claims after issuing a reservation of rights letter). 74. Constitution Assocs. v. New Hampshire Ins. Co., 930 P.2d 556 (Colo. 1996). 75. See id. at 558. 76. See id. at 562-563. 77. See id. at 563. 78. See id. at 561-62. Cf. Farmers Ins. Exch. v. District Court, 862 P.2d 944 (Colo. 1993) (the plaintiff has no standing to bring a declaratory action against a defendant’s insurer unless and until the plaintiff receives a judgment against the defendant). 79. See Gerrity Co. v. Cigna Prop. & Cas. Ins. Co., 860 P.2d 606 (Colo. App. 1993); Nikolai v. Farmers Alliance Mut. Ins. Co., 830 P.2d 1070 (Colo. App. 1991). 80. See Flatiron Paving Co. v. Great Southwest Fire Ins. Co., 812 P.2d 668 (Colo. App. 1990). 81. Northland Ins. Co. v. Bashor, 494 P.2d 1292 (Colo. 1972). 82. Id. at 1294. 83. See, e.g., Besel v. Viking Ins. Co. of Wisconsin, 49 P.3d 887, 891 (Wash. 2002) (“[A] covenant not to execute coupled with an assignment and settlement agreement is not a release permitting the insurer to escape its obligation.”); Damron v. Sledge, 460 P.2d 997, 999 (Ariz. 1969) (the insured exposed by its insurer “to the sharp thrust of personal liability . . . need not indulge in financial masochism” for the benefit of the breaching insurance company); see also Rodriquez v. Safeco Ins. Co., 821 P.2d 849 (Colo. App. 1991); Traders & Gen’l Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621 (10th Cir. 1942). Some courts, however, have rejected efforts to enforce pre-trial settlement against the insurer. See Pruyn v. Agric. Ins. Co., 42 Cal. Rptr.2d 295 (Cal. App. 1995); State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996); Gibbs M. Smith, Inc. v. U.S.F.&G., 949 P.2d 337 (Utah 1997). 84. In providing notice, it is important to determine not only to whom and how notice should be given, but also to consult the policy or contact the carrier to determine precisely what information the company requires. 85. See § 12.3 of this handbook for a discussion of LPL insurance policies. Some LPL insurers may offer nonprofit directors’ and officers’ liability insurance, which may be purchased as part the LPL policy. 86. At the time this Chapter was written, no reported Colorado appellate decision was found addressing the issue of whether an insurer has a duty to defend its insured when the insured is designated as a non-party at fault. In Colorado, the person or entity who is designated as a non-party tortfeasor must owe a legal duty to the plaintiff. Miller v. Byrne, 916 P.2d 566, 578 (Colo. App. 1995). 87. For further discussions about the attorney-client privilege, see Chapter 4, “Privileges and Confidentiality” by John M. Palmeri, and see Edna Selan Epstein, The Attorney-Client Privilege and the Work-Product Doctrine (3d ed. 1997). 88. Mountain States Tel. & Tel. Co. v. DiFede, 780 P.2d 533, 541 (Colo. 1989). 89. Id. 90. C.R.S. § 13-90-107(1)(b). 91. Lanari v. People, 827 P.2d 495, 499 (Colo. 1992). 92. Losavio v. District Court, 533 P.2d 32, 35 (Colo. 1975). 93. South Carolina Ins. Co. v. Fisher, 698 P.2d 1369, 1371 (Colo. App. 1984). 94. See People v. Medina, 72 P.3d 405, 408 (Colo. App. 2003); see also In re Grand Jury Subpoena Duces Tecum (Vesco), 391 F. Supp. 1029, 1034 (S.D. N.Y. 1975). 95. Denver Post Corp. v. Univ. of Colo., 739 P.2d 874, 881 (Colo. App. 1987). 96. E.g., DiFede, 780 P.2d at 542-544 (waiver by client’s conduct). For a more thorough discussion of the attorney-client privilege and its exceptions, please see Chapter 4, “Privileges and Confidentiality” by John M. Palmeri. 97. Colo. RPC 1.6(c) (2005). 98. Cmt., Colo. RPC 1.6 (2005).

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Notes

Lawyers’ Professional Liability in Colorado

99. People v. Robnett, 859 P.2d 872, 878-879 (Colo. 1993). 100. Id. 101. This assumes that the lawyer was not initially a party, dismissed through settlement or otherwise, and then added as a non-party tortfeasor. 102. C.R.S. § 13-21-111.5(3). 103. CRE 613; CRE 801(b)(1). 104. Lazar v. Riggs, 79 P.3d 105, 109-110 (Colo. 2003). 105. Denver Post Corp., 739 P.2d at 881 (“The work product privilege exists not to protect a confidential relationship, but to promote fairness in the adversary system by safeguarding the fruits of an attorney’s trial preparations, which have been paid for by his client, from being used without cost by his opponent.”). 106. Id. 107. See In re Vargas, 723 F.2d 1461, 1466 (10th Cir. 1983); People v. Small, 631 P.2d 148, 159 (Colo. 1981) (work product privilege not personal to client; it may be waived by lawyer’s course of conduct). 108. Small, 631 P.2d at 159; Khandji v. Keystone Resorts Mgmt., 140 F.R.D. 697, 700 (D. Colo. 1992) (work product protection waived by conduct of counsel) (applying F.R.C.P. 26(b)(3)). 109. Hawkins v. District Court, 638 P.2d 1372, 1376-1377 (Colo. 1982). 110. Small, 631 P.2d at 159. 111. Id.; Hawkins, 638 P.2d at 1376. 112. Small, 631 P.2d at 159; Hawkins, 638 P.2d at 1377; C.R.C.P. 26(b)(3). 113. Frontier Refining, Inc. v. Gorman-Rupp Co., 136 F.3d 695, 703 (10th Cir. 1998) (work product remains protected even after the termination of the litigation for which it was prepared) (applying F.R.C.P. 26(b)(3)). 114. See also Chapter 34, “Attorney Discipline Process and Procedure” by Alec Rothrock, for a further discussion of reporting requirements. 115. People v. Barnthouse, 941 P.2d 916, 917-918 (Colo. 1997). 116. People v. Bruun, 764 P.2d 1165, 1166 (Colo. 1988). 117. C.R.C.P. 251.21(b). 118. D.C. Colo. L.R. 83.5(Q).

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(1/07)


Section 3

C O L O R A D O B A R A S S O C I AT I O N CLE CLE in Colorado, Inc. is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association


SECTION 3 Underwriting

Presented by Chris Buckman Vice President Marsh Affinity Group Services Denver, CO Lucy A. Aiello Director of Underwriting Lawyers Professional Liability CNA Insurance Company Denver, CO


Notes: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________


Understanding the Application Process New and Renewal Business and Underwriter’s Considerations Underwriting a professional liability application for a law firm is designed to be a logical and rational process using the information gathered from the application to analyze and assess the risk a firm presents. This determines whether such firm falls within the insurance carrier’s guidelines of acceptability. Once acceptability is determined, the pricing is calculated based on the risk characteristics and the coverage the carrier is willing to extend. The application is the instrument by which a law firm presents itself to an underwriter for consideration of professional liability coverage. The completion and presentation of the application is important since it is the basis from which the underwriting process begins. There is no one universal application used in the lawyers marketplace today. There are some general industry-standard questions asked and most underwriters can work with any carrier’s new business application to offer an indication for coverage, if not a firm quotation.

~ New Business Application ~ A new business application is generally longer than a renewal application just as a new client checklist is lengthier than a new matter for an existing client. The logic is simple: the underwriter needs to ask more questions the first time the firm presents itself in order to become acquainted with that firm to see how well it may fit into the parameters of the carrier’s program. The applicant/firm name, a street and mailing address, phone and facsimile numbers, email and Web site addresses are required. The firm name should be consistent with the letterhead submitted as part of the application. Discrepancies are usually questioned. On the declarations page of a policy, the named insured needs to correspond with the name under which the law firm practices. If there is any discrepancy, an explanation is usually required. ~ Historical Data Used ~ The new business application is meant to draw out historical information on a firm. Very specifically, insurance coverage, claims, potential claims and disciplinary history are vital. Let us review these components separately. Insurance History ~ Coverage to be extended by any new carrier is traditionally based on continuity of prior coverage. It is important to provide full insurance history in order for an underwriter to determine what coverage is to be considered. Five years of insurance history is typically required information. This includes providing the name of the insurance company, dates of coverage, limits of liability, deductible, number of lawyers covered and premium.

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The insurance company name is preferred to naming your insurance broker or agent as this identifies to the underwriter the carrier with which the firm was insured. Your broker/agent may remain the same, but the carrier your coverage is placed with may change. Part of the analysis process includes consideration regarding the length of time a firm has been with a carrier as well as the financial stability of the carrier, whether the carrier continues as a viable market today, and the coverage that the current carrier offers. Dates which specify that coverage has been in force for each of the five years requested are important as they help verify that there has been continuity of coverage. Given that most lawyers’ professional liability policies are written on a claims-made and reported basis, coverage is not generally provided over any gaps in coverage. Continuity of policy terms is the primary basis for an underwriter being able to provide continuous coverage. An underwriter may look at a firm’s historical limits, deductible, headcount and premiums for a number of reasons, including: o how consistent a firm has been in retaining its professional staff o how a firm has amended coverage o how the limits compare with the size and practice areas o what deductible the firm has assumed o whether the premiums seem commensurate with the carrier and coverage extended. More often than not, when premiums are not provided, this could indicate that a firm considers this proprietary information; or, a broker/agent may advise them to specifically disregard providing this information; or, they do not have this information readily available to them at the time of completing an application. But when provided, historical premium information enables an underwriter to see the buying patterns of a firm and the extended coverage patterns of other carriers in relation to the market. Most seasoned underwriters are not using expiring premium as the sole basis for what they may offer your firm. But this will give them a foundation from which to consider whether they can compete with your current coverage. Another question often asked is whether an applicant firm has ever received a nonrenewal, cancellation, rescission or declination notice from any insurance company. A positive response to this question usually requires that additional details be provided. If those details are not included when submitting the application, the application review process may be stymied. There are carriers which have entered and exited the market; so, a “yes” response is not necessarily considered negatively.

Claims and Potential Claims History ~ Five years of claims and disciplinary history is industry-standard requested information, although some companies seek 10 years of historical data. Some may ask a firm to provide information on older claims that may still be open, but fall outside of the requested five- or 10-year question boundary. Some may ask whether disciplinary actions have ever occurred.

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It is very important that claims information be provided to the best of a firm’s ability. In order to understand the claim in relation to the firm as a whole, an underwriter is often limited to the information provided on a claims supplemental application. All supplemental details are essential. Although these applications vary somewhat in format, most carriers want to know: o WHO ~ who asserted the claim against the firm; who in the firm was named and to what insurance company was this matter reported? o WHAT ~ were the allegations against the firm? Include here what services were rendered and what error was made or alleged to have been made. o WHEN ~ was the firm made aware of the claim? When were the services rendered to the client and when was it reported to the insurance carrier? o WHERE ~ was the claim brought against the lawyer? Was it while the lawyer was in association with another law firm. Jurisdictionally, was the claim made where the firm routinely works? At a branch location where oversight may have been less than at the main location? While in a co-counsel relationship with another firm and/or lawyer? o WHY ~ was the claim asserted? Such as: the result of a suit for fees; a less than favorable judgment; poor client communications; documentation or clerical error; missed statute or title defect. o HOW MUCH ~ did this claim cost the firm and carrier/s? On a closed claim, disclose loss payments, expenses and any deductible contribution. If known, provide the date the claim closed. On an open claim, disclose the demand and then proceed to provide whatever information you may have from the carrier on the claim, including paid amounts to date as well as reserves set for losses and expenses. Many carriers will not provide reserve amounts as they consider this proprietary information that, if reviewed by inappropriate parties, could possibly impact their handling of the matter. o PREVENTION ~ of future similar claims? This is an important question to an underwriter. If a firm takes steps to reduce the likelihood of the occurrence of similar claims, the firm is generally regarded in a better light by an underwriter. It shows that the firm took this claim seriously and worked to make a change in order to avoid a similar matter. That action may include a new component to a diary/docket/conflict system, institution of a new office procedure or policy, a change to client intake forms or other communications (such as letters to clients), a billing process modification, an area of practice shift, conducting a firm audit, instituting annual lawyer reviews, a new hire mentoring program, or improved training of non-lawyer staff. It is generally not customary for a carrier to request copies of a summons and complaint if the above information is provided in a claims supplement. There may be a reason behind a request for this information; but, the information requested in this supplement typically suffices. An underwriter reviewing open or closed claims handled by another carrier will typically consider reserves or payments noted. These are weighed relative to the rest of their interpretation of the claim.

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Potential Claims The reporting of potential claims that may reasonably become the subject of a claim is a condition of most policies and is required to preserve rights under the policy should the matter develop into a malpractice action. Potential claim reporting is very important whether a firm is changing carriers or renewing with their current carrier. Failure to report a potential claim -- that was known during the policy period -- to your current carrier before the expiration date and then reporting it to the new carrier means that coverage will likely be denied. Most claims-made policies contain a “prior knowledge” provision that excludes claims that a firm was aware of before coverage incepted. The prior claims-made carrier will not accept the claim as it will now be after their policy expired and their policy covers claims made during the policy period. The “prior knowledge” provision is just as important between policy periods with the same carrier. When in doubt of what constitutes a potential claim, which is not typically defined in most policy contracts, it is best to err on the side of caution and report the matter. At the very least, you may want to call your carrier and discuss. A phone call, however, may not be considered proper notification as required by the policy. Most carriers require a written submission. Some firms hesitate to report potential claims for fear of increased premiums. Although an increase in premiums may be a valid concern, the potential denial of a claim based on prior knowledge due to the failure to promptly report a matter is a very real possibility and one that should supersede the premium increase concern. An underwriter may request written verification from the firm that their current carrier has accepted the potential claims reported. Disciplinary History ~ Disciplinary matters differ from a claim in the details that a carrier may request. Basically the underwriter is looking for: o what lawyer the complaint is made against and who made the complaint o when was the lawyer notified of the complaint and through whom: client or disciplinary board o was the complaint reported to your insurance carrier and, if so, to whom and when o what is the substance of the complaint o what is the current status o was any discipline or sanction imposed o what changes have been made to reduce the likelihood of similar complaints Some carriers may ask for a copy of the complaint, responses by the lawyer, and final disposition papers. Whether or not coverage is provided by a carrier for the defense of disciplinary proceedings differs from carrier to carrier. It is always recommended to bring these to the attention of your carrier so that coverage of a future malpractice claim arising out of the complaint is not compromised based on prior knowledge.

4


~ Firm Profile Details ~ The underwriter will begin to hone in on the firm’s current profile including its lawyers, practice areas, Web site, operations and management. Lawyers in the Firm ~ The basis for rating most lawyers professional liability policies is the number of lawyers in a firm; thus, the information you provide to the underwriter regarding who is at your firm is key. Some carriers may consider revenues as another rating factor. Generally, the information needed on each lawyer is: name, designation, years affiliated with the firm, years continuously insured, states admitted to practice, CLE participation and Bar affiliations. Carriers may ask for average hours each lawyer works, practice area specialization and any limiting prior acts date information. Areas of Practice ~ Practice areas are another key component in the underwriting analysis. Practice categories vary by carrier; but, again, there are basic similarities. In whatever manner a carrier outlines the areas of practice section of its application, it is incumbent upon the firm to categorize its practice and provide corresponding percentages to each practice category to the best of its ability. Some carriers will request two years of practice area percentages for new business. This allows the underwriter to view the stability in the firm’s practice. Some carriers ask for a practice break-out by lawyer. Some will require further delineation of practices related to defense or plaintiff representations. Represent your firm and its practice as candidly and precisely as possible. Firms practicing in areas of law not listed on an application should provide a narrative. Since practice areas are a common rating element, accurate representation is essential. Web site A review of a firm’s Web site is often a standard part of today’s underwriting process. The lawyers and areas of practice noted on the site are compared with the representations made on the application. There is an expectation of consistency between the data on the Web site and the application. Discrepancies may be questioned. An underwriter will generally look for a disclaimer. Generally, Web sites – with specific attention to the disclaimer -- have received a lot of attention from various bars, committees, risk managers and insurance professionals. From an underwriting perspective, a disclaimer represents a best practice procedure. Advertisements, links to other sites, references to cases, client listings are all reviewed.

5


Operations and Management ~ Questions relative to the internal operations and management of a firm vary widely from carrier to carrier. These usually include many of the following categories: o additional firm locations o advertising and marketing materials o annual audit information o billing and fee suits o client communications o concentrated billings with one client o conflict of interest system o docket and/or diary systems o equity interest in clients o management capacity for a client o multi-jurisdictional practice o office sharing arrangements o peer review process o revenues for current and prior years o training of new lawyers and support staff Most carriers have designed these questions to be answered in a yes/no fashion for ease of both the principal completing and the underwriter assessing the application. However, there are applications that require that a firm provide a narrative of many of the categories mentioned above. Additionally, other information may be requested such as queries on ratings by Martindale-Hubbell, Best LawyersŽ or other law firm rating agencies, as well as the firm’s business strategy for the next couple of years. This last item will help an underwriter to ascertain the direction a firm is taking and may be of particular relevance when a new firm of experienced lawyers is being formed. ~ Conclusion ~ Underwriters want to understand your firm. They will review your application and research data to assess the risk your firm presents. They will underwrite your firm based on such factors as practice areas, lawyers, turnover of professional and support staff, claims experience and overall operations and management. Providing a thoroughly completed application, applicable supplements, letterhead and any narrative to further augment the application will help allow the underwriter to timely complete the underwriting review process.

~ Renewal Application for CNA Insureds~ There are many variations of renewal applications in the market today. Most carriers have a condensed renewal application and strive to make the renewal process relatively simple. An underwriter will generally use previously known information about the firm from past underwriting of the risk in conjunction with updated information provided in the renewal. 6


For purposes of understanding the renewal process generally, we will review some of the basics of the renewal process currently in effect at CNA for Colorado-licensed attorneys. Our renewal requests the following types of information: o changes in the professional staff, including hours worked and designations o changes in practice areas or the handling of cases outside of Colorado o any claims, potential claims and disciplinary matters o completion of any risk management -- seminar or home study o any fee suits initiated to enforce collection of unpaid legal fees o representation of any publicly traded client/s o involvement in an any class action or mass tort case o higher hazard practice areas and outside interests. We ask for a census of current lawyers with your firm. Lawyers who work less than 25 hours weekly are considered at a discounted rate. Because of the introduction of a new credit, we ask if each lawyer is a current member of the Colorado Bar Association (CBA). This credit was introduced in mid-2007. Bar members now qualify for an additional credit simply for being a current CBA member. If all firm lawyers are CBA bar members, the credit is 5%. This credit will continue to apply annually provided each lawyer remains current in their bar membership. This premium credit is exclusive to the CNA program. We further need verification of any CBA/CLE “Preventing Legal Malpractice� program participation – seminar or home study -- during the past year. While we have participation information from the prior year, it is incumbent upon each insured to provide updated information so that the risk management credit will be applied. Participation in the risk management program qualifies a firm for up to a 7.5% credit. If there has been a significant shift in practice areas, a firm should offer a written explanation. Claims Updates on Renewals ~ If a claim has been reported to CNA during the policy period or during the renewal process, the underwriter will ask the firm to complete a claims supplement which will include relevant details on the claim, including preventive action the firm has taken to avoid similar claims in the future. The same is true of potential claims and disciplinary matters: if reported during the policy year or the renewal process, a completed claims supplement is required.

~ Conclusion to Renewal Business Application Underwriting ~ CNA intends to keep the renewal process simplified in order to retain clients. We are committed to offering the lawyers in Colorado a superior professional liability program with our exclusive administrator, Marsh Affinity Group Services, and the continued endorsement by the Colorado Bar Association.

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~ Overview of the Underwriting Rating Process ~ This broad overview points out some general, industry-accepted factors that affect the rating of a risk. Individual rating models are carrier-specific. Rating is driven by several factors, including: o prior acts coverage o number of lawyers o practice areas o claims experience o coverage Determining a premium generally starts by using a base rate and the rating model designed by company actuaries. The underwriter reviewing the application will capture the ratable risk characteristics from the application and “run them through” the rating model. Prior acts coverage is based on the continuous insurance coverage a firm has maintained. The lawyers are similarly based. A lawyer with no prior insurance who applies for coverage will be written with a retroactive or prior acts date equal to the inception date of the policy. A lawyer or firm that has been continuously insured may be considered to have “full prior acts” coverage where no retroactive date applies. Covered claims are subject to the alleged act or omission occurring after any retroactive date. The process of rating for prior acts varies by carrier, but it is usually a stepping process, increasing incrementally over a set number of years. This process is called “step-rating.” Most carriers use practice areas as one factor in their rating process. This is why it is important to accurately reflect your practice in the appropriate categories on the application. Areas of practice are carrier-specific. The classifying of the practice areas is driven from claims experience. The claims experience of a firm can have an impact on the premium. The experience rating may consider claims based on frequency, severity or both. The size of the firm and the age of the claim may also be taken into rating consideration. Most carriers surcharge for adverse claims activity. However, an underwriter should use judgment when analyzing the claim relative to the firm overall. Some of the items assessed by an underwriter include, but are not limited to: o allegations and demand by the claimant o cooperation and communication with the claims handler and defense counsel o lawyer/s involved in the matter and their experience o liability and defenses o longevity of the firm as a client and prior claims experience o practice area causing the claim compared with those represented in the application o timeliness of reporting. 8


Additional rating factors include the limits of liability and deductible a firm is seeking. Other rating factors that may impact premium in any one year are prior acts/step rating, areas of practice and claims. These may include credit scoring, revenues, quality of the firm’s management (e.g., conflict of interest and docket/diary systems, adequacy of support staff to professionals, fee suits, internal and external communications, and billings), multi-jurisdictional practice and additional office locations, risk management participation and dramatic changes in the firm’s structure. Calculating a premium for a law firm is intended to be a logical mathematical process that allows for some underwriting judgment. The process should take into consideration the specific law firm and its risk characteristics, particularly the size of the firm, its practice areas, prior acts, and claims. The limit and deductible are usually factored and the rating is typically based on the new or renewal business application submitted by the firm. Submit the application timely and accurately. Allow an underwriter the needed time to fully assess all aspects of the firm so that a fair and adequate premium may be offered.

~ Factors a Firm Should Consider~ While premium is certainly an important factor to consider in determining which carrier to place coverage with, it is not the only one. Keep in mind that, frequently, a lower premium may indicate a restriction in coverage. The selection of a carrier should be based upon several considerations which will be reviewed below. Carefully review policy forms and quotations for coverage and discuss questions or concerns with a lawyer’s insurance professional. Compare Policy Forms Since no two policies are exactly alike, comparison of the policy forms is essential. Your agent can assist you in making comparisons of carriers you are reviewing. Be wary of using only a policy highlight sheet to make your comparison. These are general overviews of a policy. The policy you purchase may not contain all the provisions that are highlighted. Be sure to look at the policy contract itself and ultimately review the carrier’s quotation for any other restrictions that may be added to the policy or conditions that must be met to bind coverage. Limits of Liability Understand the limits of the coverage you are considering. For example, are defense costs inside the limits of liability? This means that the cost of defending a malpractice action will reduce the limit available for indemnity payments. Do the limits include an additional claims expense limit? This would allow for a separate limit to be available for claims expenses, preserving your damages limit of liability for indemnity payments in the case of a claim. Find out if this expense limit is capped at a certain dollar amount or unlimited. Is there any sub-limit of liability for a specific practice area or client? 9


Deductible Know what your obligation is in the case of a claim; consider not only the amount of the deductible, but its type. Is the deducible applicable to each and every claim reported in the policy period? Is it an annual aggregate deductible that means the firm will be responsible for a set amount regardless of the number of claims? Is it a split per-claim and aggregate, such as a $5,000/$15,000 (in which a firm would pay $5,000 for each claim up to a maximum of $15,000)? Is it a loss only or first-dollar defense deductible ~ one that requires satisfaction of the deductible only if a loss/indemnity payment is made? This deductible does not apply to expenses incurred on a claim. Is the deductible applicable to loss and defense costs? If so, you will have to pay the deductible from the date expenses start incurring. Legal or Professional Services Review what legal or professional services are covered by looking to the definition in the policy. Make certain that the legal services your firm renders fall within this definition. Insuring Agreement Review this carefully. It will provide the coverage the company is extending. It will usually include defense, settlement and exhaustion of limits clauses. Conditions and Exclusions If you have completed a policy comparison, you will have looked at these two important sections of the policy contract. Since not all policies are written in the same format, it is not possible to outline what is written in the “conditions” section of a policy. Generally, this is where to find reporting requirements for claims and potential claims. Exclusions should be carefully reviewed. Not all policies contain the same exclusions. Traditionally, there are exclusions for intentional acts, bodily injury, contractual liability, and insured vs. insured. Many policies contain exclusions for an insured in his/her capacity as a director or officer or when there is a percentage of ownership in an entity other than the “named insured” firm. Your best source is to review the policy itself. Prior Acts Know if the policy you are considering has any limitations in the prior acts coverage. Cancellation and Nonrenewal Provision You will want to review this section of a policy to know under what conditions the firm or the carrier can cancel or non-renew the policy. Be aware of the notice requirements. Notice of Change Requirements Know if the carrier requires reporting of any changes to professional staff, the timing requirements, whether notice needs to be in writing and whether premium adjustments will be imposed. Extended Reporting Periods (ERP) Be aware of what ERP (also known as “tail”) coverage is available. What is the cost? Are the limits of liability reinstated? Is a free tail available for retired or deceased lawyers?

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Financial Security & Longevity of the Carrier A firm should know the A.M. Best rating of a carrier. Any carrier with less than an A- is usually not recommended by a reputable agent or broker. Review the financial size of the carrier. Too many carriers have closed their doors and left firms with uncovered claims or a claims department in runoff. You want to place coverage with a carrier that has a history of writing lawyers professional liability insurance and plans to continue to be a viable part of the market. Reputable Agent/Broker If you are not able to access a carrier directly, which is common in the lawyers market, work with an agent/broker that knows lawyers professional liability. This is a specialized and complex product. There are so many considerations in selecting coverage and a carrier that you cannot leave it to chance or, worse, an inexperienced agent. The selection process deserves the assistance of a dedicated, experienced, knowledgeable and quality professional who really knows the lawyers insurance marketplace and can serve your needs.

By: Lucy Aiello, Underwriting Director, CNA Lawyers Professional Liability, 333 South Wabash Avenue, Chicago, IL 60604 The purpose of this article is to provide general information, rather than advice or opinion that is accurate to the best of the author’s knowledge as of the date of this article. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. In addition, CNA may not necessarily endorse any coverages, systems, processes or protocols addressed herein unless such coverages, systems, processes or protocols are produced or created by CNA. Any references to non-CNA Web sites are provided solely for convenience and CNA disclaims any responsibility with respect thereto. To the extent this article contains any examples, please note that they are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. In addition, any examples are not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All CNA products and services may not be available in all states and may be subject to change without notice. CNA is a service mark registered with the United States Patent and Trademark Office.

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CBA LAWYERS PROFESSIONAL LIABILITY Lawyers & Areas of Practice Renewal Supplemental Information Firm Name If Question 1a is YES, complete a New Lawyer Supplement for each newly hired lawyer. If Questions 1b or 1c is YES, complete the information in the corresponding table below. If Question 1d is YES, complete the information in the corresponding table below. Questions 1b and 1c: Deleted or Status Change Lawyer Information Lawyer Name

Date of Departure Month

Day

Year

Designation Change * New Designation

Date of Change

1. 2. 3. 4. 5. * Designations: Officer/Partner, Employee, Of Counsel, Independent Contractor, etc. Question 1d: Lawyers working less than 25 hours Lawyer Name

Hours Worked Weekly

Services rendered to Firm’s clients

Carries separate Malpractice Insurance? * Yes / No

1. 2. 3. * If yes, attach a copy of the declarations page Lawyer Census List all lawyers currently in your firm as of the renewal date and provide details as requested next to each name. If additional space is needed, please do by attachment.

Lawyer Name

Designation *

Date attended CBA/CLE Preventing Legal Malpractice Program – Seminar or Home Study MM/DD/YY

Are you are current CBA member? Yes/No

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. * Designations: Officer/Partner, Employee, Of Counsel, Independent Contractor, etc.

3


Areas of Practice Guidelines for completing this section IF YOU ANSWERED YES TO QUESTION 2a: CHANGES IN YOUR PRACTICE: a. Express percentages of time devoted (billable hours) in each area during the previous year. b. Indicate percentages in whole numbers next to the type of law you practice, not the business of the client you represent. c. Please be as accurate as possible, as casual estimates may cause inappropriate evaluation of your practice. d All litigation should be coded as “Civil Litigation” Defense or Plaintiff with the exception of “Criminal,” “Personal Injury Plaintiff” and “Intellectual Property” which should be coded to their respective Area of Practice. _____% Admiralty / Marine – Defense _____% Corporate Business _____% Personal Injury / Property Damage – Defense Organization _____% Admiralty / Marine – Plaintiff _____% Criminal _____% ** Personal Injury / Property _____% Anti - Trust Trade Regulation _____% Banking / Financial Institutions _____% Business Transaction / Commercial Law _____% Civil / Commercial Litigation Defense _____% ** Civil / Commercial Litigation - Plaintiff _____% Civil Rights / Discrimination _____% Collection and Bankruptcy _____% Construction (Building Contracts) _____% Consumer Claims

_____ % † Environmental Law _____% Family Law _____% Government Contracts / Claims _____% Immigration / Naturalization ____ % * Intellectual Property (Patent, Trademark, Copyright) _____% † International Law _____% Labor Law – Union Representation _____% Labor Law – Management Representation _____% Local Government _____ % † Natural Resources / Oil and Gas

Damage – Plaintiff ____% Real Estate / Title Commercial _____% Real Estate / Title Residential ____ % *Securities (SEC) _____% Taxation _____% † Water Law _____% Wills, Estates, Probate & Planning _____% Workers’ Compensation Defense _____% Workers’ Compensation Plaintiff _____% † Other

Total (Must equal 100% )_____________%

* ** †

If any, complete the enclosed Intellectual Property and / or Securities Supplemental Application(s). If these areas of practice combined equal 25% or more, complete the Plaintiff Practice supplement. Provide a detailed description below. If more space is needed, please do so by attachment.

Environmental _____________________________________________________________________________________ __________________________________________________________________________________________________ International ______________________________________________________________________________________ __________________________________________________________________________________________________ Natural Resources/Oil & Gas _________________________________________________________________________ __________________________________________________________________________________________________ Water Law ________________________________________________________________________________________ __________________________________________________________________________________________________ Other Description Area _____________________________________________________________________________ __________________________________________________________________________________________________ REMINDER --- Please attach a sample of your letterhead to this application. 4


1225 17th Street, Suite 2100 Denver, CO 80202 Phone: 303-308-4602 Fax: 303-308-4900

P.O. Box 9286 Des Moines, IA 50301-9286 1-800-358-3043 Fax: 515-282-7839

Renewal Application for CBA Lawyers Professional Liability Insurance Claims Made & Reported PLEASE NOTE: If you know of any claims or incidents that you have not reported, please notify CNA prior to renewal. Applicant Instructions: 1. Please read all statements and questions on this application carefully. 2. Attach a copy of your letterhead. The Firm Name listed on this application should match the Firm Name on your letterhead. Explain any discrepancies on a separate attachment. 3. For all firms, complete the Lawyers Census on Page 3 of the application. 4. Answer all questions in ink. 5. For any yes responses provide full details on a separate attachment. 6. Application and all attachments must be signed and dated by named Applicant, partner, officer or owner of the firm. 7. The Intellectual Property and/or Securities Supplements must be completed if the firm practices in these areas. Firm Name: Principal Address: 1. Are there any attorneys who: a. are new to the firm? b. have left the firm? c. have had a change in designation? c. d. work less than 25 hours per week? 2. a.

Any YES response requires details on the attached supplement

Have there been any changes in the firm’s Areas of Practice during the expiring policy period?

Yes

No

Yes

No

Yes

No

Yes

No

Yes

No

If yes, complete the Area of Practice grid on page 4.

b.

Does the firm practice at any additional locations or have any cases outside the state of Colorado?

3. a. Is the firm, or any attorney affiliated with the firm, aware of any acts, omissions or circumstance which a reasonable person would expect may give rise to a professional liability claim in the future against the firm, any predecessor firm or any current or former attorney of the firm while affiliated with the firm, which has not been reported to CNA?

Yes

No

If yes, complete the Additional Locations/Practice States supplement.

Yes

No

b. During the current/existing policy period, are there any claims, acts or omissions that may reasonably be expected to be the basis of a claim against the firm that have not been reported to CNA?

Yes

No

c.

Yes

No

Has any attorney been refused admission to practice, disbarred, suspended, formally reprimanded or been subject to any disciplinary matter, complaint or proceeding for any reason other than non-payment of dues during the expiring policy period? If yes, please provide a detailed description.

Any such act, omission or circumstance must be disclosed regardless of whether it is considered likely that a claim will in fact be made. If Yes to a or b above, please complete a claims supplement for each instance. An update is also required for any claim/circumstance or disciplinary matter disclosed on last year’s application. G\USER\LPLADA\Colorado CNA\Applications\CO CNA EZ Renewal App

1


4. Have Attorneys in the firm attended the Colorado Bar Association Risk Management Seminar or

Yes

No

Yes

No

completed the Home Study program in the past 12 months? If yes, provide the names of the attorneys. 5. Has the firm initiated lawsuits or arbitration proceedings during the last 12 months to enforce the collection of unpaid fees to the firm? 6. Since January, 2003, has the firm represented any publicly traded clients in any practice area?

If yes, provide details on the fee suit supplement

Yes

No

Yes

No

If yes, answer the following: a. What percentage of the firm’s gross billings is attributable to this representation? ______% b. Provide the following information on a separate attachment: Name of Client, date of first affiliation, services rendered and whether this is a current client of the firm. 7. Has the firm been involved in any mass tort/class action cases within the past 12 months?

If yes, complete the Mass Tort/Class Action supplement

8.

Does your firm or any attorney affiliated with the firm do the following: a. Provide Securities, Copyright Patent & Trademark, Entertainment Law, Mergers & Acquisitions services? b. Practice in any of the following areas: Environmental, Natural Resources/Oil & Gas and/or Water Law? c. Act as Director, Officer or have equity interest in any other entity besides your law firm or have any one client which represents more than 25% of the firm’s billings?

Yes

No

If yes, complete the appropriate supplement

Yes

No

If yes, provide details on the area of practice grid page

Yes

No

If yes, complete the Equity/Outside Interest/Gross Billings Supplement.. Applicant affirms that the responses herein shall attach to and become an integral part of the application for insurance. Applicant warrants on its behalf and on behalf of each and every partner, officer, director, associate, manager, member and employee that after full investigation and inquiry, the information contained herein and in any supplemental applications or forms required hereby is true, accurate and complete and that no material facts have been suppressed or misstated. Applicant further warrants on its behalf and on behalf of each and every partner, officer, director, associate, manager, member and employee that after full investigation and inquiry (1) there are no known claims by reason of an act or omission or related acts or omissions in the rendering of legal services by the Applicant or any of its partners, officers, directors, associates, managers, members or employees, prior to the effective date of this policy; and (2) neither applicant nor any of its partners, directors, associates, managers, members or employees are aware of any act or omission or related acts or omissions in the rendering of legal services which a reasonable person would view as likely to give rise to a claim in the future. Applicant further warrants on its behalf and on behalf of each and every partner, officer, director, associate, manager, member and employee a continuing obligation to report to the Company immediately any material changes in all such information after signing the application and prior to issuance of the policy, and acknowledges that the Company shall have the right to withdraw or modify any outstanding quotations and/or authorization or agreement to bind the insurance based upon such changes. Further, Applicant and each and every partner, officer, director, associate, manager, member and employee understand and acknowledge that: 1.

2. 3.

If a policy is issued, the Company will have relied upon as representations: the application and any supplemental applications, and any other statements furnished to the Company in conjunction with this application, all of which are hereby incorporated by reference into this application and made a part hereof; This application will be the basis of the contract and will be incorporated by reference into and made part of such policy; and Applicant’s failure to report to its current insurance company during the current policy term any claim made against it or any of its partners, officers, directors, associates, managers, members or employees and any act, omission or circumstance which may give rise to a claim in the future against it or any of its partners, officers, directors, associates, managers, members or employees may create a lack of coverage.

Applicant hereby authorizes the release of claim information to the Company from any current or prior insurer of the Applicant. If Applicant is a Professional Association (PA), each lawyer in the association, regardless of designation, must sign and date this Warranty Statement. Additional signatures should attach in like format by attachment.

Signature of Officer or Partner of the Firm Signature of Lawyer in Professional Association

Print Name of Officer or Partner Print Name of Lawyer

Date

Signature of Lawyer in Professional Association

Print Name of Lawyer

Date

G\USER\LPLADA\Colorado CNA\Applications\CO CNA EZ Renewal App

2


G-130953-A (03/2006)

APPLICATION FOR LAWYERS PROFESSIONAL LIABILITY INSURANCE

Page 1 of 5 Colorado

About the Firm 1.

Provide the precise name of the applicant firm to be insured as reflected on the firm’s letterhead. Include a copy of the firm’s letterhead and explain any inconsistencies between it and the application attorney information/census.

2.

Name:

______________________________________________________________________________

Street Address:

______________________________________________________________________________

City: Telephone: Email Address:

_____________________________ County: __________ State: _______ Zip: __________ _____________________________ Fax: _________________________________________ _____________________________ Web-site Address: ________________________________

Firm Coverage Information 3.

Coverage is requested to be effective on:

4.

What year was the firm established?

5.

solo practitioner individual attorney with employee attorney(s) partnership PC PA LLC LLP Other _________________ If you are a solo practitioner, do you have an attorney that handles your cases in your absence? Yes No Explain a No reply.

6.

/

/

__________________

Type of Entity?

7.

Is the firm office or suites shared with attorneys other than firm members? Detail arrangement.

Yes

No

8.

Does the firm have offices (other than conference room only facilities) at locations other than the primary location? If yes, complete the Additional Location/Practice States Supplement. Does the firm handle cases in states other than the primary location? If yes, complete the Additional Locations/Practice States Supplement

Yes Yes

No No

Yes

No

9.

10. Is the ratio of support staff to attorneys greater than 3 to 1? If yes, detail titles & duties. 11. For how many years has the firm been continuously insured for malpractice claims?

________________

12. Enter the prior acts exclusion date, if applicable:

/

NOTE: If the firm is a spin-off from another firm include the number of years that firm has been continuously insured. 13. Has the firm ever purchased an Extended Reporting Period option? If yes, provide details. including carrier, name of firm ERP was purchased under, dates.

/

__________________ Yes No

14. Has the firm ever been non-renewed, cancelled, rescinded or declined coverage by another carrier? If yes, provide details including carrier, reason for action, dates of action. 15. Does the firm desire coverage for previously-dissolved predecessor firms and those attorneys affiliated therewith? If yes, complete the Predecessor Firm Supplement.

Yes

No

Yes

No

16. Is there an attorney listed on the letterhead not covered by the firm’s insurance? Explain YES reply.

Yes

No

17. Enter the firm’s insurance history for the last five years: Eff Date mm/dd/yy

Insurance Company

Limits (per claim/aggregate)

Retention / Deductible

Covered # of attorneys

Annual Premium

17a. Detail your current coverage relative to the following policy features. Check all that apply and attach specimens as available. Limits:

Claims Expenses Inside the Limit

Claims Expenses Outside (in addition to) the Limit

Deductible:

Annual Aggregate

First Dollar Defense (Loss Only)

Per claim


Attorney Name

Designation

0

1– 10

1125

26 +

Average # of weekly hours See NOTE below

States licensed to practice law In practice

with this firm

continuous malpractice coverage

Number of Years

Prior acts date

CNA/CBA Risk Management Preventing Legal Malpractice Seminar Date

attorney was admitted to the Bar must be explained on a separate sheet of paper following the same format. List additional attorneys on a separate sheet in the same format.

Yes

No

CO Bar Member?

Total number of attorneys: List all of the firm’s attorneys. Differences between the date attorney began practicing law for other than a corporate or governmental entity and the date the

Colorado

Page 2 of 5

G-130953-A (03/2006)

SP SPC STC SHH STH

Solo Practitioner Special Counsel Staff Counsel Shareholder Stockholder

Equity Partner Non-equity Partner Partner Limited Liability Partner Retired Partner

Partner Designations: Member of Firm Manager Owner Of Counsel Officer

EP NP P LLP RP

MEM MGR O OC OF

A CC D E IC

Associate Co-counsel Director Employee Independent Contractor

Attorney Designations:

Note: Please provide details of each lawyer working less than full time on behalf of the firm – include the services rendered for the firm, other work outside of the firm, etc. Provide such via separate attachment.

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

18.

Attorney Information/Census

APPLICATION FOR LAWYERS PROFESSIONAL LIABILITY INSURANCE


G-130953-A (08/2006)

APPLICATION FOR LAWYERS PROFESSIONAL LIABILITY INSURANCE

Page 3 of 5 Colorado

Areas of Practice 19. Guidelines for completing this section: a. b. c. d.

*

Express percentages of time devoted (billable hours) in each area during the previous year. Indicate percentages in whole numbers next to the type of law you practice, not the business client you represent. Be as accurate as possible, as casual estimates may cause inappropriate evaluation of your practice. All litigation should be coded as “civil litigation” with the exception of “criminal”, “personal injury-plaintiff” and “intellectual property” which should be coded to their respective Area of Practice.

% Admiralty / Marine – Defense

% Consumer Claims

% Local Government

% Admiralty / Marine – Plaintiff

% Corporate Business Organization

% Natural Resources / Oil & Gas

% Anti-Trust / Trade Regulation

% Criminal

% Banking / Financial Institutions

% Environmental

% Business Transaction – Comm’l Law

% Family Law

% Real Estate/Title - Commercial

% Civil/Commercial Litigation - Defense

% Government Contracts / Claims

% Real Estate/Title - Residential

%

% Immigration / Naturalization

Civil/Commercial Litigation - Plaintiff

% Pers Injury/Prop Dam -Defense *

% Pers Injury/Prop Dam - Plaintiff

*

% Securities (S.E.C.)

% Civil Rights / Discrimination

*

% Intellectual Prop–Copyright/Trademark

% Taxation

% Collection

*

%

% Water Law

Intellectual Property - Patent

% Bankruptcy - Creditors

% International Law

% Wills, Estate. Trust & Probate

% Bankruptcy - Debtors

% Labor Management Representation

% Workers Comp - Defense

% Construction (Building Contracts)

% Labor Union Representation

*

% Workers Comp - Plaintiff

% Other (describe below)

TOTAL:

must equal 100%

If any percentage, complete the Plaintiff, Intellectual Property and/or Securities Supplemental Applications.

If any percentage in Other, Natural Resources/Oil & Gas or Water Law, provide descriptions below.

OTHER description _________________________________________________________________________________ __________________________________________________________________________________________________ Natural Resources/Oil & Gas and Water Law description ____________________________________________________ __________________________________________________________________________________________________ __________________________________________________________________________________________________

Firm Operations and Management 20. Does the firm or any attorney of the firm have clients in the Entertainment industry? If yes, complete the Entertainment Supplement. 21. At any time in the past five years, has the firm, or any attorney of the firm (regardless of what firm they were with at the time) provided legal services in any way related to a security or securities transaction? If yes, complete the Securities Supplement. 22. Does the firm have any one client in which the firm’s attorneys have an equity interest greater than 10% individually or combined? If yes, complete the Equity Interest/Outside Interest /Gross Billings Supplement. 23. Does the firm have any one client which represents more that 25% or more of the firms billings? If yes, complete the Equity Interest/Outside Interest /Gross Billings Supplement. 24. Does anyone in the firm serve as a director, officer or employee or in any other management capacity for a client? If yes, complete the Equity Interest/Outside Interest /Gross Billings Supplement.

Yes

No

Yes

No

Yes

No

Yes

No

Yes

No


G-130953-A (08/2006)

APPLICATION FOR LAWYERS PROFESSIONAL LIABILITY INSURANCE

Page 4 of 5 Colorado

25. Does the firm have procedures for identifying and resolving potential or actual conflicts of interest including cross-checking of former, existing or potential clients?

Yes

No

26. Does the firm have at least two independently maintained docket controls?

Yes

No

Yes Yes

No No

27. a. 28. a.

Has the firm initiated lawsuits or arbitration procedures during the last two years to enforce the collection of unpaid fees for the firm? If yes, complete Fee Suit Supplement. In the past year has the firm represented any publicly traded clients in any practice area?

b.

If Yes, what was the firm’s gross billings attributable to such representation?

______________

c.

If Yes to a. above also provide on a separate sheet of paper: name of client, date of first affiliation, services rendered, and whether this is a current client of if the firm.

29. a.

Has the firm been involved in any mass tort / class action cases within the past five years? If Yes, complete the Mass Tort / Class Action Supplemental Application. 30. Provide the firms gross and net revenues: Year

Year Start Date

Yes

No

Gross Revenues

Current fiscal

$

Prior fiscal

$

31. What percentage of accounts receivable are outstanding more than 90 days?:

______________%

Claim / Incident Information 32. After inquiry, is any attorney in the firm aware of: a. b.

c.

a professional liability claim made in the past five years against them, the firm, any predecessor firm, or against any current or former attorney of the firm while affiliated with the firm?

Yes

No

an act or omission that may reasonably be expected to be the basis of a claim against them, the firm, any predecessor firm, or against any current or former attorney of the firm while affiliated with the firm?

Yes

No

any claim made against them, the firm, any predecessor firm or current or former attorney of the firm that is still an open/pending matter, regardless of when reported to a carrier?

Yes

No

Yes

No

For any Yes response, complete a Claim/Disciplinary Supplement for each matter. 33. Has any lawyer in the firm ever been the subject of any disciplinary complaint, refused admission to practice, disbarred, suspended or formally reprimanded or been the subject of any disciplinary proceeding? If yes, complete a Claim/Disciplinary Supplement for each matter.

Requested Coverage – 34. a.

b.

Subject to Underwriting

Select the Each Claim/Aggregate Limit the firm desires: $ 100,000/ $300,000

$

500,000/ $1,000,000

$2,000,000/ $4,000,000

$ 200,000/ $600,000

$ 1,000,000/ $1,000,000

$3,000,000/ $3,000,000

$ 250,000/ $500,000

$ 1,000,000/ $2,000,000

$4,000,000/ $4,000,000

$ 500,000/ $500,000

$ 2,000,000/ $2,000,000

$5,000,000/ $5,000,000

Other _________________

Select the Aggregate Deductible the firm desires: $ 1,000 $ 2,000

$ 2,500 $ 3,000

$4,000 $5,000

$10,000 $15,000

$25,000 $50,000

$75,000 $100,000

Other: $

35. Select the optional coverage the firm desires: Claims Expenses Outside (in addition to) Limit

Per Claim Deductible

First Dollar Defense Deductible

Title Insurance Agency NOTE: The Title Insurance Agency optional coverage extends coverage to a specific title agency as a separate entity. Complete Title Agency Supplement for coverage consideration.


G-130953-A (08/2006)

APPLICATION FOR LAWYERS PROFESSIONAL LIABILITY INSURANCE

Page 5 of 5 Colorado

Signature and Representation Applicant hereby represents, after inquiry, that the information contained herein and in any supplemental applications or forms required hereby, is true, accurate and complete and that no material facts have been suppressed or misstated. Applicant acknowledges a continuing obligation to report to the Company as soon as practicable any material changes in all such information, after signing the application and prior to issuance of the policy, and acknowledges that the Company shall have the right to withdraw or modify any outstanding quotations and/or authorization or agreement to bind the insurance based upon such changes. Further, Applicant understands and acknowledges that: 1.

2. 3.

If a policy is issued, the Company will have relied upon, as representations: this application, and any supplemental applications, and any other statements furnished to the Company in conjunction with this application, all of which are hereby incorporated by reference into this application and made a part hereof. This application will be the basis of the contract and will be incorporated by reference into and made part of such policy; and Applicant’s failure to return to its current insurance company any claim made against it during the current policy term , or act, omission or circumstance which Applicant is aware of which may give rise to a claim before the expiration of the current policy may create a lack of coverage.

Applicant hereby authorizes the release of claim information to the Company from any current or prior insurer of the Applicant.

FRAUD NOTICE – WHERE APPLICABLE UNDER THE LAW OF YOUR STATE Any person who knowingly and with intent to defraud any insurance company or other person files an application for insurance or statement of claim containing any materially false information, or conceals for the purpose of misleading, information concerning any fact material thereto, commits a fraudulent insurance act, which is a crime AND MAY BE SUBJECT TO CIVIL FINES AND CRIMINAL PENALTIES (for New York residents only: and shall also be subject to a civil penalty not to exceed five thousand dollars and the stated value of the claim for each such violation.) (For Pennsylvania Residents only: Any person who knowingly and with intent to injure or defraud any insurer files an application or claim containing any false, incomplete or misleading information shall, upon conviction, be subject to imprisonment for up to seven years and payment of a fine of up to $15,000.) (For Tennessee Residents only: Penalties include imprisonment, fines and denial of insurance benefits.)

Applicant:

By SIGNATURE OF OFFICER OR PARTNER OF THE FIRM

PRINT NAME OF OFFICER OR PARTNER

DATE

REMINDER Please attach a sample of your letterhead to this application. Inconsistencies between it and the application, including attorneys named, address, other offices, etc. should be explained on a separate sheet of paper


If you are interested in starting a lawyers-only peer support group in your community, our

Confidential Peer Support Groups CLHL, in partnership with Peer Assistance Services, Inc. (PAS), offers facilitated substance abuse peer support group meetings, family support group meetings and mental health group meetings. These confidential peer support group meetings currently are held in Denver, Greeley, Boulder, Grand Junction, Colorado Springs, Durango, and Pueblo. Meetings are open to all Colorado lawyers, law students/ graduates, and their families at no cost. Contact PAS at (303) 369-0039 or (866) 3690039 for meeting times and locations.

CLHL’s SERVICES

Recovery and relapse prevention, which directly impact the efficient administration of justice, remain CLHL’s ultimate goal. Most of CLHL’s services are free or available at a nominal cost.

Colorado Lawyers Helping Lawyers, Inc. (CLHL) is a Supreme Court-approved, volunteer-run, independent non-profit lawyers’ assistance program. In partnership with Peer Assistance Services, Inc. (PAS), CLHL provides confidential peer support and/or referrals for alcohol and substance abuse, mental health issues and other destructive behaviors for all Colorado lawyers, law students/graduates and their families.

CLHL’s PURPOSE

Outreach CLHL’s trained volunteers are available to speak at law firms, bar association meetings, conferences, or any other event regarding the necessity of intervention and relapse prevention when substance abuse, mental health issues, or other destructive behaviors impact a lawyer’s personal and professional life. CLHL’s website, http://www.clhl.org, contains educational information regarding substance abuse and mental health issues and also provides links

Referrals for Evaluation and Treatment Although CLHL does not conduct initial evaluations or treatment, we can refer you to appropriate facilities that are able to provide these services. Please call CLHL at (303) 8322233 or (800) 432-0977 and leave a confidential voice message for one of our trained volunteers who will return your call as soon as possible. You can also email CLHL at confidential@clhl.org. Always remember that if the situation is an emergency, you should call 911 immediately.

Voluntary Monitoring and Case Management CLHL also facilitates statewide assessment and monitoring services for law firms and employers who wish to have a monitoring agreement in place for an attorney-employee. Peer Assistance Services, Inc., a statewide peer employee assistance program, provides these services on a fee-for-service basis. For more information, please contact Peer Assistance Services, Inc. directly at (303) 369-0039 or (866) 369-0039.

experienced volunteers are glad to provide assistance. Please contact CLHL directly.

In addition to the services offered by CLHL, services are also available through Mines and Associates, the Colorado Supreme Court’s Colorado Attorney Assistance Program (CAAP). This voluntary program provides confidential assessments, referrals, and therapy to Colorado attorneys. CAAP sessions are free for you. When you call, you will be promptly scheduled for an appointment or a telephone consultation. Office hours are flexible for your convenience. To obtain more information about Colorado’s CAAP program, or to schedule an appointment with Mines and Associates, please call (303) 832-1068 or (800) 873-7138, or go to: http://www.coloradosupremecourt. com/Registration/CAAP.htm.

OTHER SERVICES

Disciplinary Issues As a Supreme Court-approved lawyers’ assistance program under the Colorado Rule of Professional Conduct, Rule 8.3(c), confidential information obtained by CLHL is not subject to the mandatory reporting requirements of Rule 8.3. CLHL encourages any attorney facing a disciplinary issue or who believes s/he might be facing a disciplinary issue to contact CLHL as soon as possible. Active participation in CLHL’s programs can facilitate the resolution of many disciplinary issues.

to other resources that specialize in addressing these issues as they affect lawyers. You also can read CLHL’s column in The Colorado Lawyer.


We are here to help.

We receive calls from attorneys, family members, friends, partners, associates, staff, employers and judges. We never reveal the source of a call.

You also can email CLHL at: confidential@clhl.org

You can contact us by mail at: Colorado Lawyers Helping Lawyers, Inc. P. O. Box 423 Denver, Colorado 80201-0423

Anyone can call CLHL at any time. Our metro number is (303) 832-2233. Our nationwide toll-free number is (800) 4320977. Calls are answered as quickly as possible and will be held in strict confidence.

Phone: (303) 832-2233 Toll-Free: (800) 432-0977

P.O. Box 423 Denver, CO 80201-0423

Colorado Lawyers Helping Lawyers

Contact Information Colorado Lawyers Helping Lawyers P.O. Box 423 Denver, CO 80201-0423

www.CLHL.org


Section 4

C O L O R A D O B A R A S S O C I AT I O N CLE CLE in Colorado, Inc. is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association


SECTION 4 Insurance Coverage: What’s in your policy? Part II – Choosing the Right Coverage

Presented by Carolyn Fairless, Esq. Wheeler Trigg Kennedy Denver, CO


Notes: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________


INSURANCE COVERAGE: WHAT’S IN YOUR POLICY? PART II—CHOOSING THE RIGHT COVERAGE By Carolyn J. Fairless I.

Choosing a Policy A.

Every policy is different—be sure to carefully review the language of your particular policy.

B.

Using a Broker

C.

1.

Unlike an agent, a broker represents you, not the insurer.

2.

Choose a broker who has expertise in lawyer’s professional liability insurance, and in working with firms similar to yours.

3.

Colorado Bar Association maintains a Lawyers Professional Liability Insurance Producers list.

Liability Limits 1.

2.

How much is enough? Conversely, how much is too much? a.

It may not be feasible or affordable to obtain limits sufficient to cover the maximum likely exposure. But, a judgment in excess of limits exposes personal assets.

b.

At a minimum, should obtain limits large enough to make a settlement within policy limits attractive to a claimant, even if the potential damages are in excess of limits.

Types of limits a.

“Per claim” or “per occurrence” limit: Total amount the insurer will pay for all claims arising out of the same act or omission.

b.

“Aggregate” limit: Total amount the insurer will pay for all claims made within the policy year (plus any additional time provided by an extended reporting period).

c.

A firm with a high volume of cases or transactions is more likely to have multiple claims in a year, and therefore may be more concerned with obtaining a higher aggregate limit.

d.

A firm with a limited number of high-dollar cases or transactions may be more concerned with obtaining a higher per claim limit.

1


3.

D.

It is not enough to simply purchase the policy that provides the limits you want at the lowest premium. a.

Many other factors should be considered.

b.

Policies with identical liability limits can offer substantially different levels of insurance coverage.

Deductible and Defense Costs 1.

2.

Will the insurer pay defense costs? a.

Duty to defend must be found within the language of the policy. Bertagnolli v. Association of Trial Lawyers Assurance, 934 P.2d 916, 918 (Colo. App. 1997) (insurer had no duty to defend where the policy provided that the insurer had the right to approve defense counsel, but that the insurer “shall not have the right nor shall it be called upon to assume charge of the defense of any claim made or suit brought or proceeding instituted against an insured.”).

b.

Will insurer pay to defend disciplinary actions?

Do defense costs reduce the liability limits? a.

Defense costs in a legal malpractice case can be substantial. Generally, the more that is at stake, the more the case costs to defend. Depending on the exposure and the complexity of the case, the cost of defense can equal or exceed liability limits.

b.

Under some policies, defense costs are not counted toward the policy limits.

c.

Under other policies (sometimes called “eroding,” “wasting” or “Pac Man” policies), defense costs reduce liability limits. i.

3.

If so, policy limits should be sufficient to cover defense costs as well as potential liability.

Who will defend you? a.

Some policies allow the insurer to select defense counsel without the participation of the insured.

b.

Other policies allow the insured to participate in selection of counsel (e.g., the policies provide that defense counsel must be acceptable to both the insurer and the insured).

2


i. 4.

How large should the deductible be? a.

Deductibles are amounts that must be paid by the insured before the insurer has an obligation to pay.

b.

When does the policy require that the deductible be paid?

c.

i.

Under some policies, the deductible only applies to settlements or judgments.

ii.

Under other policies, the deductible also applies to defense costs.

Typically, a deductible will apply to each claim. i.

d.

E.

Some insurers have a panel of approved counsel from which the insured must select.

Some policies may provide aggregate deductibles as well.

Deductible should be based on the number of claims the firm anticipates, and the amount that the firm is willing to risk paying in exchange for a lower premium.

Minimum Limits Required By Law 1.

Like many states, Colorado does not require lawyers to purchase professional liability insurance.

2.

C.R.C.P. 265 (located in Chapter 22 of the Colorado Court Rules) allows shareholders/partners who did not “directly and actively participate” in an act or omission to limit liability if, among other things, certain minimum insurance policy limits were maintained at the time of the act or omission. a.

“Per claim” limits of at least $100,000 multiplied by the number of lawyers in the firm, or $500,000, whichever number is lower.

b.

“Aggregate” limits of at least $300,000 multiplied by the number of lawyers in the firm, or $2,000,000, whichever number is lower.

c.

The limits can include a deductible amount and/or amounts to be paid for defense costs, but the shareholders/partners assume liability for the difference between the remaining liability limits and the minimum limits set forth in Rule 265.

3


F.

Settlement 1.

G.

Can the insurer settle without your consent? a.

Because of concerns for the attorney’s reputation, many policies provide that the insurer will not settle without the insured’s consent.

b.

But, some policies contain a “hammer clause” which provides that, if the insured refuses to consent to a settlement that the insurer wishes to accept, the insurer’s liability will be limited to the amount of the proposed settlement plus the defense costs incurred up to that date—i.e., the insured will be liable for any indemnity and defense costs that could have been avoided had the insured accepted the settlement.

Types of Policies 1.

2.

Occurrence Policy a.

Affords coverage if an act or omission occurred during the policy period, regardless of when the claim is made.

b.

Difficult to underwrite, and no longer offered by many insurers.

Claims-Made Policy a.

Affords coverage if a claim is made during the policy period. See C.R.S. § 10-4-419(5) (defining a “claims-made policy” as “a policy of liability insurance that provides coverage for those claims that are made or reported to the insurance carrier, as is required in the policy, during the term of the policy or for such extended reporting term for which coverage has been purchased. A ‘claims-made policy’ may include coverage for events occurring before the current policy term.”).

b.

Some provide coverage regardless of when the act or omission occurred.

c.

Others provide coverage only if the act or omission also occurred within the policy period, or after a specified “retroactive date.” i.

Less expensive than the typical claims-made policy.

ii.

But, coverage can be illusory, because it is unusual for both the act or omission and the claim to occur within the same policy year.

4


iii.

3.

Can be suitable if the lawyer is just entering the practice of law, or if the lawyer has suitable tail coverage from the previous insurer.

Claims-Made and Reported Policy a.

Affords coverage if a claim is both made and reported during the policy period.

b.

Most common form of policy.

c.

More economical because the reporting requirement ensures that, after a certain date, the insurer is no longer liable under the policy. LaForge v. American Cas. Co. of Reading, Pennsylvania, 37 F.3d 580, 583 (10th Cir. 1994). This allows the insurer to more accurately fix reserves and compute premiums, reduces the potential exposure of the insurer, and reduces the premium charged to the insured.

d.

Unlike with an occurrence policy, providing notice of the claim to the insurer is a condition precedent to coverage. i.

e.

“[T]he requirement of notice in an ‘occurrence’ policy is subsidiary to the event that invokes coverage. By contrast, the event that invokes coverage under a ‘claims-made’ policy is the transmittal of notice of the claim to the insurance carrier. . . . Thus, in a ‘claims-made’ policy, the notice provision provides a certain date after which an insurer knows it no longer is liable under the policy and, accordingly, allows the insurer to fix more accurately its reserves for future liabilities and compute premiums with greater certainty. . . . [T]his allows insurers to offer the insurance for a substantially lower cost than occurrence policies.” St. Paul Fire and Marine Ins. Co. v. Estate of Hunt, 811 P.2d 432, 434-35 (Colo. App. 1991) (internal citations omitted).

Therefore, failure to provide notice within the period required by the policy will not be excused. i.

“It is because of this significant role of notice in ‘claims-made’ policies that numerous courts have held that excusing a delay in notice beyond the policy period should not be done, because to do so would alter a basic term of the insurance contract which expresses the parties’ agreement. . . . Here, we conclude that the condition requiring the insured to provide notice of a claim during the policy period was a material part of the agreed exchange. 5


Therefore, impracticability cannot serve as an excuse for the non-occurrence of such a material condition.” Id. (internal citations omitted). ii.

Allowing an insured to give notice beyond the policy period would “constitute an unbargained-for expansion of coverage, gratis, resulting in the insurance company’s exposure to a risk substantially broader than that expressly insured against in the policy.” LaForge, 37 F.3d at 583 (internal citations omitted).

iii.

Colorado courts have not yet addressed whether the Colorado Supreme Court’s adoption of the “notice-prejudice” rule should also apply to claims-made policies. Clementi v. Nationwide Mut. Fire Ins. Co., 16 P.3d 223 (Colo. 2001) (requiring that a UIM insurer show prejudice as part of a determination of whether noncompliance with a UIM policy’s notice requirements vitiates coverage); Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005) (holding that the notice-prejudice rule applies to general liability insurance policies). (a)

But, most other courts that have decided the issue have refused to apply a notice-prejudice requirement to a claims-made policy. See, e.g., Wallace v. General Star Indem. Co., 2007 WL 1624071 (E.D. Tenn. 2007) (“[T]he majority of courts in other jurisdictions refuse to apply the notice-prejudice rule to claims-made insurance policies. Some of these cases reason that requiring a showing of prejudice for late notice would defeat the purpose of ‘claims-made’ policies, and in effect, change such a policy into an ‘occurrence’ policy.”) (internal citations and punctuation omitted).

f.

Some policies provide for extended reported periods.

g.

Although many people refer to them synonymously, an extended reporting period is not necessarily the same as tail coverage. i.

An extended reporting period may require that the claim have been made within the policy period, and simply provides a longer period of time in which to report the claim.

ii.

In contrast, tail coverage provides coverage for claims made after the expiration of the policy period. 6


iii.

H.

(a)

Colorado statute and case law generally uses the term “extended reporting period” synonymously with “tail.” E.g., Ballow v. PHICO Ins. Co., 875 P.2d 1354, 1357 (Colo. 1993).

(b)

C.R.S. § 10-4-419(2)(d) requires all claims-made policies to offer, “at the insured’s option, the purchase of an extended reporting period of at least one year for claims not filed during the policy period.” The premium generally may not exceed two hundred percent of the expiring policy’s premium. Id.

(c)

Moreover, the commissioner may prohibit the use of a claims-made liability policy if the policy does not contain a provision stating that, at the insured’s option, the insured may purchase coverage for an extended reporting period of at least the length of time of exposure under the applicable statute of limitation. C.R.S. § 10-4-419(3)(a).

The language of the policy should control. If your policy includes an “extended reporting period,” carefully review the policy language to determine whether that term refers to tail coverage, or simply refers to an extended period of time in which to report a claim made during the policy period.

Policy Coverage Provisions 1.

What is a “claim”? a.

Should be defined within the policy—typically, as a demand for money or services.

b.

Where the insurance policy does not define the term, “claim” will be construed as a demand for some asserted right; a mere request for information, in contrast, does not constitute a claim. Nat’l. Casualty Co. v. Great Southwest Fire Ins. Co., 833 P.2d 741, 744 (Colo. 1992).

c.

Claims-made policies often provide that a claim is first made against an insured when the insured receives notice of the claim.

d.

Absent such language, a court may not necessarily require that the insured have notice of the claim in order to find that a claim has been made. Jones v. Lexington Manor Nursing Center, L.L.C., 480 F. Supp. 2d 865, 870 (S.D. Miss. 2006) (where the policy did not define a “claim” as being made when the insured received notice, a 7


lawsuit filed against the insured during the policy period, but not served on the insured until after the policy period, was nonetheless a covered “claim”). 2.

Professional Legal Services a.

Policies typically limit coverage to “legal services.”

b.

Absent contrary language in the policy, the term “legal services” is generally construed to mean those services which require specialized legal knowledge or skill. i.

“To qualify as a professional service, the task must arise out of acts particular to the individual’s specialized vocation. We do not deem an act a professional service merely because it is performed by a professional. Rather, it must be necessary for the professional to use his specialized knowledge or training.” Atlantic Lloyd's Ins. Co. of Texas v. Susman Godfrey, L.L.P., 982 S.W.2d 472, 476-77 (Tex. App. 1998) (allegedly defamatory solicitation letter sent by lawyer to potential client was not a “professional service” because “[s]oliciting clients does not require a lawyer to use the specialized education and knowledge inherent to lawyers.”).

ii.

“The term ‘professional services’ in the context of a professional liability policy refers to the practice of law. . . . [namely], the giving of advice or rendition of any sort of service by any person, firm or corporation when the giving of such advice or rendition of such service requires the use of any degree of legal knowledge or skill.” Continental Cas. Co. v. Cuda, 715 N.E.2d 663, 668 (Ill. App. 1999) (internal citations omitted) (lawyer’s alleged failure to inform the client of a conflict of interest was an “alleged wrongful act[] in the performance of professional services”).

iii.

Gregg & Valby, L.L.P. v. Great American Ins. Co., 316 F. Supp. 2d 505, 513 (S.D. Tex. 2004) (lawyer’s billing and fee-setting practices were not “professional services”); Medical Records Associates, Inc. v. American Empire Surplus Lines Ins. Co., 142 F.3d 512, 514-17 (1st Cir.1998) (same).

8


c.

Consider adding endorsement for additional coverage where insureds also provide other services. i.

d.

E.g., Notary, title agent, executor, administrator or trustee, or other fiduciary.

Professional liability policies offer limited protection. Additional policies will need to be obtained in order to have more comprehensive coverage. Some examples are as follows: i.

Commercial general liability policy (e.g., to cover third-party claims of bodily injury and property damage).

ii.

Employment practices liability insurance (e.g., to cover discrimination and other employment-related claims).

iii.

Business income insurance (e.g., to cover loss of business income as a result of property damage or natural disaster).

iv.

Directors and officers (D&O) insurance (e.g., to cover claims arising from attorney’s other business disputes).

v.

Electronic data processing (EDP) insurance (e.g., to protect against loss caused by computer virus or off-premises power failure).

vi.

Crime coverage (e.g., to protect against loss caused by employee’s theft from client).

vii.

Fiduciary liability (e.g., to cover claims arising out of a lawyer’s role as a trustee or other fiduciary).

viii.

Commercial auto (e.g., to cover claims arising out of the use of a firm-owned, non-owned, or hired vehicle used in the course of firm business).

ix.

Workers’ compensation insurance (e.g., to cover claims by firm employees for injuries arising out of and in the course of employment).

x.

Health, disability, life and long-term care insurance.

xi.

“Umbrella” or “excess” policy (to provide additional protection if the underlying limits have been exhausted).

9


3.

4.

5.

Because policies are designed to fit with one another (e.g., a risk excluded by one policy will be covered by another), it is desirable to place all policies with one insurer. a.

Avoids gaps in coverage.

b.

May be cheaper.

c.

Some insurers offer “packages” that include all of the insurance typically needed for a small or midsize law firm.

“For Others” a.

Professional liability coverage typically limited to services performed “for others.”

b.

Attorney acting in dual capacity (e.g., as both attorney and executor for estate) may not have coverage, because lawyer is performing services for himself or herself in the dual role.

c.

Acts or omissions of attorney representing himself pro se may not be covered. E.g., Mendelsohn v. CNA Ins. Co., 451 N.E.2d 919, 922 (Ill. App. 1983) (holding that, where attorney conducted all or part of a divorce action on his own behalf, that conduct was not covered by the insurance policy, because “[t]hat the practice of law involves service to another seems axiomatic.”) (emphasis added).

d.

Consider adding endorsement for fiduciary or other additional coverage, or obtaining separate policy providing that coverage.

Insureds a.

b.

The declarations page lists the persons protected under the policy as “named insureds.” i.

Current and past attorneys are typically named insureds, for work done at the firm.

ii.

Ascertain whether retired attorneys are named insureds for work done at the firm.

The policy should contain language describing any other persons who may be “additional insureds” or “other insureds.” i.

Ascertain whether the policy covers not just partners/shareholders, but also employees (such as associate and “of counsel” attorneys, paralegals, and secretaries) and non-employee contract attorneys. 10


6.

7.

ii.

Some policies require an endorsement to insure such persons, and payment of additional premium.

iii.

Ascertain whether the policy covers vicarious liability claims.

Territorial Restrictions a.

Some policies contain language limiting the geographic area in which coverage is provided.

b.

Insured may be able to purchase endorsement providing more expansive geographic coverage.

Typical Exclusions a.

Prior knowledge exclusion i.

Excludes coverage where, at the time of the insurance application, the lawyer knew of or reasonably should have foreseen the claim, but did not disclose it to the insurer.

ii.

Two-part test. See Westport Ins. Corp. v. Lilley, 292 F. Supp. 2d 165, 171 (D. Me. 2003); Selko v. Home Ins. Co., 139 F.3d 146, 152 (3d Cir. 1998).

iii.

(a)

Subjective Component: Did the insured subjectively know of certain facts?

(b)

Objective Component: Would a reasonable lawyer have recognized that an act or omission had occurred that might lead to a claim?

Question of whether this exclusion applies has been—and continues to be—heavily litigated. (a)

E.g., General Star National Ins. Co. v. Law Offices of Robert A. Olkowitz, P.C., No. 07-5433 (D.N.J.) (declaratory judgment action filed by insurer in November 2007, invoking prior knowledge exclusion where the client voiced displeasure over the size of a settlement offer and threatened to consult with separate counsel).

(b)

Westport Ins. Corp. v. Mirsky, 2003 WL 23002528 (3d. Cir. 2003) (where the insured attorneys committed discovery violations which resulted in the entry of summary judgment against their 11


plaintiff-client, yet failed to report the plaintiffclient’s potential claim when they renewed their insurance policy, coverage for the claim was excluded under the policy).

iv.

(c)

Ehrgood v. Coregis Ins. Co., 59 F. Supp. 2d 438, 443 (M.D. Pa. 1998) (where attorney representing a plaintiff in a lawsuit failed to properly effect service and knew he had no defense for the failure, yet subsequently submitted an application for renewal of his professional insurance policy denying knowledge “of any circumstance, act, error, omission, or personal injury which might be expected to be the basis of a legal malpractice claim,” coverage was properly excluded).

(d)

Maynard v. Westport Ins. Corp., 208 F. Supp. 2d 568, 575-76 (D. Md. 2002) (coverage excluded where an objectively reasonable attorney knew or should have known that a potential legal malpractice claim existed prior to the effective date of the policy); Coregis Ins. Co. v. Baratta & Fenerty, Ltd., 57 F. Supp. 2d 179, 184 (E.D. Pa. 1999) (same).

Courts generally reject “innocent insured” argument. E.g., Coregis Ins. Co. v. McCollum, 961 F. Supp. 1572, 1579 (M.D. Fla. 1997) (“The language of the exclusion contained within [the] policy explicitly states that coverage will be excluded if any insured under the policy knew or could have reasonably foreseen a possible claim. Courts have agreed that, unlike the phrase ‘the insured,’ the use of the phrase ‘any insured’ in a policy exclusion unambiguously expresses a contractual intent to create joint obligations and to prohibit recovery by an innocent co-insured.”).

b.

Exclusion of claim by client for return or disgorgement of fees.

c.

Exclusion for fines, sanctions and other penalties (including punitive damage awards). i.

In Colorado, public policy prohibits an insurance carrier from providing insurance coverage for punitive damages. Lira v. Shelter Ins. Co., 913 P.2d 514, 517 (Colo. 1996).

12


d.

e.

f.

Exclusion for fraudulent, malicious, intentional or dishonest conduct. i.

Some policies provide a defense (but not indemnity) for malicious prosecution and defamation claims.

ii.

Policies differ as to whether, in order for the exclusion to apply, there must be an adjudication of fraudulent, malicious, intentional or dishonest conduct.

Exclusion for claims alleging violation of federal or state securities laws, rules or regulations. i.

Insurer may be willing to delete this exclusion for additional premium.

ii.

But, deletion of the securities law exclusion will not provide coverage for securities law claims based on fraud (as the fraud exclusion will still apply).

Lateral hire exclusion i.

Excludes coverage for work done by the lateral before joining the firm.

ii.

Lateral hire exclusion may benefit the new firm for several reasons:

iii.

(a)

New firm does not need to pay a deductible for a claim arising out of work that only benefited a previous firm.

(b)

New firm’s aggregate limit is not reduced based on a claim arising out of work that only benefited a previous firm.

(c)

New firm’s loss history is not negatively impacted based on a claim arising out of work that only benefited a previous firm.

(d)

Can result in lower premiums.

But, if the previous firm had inadequate limits or no coverage, the exclusion potentially leaves the lateral attorney exposed.

13


g.

Bodily injury or property damage exclusion. i.

h.

Business pursuits exclusion (e.g., attorney sits on the client’s board of directors, or owns, operates or controls the client).

i.

Insured vs. insured exclusion (e.g., employment discrimination claim or internal dispute between partners). i.

j.

I.

Rarely an issue in professional liability cases.

Even if not specifically excluded, may nonetheless fall outside of coverage because such claims do not arise out of the rendering of “legal services.”

Sexual misconduct exclusion. i.

C.R.S. § 10-4-110.3 prohibits a professional malpractice insurer, as a matter of public policy, from attempting to “nullify or limit its stated liability with regard to claims not relating to sexual misconduct in cases where: (a) There is an allegation or proof of a claim of sexual misconduct by the insured; and (b) The policy requires aggregation of all damages under the liability limit for sexual misconduct.”

ii.

However, excluding coverage for sexual misconduct is not contrary to public policy. Church Mut. Ins. Co. v. Klein, 940 P.2d 1001, 1004 (Colo. App. 1996).

Avoiding Gaps in Coverage 1.

Claims-made policies do not provide coverage after the expiration of the policy period. Gaps in coverage may arise where the lawyer fails to renew or obtain substitute coverage, or where the new policy does not take effect until some period of time after the expiration of the previous policy.

2.

Claims-made policies typically do not provide coverage for “prior acts,” i.e., acts or omissions occurring prior to the policy period or a specified retroactive date. a.

Some insurers may allow you to add coverage for prior acts by endorsement.

b.

Alternatively, consider purchasing tail coverage. See Ballow v. PHICO Ins. Co., 875 P.2d 1354, 1357 (Colo. 1993) (“Insureds who purchase claims-made policies can protect themselves against claims made after the policy terminates in one of two ways. One option is to obtain ‘prior acts’ coverage. Under this option, the new insurer charges an additional premium to cover the insured for 14


acts occurring before the inception date of the new policy. Insurers need not offer this coverage. Another option is to purchase . . . ‘tail’ coverage. . . . This coverage, which is usually available, is purchased from the first insurer and covers future claims made for incidents occurring during the time of the claims-made coverage. In effect, such coverage turns claims-made coverage into occurrence coverage.”). 3.

Ascertain whether policy contains a “discovery clause” that provides coverage for acts or omissions that are reported within the policy period, but that have not yet resulted in a claim. a.

Discovery clause typically provides insured the option of reporting potential claims and thereby triggering coverage under the policy, regardless of when the claim is actually made. i.

b.

4.

Because claims-made policies typically do not provide coverage for an act or omission unless, prior to the policy period, the insured had no reasonable basis to believe that the act or omission had occurred, the lack of a discovery clause in the previous insurer’s policy may create a gap in coverage.

Failure to promptly report claims and potential claims can result in loss of coverage. E.g., Continental Cas. Co. v. Cuda, 715 N.E.2d 663, 669 (Ill. App. 1999) (“While the [] claim was first made on September 15, 1995, and [the lawyer] had purchased a professional liability policy covering this period (first policy), it is undisputed that [the lawyer] failed to notify [the insurer] during this corresponding policy period. By arguing that the [] complaint filed during the first policy period, and reported to [the insurer] during the second policy period on October 4, 1996, should be covered by the first policy, [the lawyer] is in effect attempting to turn a claims-made policy into an occurrence policy. [The lawyer] failed to notify [the insurer] of the claim during the corresponding first policy period under a claims-made policy. Therefore, his policy was not triggered and he is barred from benefitting from [the insurer’s] services.”). a.

J.

Under some policies, notice of potential claims may be mandatory.

This can be true even if the insured renews with the same insurer.

Leaving a Firm 1.

Ascertain whether there are any claims or potential claims that should be reported to the current insurer.

2.

What coverage, if any, will be provided by the previous firm and its insurer? 15


3.

a.

What does the current policy provide?

b.

Is there an employment or partnership agreement that requires the firm to provide insurance for claims arising out of acts or omissions that occurred while the departing lawyer was at the firm?

c.

What is the risk of the firm changing its insurance coverage?

d.

What is the risk of the firm dissolving or ceasing to carry insurance?

Going Solo a.

Unless you are just starting the practice of law, obtain a policy with prior acts coverage. i.

2.

Consider “full prior acts” or “career” coverage, if available.

b.

Consider limiting your practice areas to avoid areas that are considered high risk by underwriters (e.g., securities law or plaintiff’s personal injury litigation).

c.

Consider adding exclusions/endorsements to make professional liability insurance more affordable. i.

Eliminate coverage for claims outside your practice area (e.g., ask for a securities law exclusion).

ii.

Add endorsement that limits the definition of “professional services” to only those services that are in your practice area.

Lateral Move a.

Ascertain whether the policy at the new firm provides provisional automatic coverage for attorneys and other employees who join the firm during the policy period.

a.

“Provisional” automatic coverage usually requires written notice to the insurer within a certain period of time—new firm should ensure such notice is given. i.

Additional premium may be charged.

16


b.

Ascertain whether the policy at the new firm covers acts or omissions that took place at the prior firm. i.

c.

How extensive is that coverage? Is it “full prior acts” or “career” coverage?

Consider obtaining tail coverage for prior acts/omissions, if possible. i.

How long should the “tail” be? (a)

Garden variety legal malpractice claims have a two-year statute of limitations in Colorado. (1)

(b)

But, some claims that have been asserted against lawyers (e.g., breach of contract, fraud, breach of fiduciary duty, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty) have a longer limitations period.

(c)

In addition, the “discovery rule” may mean that the statute of limitations is not yet running. (1)

(d)

ii. d. 4.

Most claims will accrue within two years and, if not brought within two years, will be time-barred.

In some practice areas (e.g., litigation), an act or omission is likely to be “discovered” soon after the act or omission occurs.

In other practice areas (e.g., estate planning), an act or omission may not be “discovered” until many years after the act or omission occurs.

Tail coverage of unlimited duration is rare, but may be obtainable for a (very expensive) additional premium.

Does the current firm’s policy exclude coverage for any practice areas in which the lateral practices law?

Lawyers Leaving the Private Practice of Law a.

Because claims-made policies do not provide coverage after the expiration of the policy period, lawyers leaving the practice of law (e.g., to retire or to work in the public sector) should obtain tail coverage if possible.

17


K.

Other Considerations 1.

Part-Timers a.

2.

II.

Different insurers have different thresholds of hours that must be met before they will charge for an insured. You may be able to negotiate a reduction or elimination of premium for part-time attorneys.

Of Counsel b.

If a firm employs an “of counsel” attorney who works both for the firm and his own clients, some insurers will allow the firm to elect whether to cover all of that work, or only work done on behalf of the firm.

c.

From a risk management perspective, the best practice is to prohibit any attorney associated with the firm from having an outside private practice.

d.

At a minimum, if the “of counsel” attorney has an outside practice, the firm should require the attorney to provide evidence that the attorney has obtained adequate insurance for that practice.

Choosing an Insurer A.

What is the insurer’s financial rating? 1.

Protection provided by the policy is only as good as the insurer’s financial ability to provide it.

2.

E.g., A.M. Best (A- or better) or Standard & Poor’s (AA or better).

3.

Colorado Bar Association maintains a list of “Insurance Companies Underwriting Lawyers Professional Liability Insurance in Colorado,” providing names of companies, current ratings, and contact information.

B.

Does the insurer offer loss prevention services (e.g., law firm audits or CLEs and other educational materials)?

C.

What is the insurer’s reputation for paying/denying claims?

D.

Who insures your other policies? 1.

Obtaining policies from the same insurer avoids disputes over overlapping coverage, and also avoids gaps in coverage.

2.

Premiums also may be lower than if coverage is obtained from separate insurers. 18


III.

Other Resources A.

http://www.abanet.org/legalservices/lpl/preventionlibrary.html#insurance

B.

http://www.cobar.org/index.cfm/ID/23/dplpm/Malpractice-Insurance-Info

19


CHECKLIST Considerations When Purchasing Professional Liability Insurance •

What is the likely maximum exposure should a claim be made? Are the per claim limits of liability adequate to cover the exposure? Are the per claim limits of liability sufficiently large to make a settlement within policy limits attractive to a claimant?

How many claims are likely to be made each year? Are the aggregate limits of liability adequate to cover the exposure for multiple claims?

Are the liability limits sufficient to satisfy C.R.C.P. 265?

Will the insurer pay defense costs? Does that include the cost of defending a disciplinary action? Is a defense provided for claims such as malicious prosecution and defamation?

Do defense costs erode the liability limits? If so, are the limits adequate to cover both potential liability and the likely costs of defense?

Does the policy allow you to participate in selection of defense counsel? Is there a panel of counsel from which you are required to select? Who is on the panel?

Does the policy require your consent to any settlement of a claim?

What is the per claim deductible? Is there an aggregate deductible? Can you afford the per claim deductible if multiple claims are made?

Who are the named insureds under the policy? Who are the additional insureds?

Does the policy cover employees such as associates, of counsel attorneys, paralegals and secretaries?

Does the policy cover former/retired attorneys and other employees for work done while at the firm?

Does the policy cover claims of vicarious liability arising out of the acts or omissions of contractors and other non-employees?

Is the policy a claims-made policy, or a claims-made and reported policy?

Does the policy cover acts and omissions that occurred before the policy period? Or does it only cover acts and omissions that occur during the policy period? Is there a retroactive date?

Does the policy contain a discovery clause?

20


How does the policy address the hiring of attorneys and other employees during the policy period? Is coverage (provisional or otherwise) provided? What are the notice requirements? What is the additional premium that will be charged?

What are the exclusions? Does the policy exclude coverage for claims in an area in which you practice (e.g., securities law)? For other types of services in which you engage (e.g., as a notary, trustee or other fiduciary)? If so, can you obtain an endorsement that will provide coverage?

Does the policy provide coverage for claims in an area in which you do not practice? If so, can you exclude that coverage in exchange for a reduction in premium?

Does the policy provide an extended reporting period or tail coverage? How long is the extended reporting period? Is an additional premium charged for that?

What experience does the insurer have in writing lawyer’s professional liability policies? What is its reputation for paying or denying claims?

What is the insurer’s financial rating?

Does the insurer provide loss prevention services? If so, what services are offered?

If switching insurers, have you notified the previous insurer of any potential claims? Have you identified those on any application for insurance submitted to the new insurer?

21


Insurance Coverage: What’s in Your Policy? Part IIII-Choosing the Right Coverage

Choosing a Policy

• Every policy is different • Using a broker • Expertise in LPL insurance • Experience working with similar firms

Liability Limits

• How much is enough? Conversely, how much is too much?

• Types of limits • “Per claim” or “per occurrence” limit • “Aggregate” limit • Not enough to simply buy policy that provides limits you want at lowest premium

1


Deductible and Defense Costs

• Will the insurer pay defense costs? • Do defense costs erode the liability limits? • Who will defend you? • How large should the deductible be?

Settlement

• Can the insurer settle without your consent?

• “Hammer clause”

Types of Policies

• Occurrence policy • ClaimsClaims-made policy • ClaimsClaims-made and reported policy • Notice is condition precedent to coverage • Extended reporting period • Tail coverage • C.R.S. § 1010-4-419(2)(d)

2


Policy Coverage Provisions

• What is a “claim”? • Coverage limited to “legal services” • “For others”

Insureds

• Named insureds • “Additional” or “other” insureds • Vicarious liability claims

Typical Exclusions • Prior knowledge exclusion • Claim by client for return or disgorgement of fees

• Fines, sanctions and other penalties (including punitive damage awards)

• Fraudulent, malicious, intentional or dishonest conduct

• Adjudication required?

3


Typical Exclusions (cont’d)

• Claims for violation of federal or state securities laws, rules or regulations

• Lateral hire exclusion • Bodily injury/property damage • Business pursuit • Insured vs. insured

Avoiding Gaps in Coverage

• Gaps between policy periods • No coverage for “prior acts” • No “discovery clause” • Failure to promptly report claims and potential claims

Leaving a Firm

• Going solo • Lateral move • Lawyers leaving the private practice of law

4


Other Considerations

• PartPart-Time • Of Counsel

Choosing an Insurer

• What is the insurer’s financial rating? • Does the insurer offer loss prevention services?

• What is the insurer’s reputation for paying/denying claims?

• Who insures your other policies?

THE END

5


CLE in Colorado, Inc. is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association

Section 5

C O L O R A D O B A R A S S O C I AT I O N CLE


SECTION 5 Risk Management & The New Ethics Rules

Presented by Christopher B. Little, Esq. Montgomery Little Soran & Murray PC Greenwood Village, CO David C. Little, Esq. Montgomery Little Soran & Murray PC Greenwood Village, CO


Notes: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________


TEN COMMANDMENTS FOR CLIENT COMMUNICATION 1. COMMUNICATION STARTS WITH CLIENT IDENTIFICATION. COMMUNICATE AND CONFIRM IN WRITING WITH THE INTENDED AND REPRESENTED CLIENT THE CREATION OF THE RELATIONSHIP AND THE EXCLUSION OF OTHER INTERESTS AND REPRESENTATIONS. 2.

DESCRIBE AND DEFINE THE SCOPE OF THE REPRESENTATION. (C.R.P.C. 1.2) Specify the objectives and purposes of the representation – what the lawyer is to do and what is excluded from the scope.

3. FULLY DESCRIBE THE BASIS FOR THE LEGAL FEES, HOW THE FEES WILL BE DETERMINED, AND WHAT COSTS OR OTHER OBLIGATIONS FOR WHICH THE CLIENT MAY BE RESPONSIBLE TO PAY. (C.R.P.C. 1.5(b)) Be mindful of requirements of Chapter 23.3 C.R.C.P. 4. HAVE A FULL-FLEDGED ENGAGEMENT/FEE AGREEMENT THAT MAY INCLUDE DEFINITIONS OF SCOPE AND OBJECTIVES, FEE BASIS, AND EXPENSE RESPONSIBILITY. Include and define in the engagement agreement scope of attorney’s authority including authority to retain consultants, experts, associate counsel, and any other relationships that may be necessary for the case management. (include retention of file and client papers) (C.R.P.C. 1.2 and 1.4) 5. MAKE PERIODIC REPORTS ON THE PROGRESS OF THE MATTER. INCLUDE PERIODS OF TIME WHERE NO PROGRESS OR ACTIVITY OCCURS. (C.R.P.C. 1.4) 6. REPORT, DESCRIBE AND DISCUSS CASE DEVELOPMENTS, BOTH FAVORABLE AND ADVERSE, AND INCLUDE DISCUSSIONS CONCERNING ALTERNATIVE COURSES OF ACTION WITH A DESCRIPTION OF THE RISKS AND BENEFITS FOR EACH ALTERNATIVE. (Colorado Bar Association Formal Ethics Opinion No. 113, January 2006) 7. BILL PROMPTLY AND COMPLETELY FOR ALL WORK DONE, EXPENSES ADVANCED, AND MAINTENANCE OF ACCOUNTS. Limit account receivables and past due obligations. When account is first past due, call and talk to the client. Why is it past due? Is there any problem with service?


8. CONFIRM CLIENT RESPONSIBILITIES, INCLUDING THE PAYMENT OF FEES AND EXPENSES, THE NEED FOR CANDID AND COMPLETE INFORMATION, AND THE IMPORTANCE OF CLIENT RESPONSIBILITY AND COOPERATION. 9. UPON COMPLETION OF THE CASE, CONFIRM THE END OF THE RELATIONSHIP, WITHDRAWAL FROM THE REPRESENTATION, AND CLIENT RESPONSIBILITY FOR FOLLOW-UP ACTIVITIES. 10. PUT IT ALL IN WRITING AND, WHEREVER NECESSARY, MEMORIALIZE CLIENT’S INFORMED CONSENT AND OBTAIN THE CLIENT’S SIGNATURE. Become familiar with C.R.P.C. 1.0, Terminology, especially Confirmed in Writing (1.0 (b)) Informed Consent (1.0 (e))


Chapter 8

RISK MANAGEMENT Christopher Little, Esq. Montgomery Little Soran & Murray, P.C.

SYNOPSIS § 8.1

INTRODUCTION TO RISK MANAGEMENT § 8.1.1—What Is Risk Management? § 8.1.2—How Do Lawyers Handle The Risks?

§ 8.2

FORMAL ORGANIZATIONS OF PRACTICE § 8.2.1—C.R.C.P. 265 § 8.2.2—Sole Proprietorship § 8.2.3—Partnership § 8.2.4—Limited Liability Company § 8.2.5—Limited Liability Partnership § 8.2.6—Professional Corporation

§ 8.3

INFORMAL ORGANIZATIONS OF PRACTICE § 8.3.1—“Of Counsel” And “Special Counsel” § 8.3.2—Independent Contractors § 8.3.3—Office Sharing, Professional Suites, And Other Arrangements

§ 8.4

INTERNAL CONTROLS § 8.4.1—Law Firm Committees § 8.4.2—Avoiding Conflicts § 8.4.3—The Engagement § 8.4.4—Trust Accounts § 8.4.5—Fee Arrangements § 8.4.6—Withdrawal And Termination § 8.4.7—Establish Administrative Procedures

§ 8.5

CLIENT RELATIONS

§ 8.6

PEER REVIEW FOR HEALTH CONCERNS

§ 8.7

CLAIMS REPAIR

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§ 8.1

§ 8.8

Lawyers’ Professional Liability in Colorado

LAWYERS SERVING ON BOARDS OF DIRECTORS § 8.8.1—Generally § 8.8.2—Serving On Boards Of Clients § 8.8.3—Serving On Boards Of Publicly Traded Companies § 8.8.4—Serving On Boards Of Closely Held Companies § 8.8.5—Serving On Boards Of Non-Profit Entities

§ 8.9

THE RECAPITULATION OVERVIEW

EXHIBIT 8A

C.R.C.P. CHAPTER 23.3, “RULES GOVERNING CONTINGENT FEES”

EXHIBIT 8B

FORMAL OPINION 113, “ETHICAL DUTY OF ATTORNEY TO DISCLOSE ERRORS TO CLIENT”

§ 8.1 • INTRODUCTION TO RISK MANAGEMENT § 8.1.1—What Is Risk Management? Every lawyer is subject to risk. A risk can reveal itself in the form of a claim for legal malpractice or as a complaint to the Office of Attorney Regulation. A risk can mean exposure to mental and physical health problems. Risk management is the lawyer’s dedication to procedures and practices that reduce the risk of error detrimental to the client’s representation. It is a dedication that permeates all aspects of the professional practice and client service. Sometimes, the lawyer fails to focus on the tools that should be in place to minimize risks for the client. At other times, the lawyer pursues tasks for the client with such singularity of purpose that the lawyer fails to effectively manage risks to himself or herself. This Chapter addresses both of these aspects of risk management and presents methods to minimize the risks for clients, as well as tools to effectively manage risks for the lawyer. When opening a law firm, the lawyer makes two basic decisions: (1) the form of the practice, and (2) the method of practice. These two decisions will be made immediately, even if by default. The lawyer begins to manage risks by making these decisions knowingly and purposefully. This Chapter provides information to facilitate the process. The goal of risk management is to define and use information to prioritize known risks. Through predetermined business practice, risk management allows the lawyer to place emphasis on performance for the client instead of the strains of operating a business. Risk management provides the protocols and paradigm for the standards of practice that are useful to avoid malpractice claims. Risk management should be viewed as a way to operate the law practice so that the methods of delivering service to clients do not cause neglect to clients’ matters resulting in malpractice claims. A lawyer’s adherence to a risk management system may later assist the lawyer in the defense of a malpractice claim.

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§ 8.1.2

Sections 8.2 and 8.3 examine alternative forms of practice through which the lawyer may offer services to the public, discussing benefits and pitfalls of each. Section 8.2 discusses formal organizations. Section 8.3 reviews informal relationships. Section 8.4 focuses on specific aspects and challenges of the practice itself, and reviews control components internal to the practice, covering topics ranging from conflicts to docketing to record retention. § 8.1.2—How Do Lawyers Handle The Risks? The practice of law is not a business open to all, but a personal right, limited to a few persons of good moral character, with special qualifications ascertained and certified after a long course of study, both general and professional, and a thorough examination by a state board appointed for the purpose. The right to practice law is in the nature of a franchise from the state conferred only for merit. It cannot be assigned or inherited but must be earned by hard study and good conduct. It is attested by a certificate of the Supreme Court and is protected by registration. No one can practice law unless he has taken an oath of office and has become an officer of the court, subject to its discipline, liable to punishment for contempt in violating his duties as such, and to suspension or removal. It is not a lawful business except for members of the bar who have complied with all the conditions required by statute and the rules of the courts.1 The practice of law is a profession subject to the regulation of the Colorado Supreme To practice law in Colorado, a prospective lawyer first commits tens of thousands of dollars attending an accredited law school. The ABA reports that the average law student in 2005 will pay $11,094 per year just for living and book expenses;3 this figure does not include tuition or the service of educational loans for tuition. A 2004 ABA report estimates that the average law student accumulates educational debt in excess of $80,000.4 Servicing these debts is very difficult, considering that the starting public-sector salary is $34,000 per year and only a small percentage of law graduates make the high-end, first-year salary of $80,000.5 Following the accumulation of a large educational debt, the law school graduate must then pass a rigorous bar exam, the MultiState Professional Responsibility Examination, demonstrate mental stability, and possess moral and ethical qualifications for admission.6 Court.2

Those who qualify for and pass the bar examination then must adhere to the Colorado Rules of Professional Conduct and complete 45 units of continuing legal education (CLE) during an applicable three-year compliance period, as provided by these rules. At least seven of the 45 CLE units must be devoted to legal or judicial ethics topics.7 Lawyers regulate themselves through imposition of these rigorous standards, requirements, and regulations to protect their clients. The process of practicing law requires the constant exercise of educated, independent judgment founded in a sound and informed mental process. The process of decision-making for the client is assisted by structures and frameworks within which the lawyer functions. The framework for the lawyer’s creative work is addressed here; that framework minimizes risks for the lawyer and, in turn, for the client.

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§ 8.1.2

Lawyers’ Professional Liability in Colorado

The business of practicing law is affected by ethical, moral, professional, and business implications. The practice of law is challenged on a daily basis with the practical operations of running a business. There are no law schools or bar review courses that teach lawyers how to operate the business. Rarely does a lawyer evaluate the risks of operating the practice of law as a business until after the malpractice claim is filed. The “practice of law” is defined by the Colorado Supreme Court as: (a) The private practice of law as a sole practitioner or as a lawyer employee of or partner or shareholder in a law firm, professional corporation, legal clinic, legal services office, or similar entity; or (b) Employment as a lawyer for a corporation, partnership, trust, individual, or other entity with the primary duties of: (i) Furnishing legal counsel, drafting documents and pleadings, and interpreting and giving advice with respect to the law, and/or (ii) Preparing, trying or presenting cases before courts, executive departments, administrative bureaus or agencies; or (c) Employment as a lawyer in the law offices of the executive, legislative, or judicial departments of the United States, including the independent agencies thereof, or of any state, political subdivision of a state, territory, special district, or municipality of the United States, with the primary duties of (i) Furnishing legal counsel, drafting documents and pleadings, and interpreting and giving advice with respect to the law, and/or (ii) Preparing, trying or presenting cases before courts, executive departments, administrative bureaus or agencies; or (d) Employment as a judge, magistrate, hearing examiner, administrative law judge, law clerk, or similar official of the United States, including the independent agencies thereof, or of any state, territory or municipality of the United States with the duties of hearing and deciding cases and controversies in judicial or administrative proceedings, provided such employment is available only to a lawyer; or (e) Employment as a teacher of law at a law school approved by the American Bar Association throughout the applicant’s employment; or (f) Any combination of subparagraphs (a) - (e) above.8

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Risk Management

§ 8.2

This definition does not assist the lawyer in the operation of the business where the practice of law takes place. To engage in the private practice of law, a lawyer must enter into a business venture for profit. To properly advise a client, the lawyer must have the proper resources, research tools, and business structure. The business venture creates financial burdens and hardships. The business is strained on a daily basis by the economics of law practice. How to manage these financial burdens, hardships, strains, and constraints of the business is a goal of risk management. According to the “Profile of Legal Malpractice Claims,” a white paper published in April 2005 by the ABA Lawyers Professional Liability Committee, 23 percent of alleged errors occurred in the preparation, filing, or transmission of documents. Nineteen percent of claims arose when errors were committed in the litigation/pretrial/prehearing phase. Almost 16 percent of the reported claims occurred by failing to timely commence an action. Another 15 percent of claims arose when lawyers gave bad advice. Remarkably, nearly 29 percent of all claims may be directly related to administrative errors. Risk management can help. This same study showed that 33 percent of all claims were made against firms with two to five lawyers. Thirty percent of the claims were made against sole practitioners. In terms of practice areas, 20 percent of the claims were made against plaintiff personal injury lawyers; 16 percent were made against real estate lawyers; and personal injury defense, family, and estate lawyers each comprised 9 percent respectively, or 27 percent of all claims.9 In 2005, Colorado had 20,787 active lawyers and more than 10,000 inactive lawyers. Of this number, the Colorado Bar Association estimates that 15,000 were in private practice, of which more than two-thirds practiced either as sole practitioners or in groups of five or less. The balance of the lawyers in private practice was in larger firms, with about half of these in groups comprised of 25 lawyers or more.10 A simple comparison of statistics shows that small and sole practitioners have a higher chance of being sued. Why? Most such practitioners have neither focused upon the need for nor have they learned good risk management policies. They do not have the benefit of risk management procedures typically in place within larger groups. There are numerous resources available to help the lawyer form, establish, and organize the business aspects of a law practice. The members of the Law Office Management Committee of the Colorado Bar Association have the experience and background in establishing law practices and can help Colorado lawyers connect with a variety of consultants.

§ 8.2 • FORMAL ORGANIZATIONS OF PRACTICE A lawyer or group of lawyers must first establish the organization of the practice. Selecting an entity under which to practice law today is dependent upon the nature of the practice. This selection process is complicated by the ever-growing business organization alternatives available and their respective operational flexibility.

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§ 8.2

Lawyers’ Professional Liability in Colorado

Lawyers licensed to practice law are permitted by the Colorado Supreme Court to practice as a Sole Proprietorship, Partnership, Limited Liability Company (LLC), Limited Liability Partnership (LLP), or Professional Corporation (PC). It would be a violation of the Colorado Rules of Professional Conduct and C.R.C.P. 265 to practice law as a Limited Partnership (LP) or a Limited Liability Limited Partnership (LLLP). Therefore, neither the LP nor the LLLP will be discussed as an alternative entity under which to practice law. Variables affecting the decision-making process include the individual desires and needs of the owners of the entity; preference of the managers of the entity; jurisdiction of practice; transferability; capital; internal growth; and dissolution. Tax laws continue to become more complex. It is advisable to consult a tax advisor to determine the income tax ramifications resulting from the choice of entity. For a thorough discussion of this issue, see Chapter 6, “Choice of Law Firm Entity.” In addition, it is always prudent to form a business plan and prepare for the future. Each scenario should be evaluated on an individual basis with thorough consideration, research, and, as necessary, the proper legal and tax advice. There is no reason to subject yourself and your family to unnecessary professional liability. Finally, always remember to consult C.R.C.P. 265 and the Colorado Rules of Professional Conduct when making any decision concerning the form of business in which to practice law. § 8.2.1—C.R.C.P. 265 C.R.C.P. 265 contains certain requirements for lawyers who establish a professional company for the practice of law. First, the name of the professional company must contain the name and the type of entity under which the lawyers are operating or an appropriate abbreviation as authorized by the statute (e.g., PC, LLC, etc.). In addition, the name of the law firm must meet the ethical standards of the Colorado Rules of Professional Conduct. Second, the professional company must be established for the sole purpose of the practice of law by persons duly qualified and licensed in Colorado. The entity may exercise all the existing powers and privileges permitted by Colorado law, but only for purposes attendant to the practice of law. Third, each of the shareholders, partners, or members are jointly and severally liable for an act, error, or omission of the professional company. However, the shareholders, partners, or members may agree that they are not liable in the entity’s governing document so long as they have not directly and actively participated in the negligent act, error, or omission for which liability is claimed and certain minimum standards regarding professional liability insurance are met. The insurance must specifically cover the professional company and its employees engaged in the practice of law, including non-professional employees as well. The insurance shall be at least $100,000 per occurrence per lawyer, with a top aggregate limit per year of at least $300,000 multiplied by the number of lawyers in the professional company. No professional company is required to carry more than $500,000 per claim or more than $2 million aggregate insurance, no matter how many lawyers work in the firm. Always refer to the actual rule because there are other more specific details that should be noted, and the consequences of non-compliance can be drastic.11

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Risk Management

§ 8.2.3

The liability imposed on the shareholders, partners, or members of a professional company is limited to professional errors or omissions and does not extend to liability arising from conduct outside the practice of law. The individual’s personal liability may arise in this context only pursuant to C.R.C.P. 106 after a judgment has been entered against the professional company. Finally, nothing in C.R.C.P. 265 diminishes or alters the obligations of the Colorado Rules of Professional Conduct. The rule allows non-lawyer management of law firms; however, any officer or manager not licensed to practice law must refrain from the exercise of any authority over any of the professional company’s professional activities. § 8.2.2—Sole Proprietorship A sole proprietorship is an individually owned business. It is really a misnomer to call a sole proprietorship an entity because there are no legal formalities or election requirements to form such a structure. A negative aspect to sole proprietorship is the lack of protection for individually owned assets, should a professional negligence claim proceed to judgment against the lawyer. Even jointly held assets could be reached in post-judgment proceedings to the extent of the proprietor’s share. One primary reason for creating an entity under which to practice law is the entity’s role in providing a shield to protect personal assets from traditional legal and business liability. Creating an entity may also protect a lawyer from the liability of employees and associates. There are also income tax ramifications for the sole practitioner’s individual income tax structure that must be explored and taken into account. A certified public accountant should be consulted regarding these tax ramifications. Many sole proprietors join together in office-sharing arrangements. It is important to properly structure office-sharing arrangements because if these arrangements are mishandled, a partnership may be created. If the arrangement is deemed to be a partnership, then there will be joint and several liability for the professional negligence of the other lawyers in the office-sharing arrangement. § 8.2.3—Partnership A partnership is an association of two or more persons carrying on as co-owners in a business for profit. A partnership is the traditional, long-recognized form of group professional practice. Although a partnership may exist without any formal agreement, it is a better practice to enter into an agreement that sets forth the rights, duties, and obligations of the partners. Foreign registration is a non-issue for partnerships. Once again there are no formal organizational requirements or documents to be filed so long as a trade name is not involved. If a partnership in Colorado is operating under a trade name, it must be registered with the Department of Revenue.12 The partnership should also file with the Internal Revenue Service and receive an employer tax number. Before considering any type of trade name, consult the Rules of Professional Conduct, starting with Rule 7.5.

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§ 8.2.3

Lawyers’ Professional Liability in Colorado

Partners are managers of the business and have a statutory right to participate in management and are jointly and severally liable for the obligations of the organization. They are also obliged to indemnify the other partners for liability imposed on account of their actions. As with a sole proprietorship, there is no entity structure to pierce, and creditors may reach a partner’s assets directly if it is determined that the partnership has no assets to satisfy a partnership liability. Partnerships are not taxed at the organizational level, but they must still annually file a Form 1065 with the Internal Revenue Service and a Form 106 with the State of Colorado. The partners are taxed at their individual income tax rates based on their distributive share of income set forth on Form K-1. § 8.2.4—Limited Liability Company (LLC) An LLC may be formed in Colorado by filing Articles of Organization with the secretary of state. It is an accepted organizational vehicle for the practice of law. Members or managers are designated with the authority to bind the organization and participate in the management. The statutes permit the creation of a one-member LLC, allowing a sole practitioner to do business as an LLC. An LLC may do business in a foreign jurisdiction, but it must generally qualify to do business in that state. It is assumed that the laws of the state of organization will apply to the internal affairs of the entity and the liability of the members. The advantage of an LLC, for both business purposes and the practice of law, is the ability to be taxed like a partnership but with the personal liability protection of a corporation. Typically, members enter into an operating agreement that sets forth the relative rights, duties, and obligations. Except for a few non-waivable provisions, the members can vary the provisions of the statutory requirements and thus tailor their operating agreement to their business needs. The customary drawback of double taxation usually associated with operating through a corporation (whereby income is at least theoretically taxed first when received by the corporation and then again when distributed to the owner from the corporation) is not imposed upon the LLC. Liability is limited to the amount of capital contributions to the organization. However, just like a corporation, this advantage can be forfeited where the corporate veil is pierced. As in partnerships, a Form 1065 is filed with the Internal Revenue Service and K-1s are distributed to the member partners for flow-through taxation on their individual income tax return. The LLC term or some variation of its full meaning must be used in the title of the professional name in order to receive the proper liability protection. Appealing as this structure appears for its ease of creation and flexibility in operations, the case law is undeveloped, providing little guidance from the courts regarding interpretation of the statute. § 8.2.5—Limited Liability Partnership (LLP) Generally speaking, an LLP is a partnership in which the partners are not personally liable for the debts and obligations of the partnership. It is also an appropriate form of business organization for the practice of law. A general partnership may become an LLP by simply filing a registration statement with the secretary of state. This filing must be kept up to date; otherwise, the LLP will default into a partnership. The laws of the state of organization will regulate the internal

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Risk Management

§ 8.2.6

affairs of the entity even when it is registered to operate in a foreign jurisdiction. As with an LLC, some variation of the term LLP must be used in the title of the business in order to be recognized as such. Although an LLP may provide the partners protection from joint and several liability, their protection is still subject to the provisions of C.R.C.P. 265. Case law related to the process known as “piercing the corporate veil” may still apply. Case law requirements attendant to this process, just as for the shareholders in a corporation, provide a threshold of protection of personal assets from creditors in post-judgment collection proceedings. An LLP also provides for flow-through taxation to the partner’s individual income tax return, which eliminates the need for the entity to pay income taxes. The additional step of filing with the secretary of state must be taken; otherwise, the entity will be treated merely as a general partnership. § 8.2.6—Professional Corporation (PC) A professional corporation is formed by the filing of Articles of Incorporation with the secretary of state. Management of the corporation, including all matters of professional judgment, is vested in the officers and directors of the corporation. A professional corporation may furnish legal services in a foreign jurisdiction, but the laws of the state of organization will apply to the internal affairs. Once again, according to C.R.C.P. 265, the corporate identity must be so designated in the name of the business. Shareholders of the corporation may not be liable for the debts of the corporation. Shareholders may become liable if a creditor is able to meet the threshold requirements to pierce the corporate veil in post-judgment proceedings brought against the shareholders and their corporation. The shareholders are personally liable for payroll withholding taxes, and are personally subject to penalties for failure to assure that such taxes are appropriately and timely filed. It is essential to observe all of the procedural and substantive aspects of corporate operation to enjoy the benefits available. This includes record maintenance, meetings, and corporate formalities required by statutes and case law. A corporation must file its own separate tax return. Corporations practicing law are “personal service corporations” and are subject to a flat federal tax rate of 35 percent on all taxable income. There are no graduated tax rates for “personal service corporations.” To avoid this tax structure, qualifying corporations can elect to be treated as a small business corporation under Subchapter S of the Internal Revenue Code. Form 2553 must be filed with the Internal Revenue Service in a timely manner. S corporations do not pay a separate tax like C corporations, but offer pass-through taxation similar to partnerships, albeit with certain important differences. Dividends are doubly taxed: once to the corporation and then to the individual.13 From a pure theoretical tax standpoint, it can be the most costly form of doing business. There may also be advantages. For instance, the corporation may be permitted to deduct certain expenses not available to other forms of business. The lawyer should check with a tax consultant to determine

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§ 8.2.6

Lawyers’ Professional Liability in Colorado

the practical consequences in a particular circumstance. Of course, each situation should be evaluated on an individual basis to best determine the advantages and disadvantages of a certain entity when selecting the formal organization of practice. A lawyer who fails to register the professional corporation with the Colorado Supreme Court violates the Rules of Professional Conduct and may be subject to disciplinary proceedings.14

§ 8.3 • INFORMAL ORGANIZATIONS OF PRACTICE § 8.3.1—“Of Counsel” And “Special Counsel” “Of Counsel” was formerly used to denote the lawyer who is not the principal counsel of 15 record. Recent developments in the business of practicing law have changed the concept to define a contractual relationship between one lawyer and a group of lawyers practicing in a firm or other business organization. The contractual relationship should be written and should define the parameters of the employment. This relationship can afford the lawyer and the firm the opportunity to evaluate compatibility. This relationship allows firms to hire experienced lawyers with the hope of developing more business without having to devote training time inherent in the development of associates. A contract between a lawyer “Of Counsel/Special Counsel” and the firm should set forth all material terms. This contract is an employment contract in every respect. The contract should contain all of the terms of the employment including compensation, responsibility, and the nature of the relationship. The contract should also provide for appropriate progress reviews that are defined and based on objective criteria. The contract must specify the manner of compensation and how it is calculated. If the hired lawyer is employed to generate business, any performance income and bonuses should be identified and based upon objective criteria. All other terms of employment should be identified, including such details as authority to incur expenses; when payments are to be made; who is responsible for different categories of expenses and fees; and so forth. The contract should also define the manner in which the firm will bill the lawyer’s time. If there is any deviation from routine billing, consent should be obtained from all clients who may be affected. Also, definitions should be set forth for eligibility in profit sharing; 401(k); and health, disability, and life insurance. Other areas of consideration must include professional liability coverage. It is the lawyer’s task to assure that proper insurance coverage is in place by reviewing coverage and contractual documents, or consulting with the insurance company as necessary to resolve any concerns or unknowns. Occasionally, the Of Counsel/Special Counsel contract affords an evaluation of an experienced lawyer for partnership purposes. The designation may also be used for the reverse process:

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Risk Management

§ 8.3.3

allowing an experienced lawyer to evaluate an organization as a prelude to making a greater commitment. When such evaluative processes are at work, the criteria for partnership should be discussed in the writing. § 8.3.2—Independent Contractors Independent contracting is another method of hiring lawyers without formal association. Lawyers and support staff can be hired on a piecemeal basis. Employment can be limited by whatever terms the parties can reach, e.g., by scope of task, hours, days, and client. Independent contractors can limit business expenses for the sole practitioner or small firm. Independent contractors enable the hiring lawyer to utilize the services of another lawyer for particular tasks or short periods of time and usually at fixed hourly rates. The hiring lawyer may be able to avoid the other employment expenses, including insurance. A lawyer must be careful when using independent contractors, for many reasons. Independent contractors may or may not be covered by the hiring lawyer’s professional liability policy. Independent contractors may not carry their own insurance. Clients must be advised of, but may not fully appreciate, the use of independent contractors. Fee arrangements may not anticipate the use of the independent contractor. If an independent contractor is to be used, consider the extent to which the client should be made aware of the process, and obtain consent and agreement from the client for all ingredients of the billing procedure, including overhead costs and administrative charges. The disclosure of the independent contractor should be made in writing to the client. It is suggested by some that the client must be made aware of the billing process and whether there will be additional charges added to the cost of the contractor for oversight. Use of an independent contractor may strain the client-lawyer relationship. There may be circumstances in which the independent contractor does not agree with the lawyer’s tactics or advice. If this occurs, the independent contractor may have a professional conflict with the hiring lawyer, depending on the scope of the tasks assigned and breadth of information made available pursuant to the tasks. Some practitioners feel that such a disagreement may create a duty to inform the client of the dissension. Can such a potential disagreement be anticipated and handled in the contract through such tools as limiting the tasks of the independent contractor? The Rules of Professional Conduct and Ethics Opinions do not fully answer the dilemma. § 8.3.3—Office Sharing, Professional Suites, And Other Arrangements With the development of multimedia, Lexis, Westlaw, and Internet services, many practitioners find it convenient to operate as a solo practice in proximity with other solo practices. There are many advantages to this arrangement. Office sharing provides some support and collegiality not readily available to the sole practice. Office space and modern technology equipment are expensive. The cost of competent assistants may be daunting. Office sharing might help to reduce these expenses, but there are risk management issues.

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§ 8.3.3

Lawyers’ Professional Liability in Colorado

Sensible planning and control of costs are fundamentally essential. Office sharing may provide a less expensive access to utilize research facilities such as Westlaw, Lexis, or CD-ROM. But office sharing can just as easily increase the costs of operation if not carefully monitored. The Model Rules define a firm or law firm as a lawyer or group of lawyers in a private firm.16 When the sole or main relationship among lawyers is merely the sharing of office space and expenses, they should carefully avoid any implication that there is some deeper relationship. For instance, the use of each other’s names on letterheads should never occur. Names on the doorplate or in advertisements must clearly delineate the separate quality of the practices. CBA Ethics Committee Formal Opinions 8, 24, 50, and 89 discuss these arrangements, and the reader is encouraged to study these opinions before embarking on any such arrangement. When sharing office space, do not allow any implication of association. The term “associate” is used to describe lawyers who are practicing together or are employed in a firm, not lawyers who share offices.17 Those lawyers who are working for an individual lawyer or law firm may be designated on the letterhead and in other appropriate places as associates. The word “associate” can also be used as a description for the employer-employee relationship.18 But it should never be used in connection with a pure office-sharing arrangement. A shared-office arrangement often permits lawyers to curtail support staff expenses. This effort must be done carefully. CBA Ethics Committee Formal Opinions 61, 79, and 84 discuss the use of legal assistants, as do Colo. RPC 1.6(d), 5.3, and 5.5(b). If a lawyer is to share assistants in an office-sharing program, it is the lawyer’s responsibility to make certain that client confidences are always protected. Again, proper disclosure to the client is mandatory when a concern arises. The key guideline in all situations is to provide an assurance of professional independence, competence, and confidentiality and to avoid any conflict of interest. In any office-sharing group, the potential exists at all times for a conflict to arise, requiring constant vigilance by the individuals in the office-sharing group. Office-sharing lawyers must ensure confidentiality to their clients in all matters. These two guarantees to the client — confidentiality and conflict-free representation — require constant, proactive monitoring by the officesharing lawyer, since the built-in safeguards found in more formal organizations are difficult to put in place and maintain. In this situation, a lawyer must always analyze and monitor conflicts and confidentiality. These two protections belong to the client and must be safeguarded as a part of the representation and should never be ignored. The lawyer must have financial arrangements to exercise independent judgment. The lawyer can never be financially obligated at the client’s expense.19 At all times, lawyers are strongly cautioned to avoid business relationships with clients. Care should be taken in leasing office space owned by clients.20 Ironically, office-sharing lawyers can and often do function within effective shared risk management systems, just as separate lawyers in a small law firm, while maintaining their individual autonomy. In contrast, some small law firms operate on a day-to-day basis as if they were

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Risk Management

§ 8.4.2

office sharing, with minimal use of integrated risk management systems. The difference is that in small firms managed in this manner, the individual lawyers give up their autonomy by representing themselves to the public as a part of the law firm entity.

§ 8.4 • INTERNAL CONTROLS § 8.4.1—Law Firm Committees Forming a law firm committee generally means that the firm is too large for individual control. Committees give larger firms some freedom in management decisions. Ruling through committee means loss of control and knowledge of the business activities. If ruling by committee is necessary, a firm must establish methods to properly advise all others of the committee decisions and, thereafter, to ordain procedures to monitor the implementation of decisions. A danger attendant to committee management is that the committee can develop its own reasons for existence. The committee can sometimes control an individual lawyer’s law practice without regard for the needs and wants of individual clients, who may suffer as a result. § 8.4.2—Avoiding Conflicts To avoid conflicts, a lawyer must develop a conflict avoidance policy with proper backup documentation and continued updates. Most importantly, it must be practiced religiously. The task of clearing conflicts for a new matter first arises at the threshold of taking on the new case. The client first appears and presents the matter while anxious for its resolution. The lawyer is eager to help and to allay the fears and anxieties of the prospective client. Yet, this is a time for caution, as no confidential material should be received until potential conflicts are cleared. The prospective client wants to unload the burden of his or her legal problem. It can be awkward for the lawyer to advise this prospective client that the lawyer may receive only limited information and that the lawyer does not know whether he or she will be able to accept this representation. Add to this the challenge of obtaining information necessary to clear any conflicts while avoiding confidential material, and the result is a discussion fraught with frustration. There are many software programs that will support procedures with automated conflict checks. A lawyer should check conflicts before ever receiving any confidential disclosures from prospective clients. Once confidences are disclosed, the conflict becomes an unsolvable problem. The conflict check must begin before the lawyer accepts the legal matter. Each time a file is opened, the lawyer must have the client and file number designated and must perform a conflict check that includes: • The name of all of the clients, including any prior names. If multiple individuals have come for advice, make certain they all know who is being represented and where the loyalty lies. If there is a concern about this, independent counsel for each may be necessary. • If it is a corporation, any related corporations. If the corporation is publicly traded, make certain you are familiar with Sarbanes-Oxley issues.

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§ 8.4.2

Lawyers’ Professional Liability in Colorado

• The name of each person and entity related to the client that may provide substantial information. If the client is publicly traded, make certain the ladder of reporting is defined and understood. • The name of each adverse party and a description of the matter. • The complete case caption (in the case of litigation). • A list of witnesses who may or may not be called. • Each amendment to a pleading, including cross claims, counterclaims, and so forth. • Each designation of a non-party at fault. • Opposing experts and witnesses. • Changes to the client’s name, officers, or board of directors. • The name of the opposing counsel and opposing counsel’s law firm. • Spouses. • Co-defendants, plaintiffs, and third parties. The authority for accepting new clients should be delegated to a partner assigned the task of new business review, or, if necessary, a new business review committee. Each time a file is opened, it should be efficiently processed for the client. Each new client information form should have relevant information about the client name; address; Social Security number; place of employment; name of company; and if the client is a company, its phone number, fax number, employer identification number, and case description. Depending on the circumstances, further information may also be necessary. Any information stored electronically must be protected with appropriate firewalls and password protection. § 8.4.3—The Engagement Once the client has been accepted and cleared through conflicts, an engagement letter must be written and signed by the client. A lawyer should never accept an engagement without a written fee agreement. Each engagement letter should adhere to a checklist that may include the following: • Client’s name and address. • Effective date of agreement. • Purpose of representation. • Statement that a client-lawyer relationship is created. • Definition of the terms or the duration of the engagement, with any limitations on the scope of the representation, and the defined fee schedules for the lawyer (s) in the firm. • Manner of billing. • Manner of paying. • Amount of payment of retainer, if required, and if the agreement contemplates when the retainer is earned. You must read and understand In re Sather, 3 P.3d 403 (Colo. 2000). • Contingent fee forms. Reading and following Chapter 23.3 of the Colorado Rules of Civil Procedure are mandatory and without exception (see Exhibit 8A to this Chapter). • A statement that upon completion of the services the law firm will provide the client with a written statement stating the outcome of the matter and, if there is recovery, showing the remittance to the client and the method of termination.

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§ 8.4.4

• A provision for a lien in favor of the firm. • That costs are always the client’s responsibility. • A statement that this matter is disputed or contested and that there are no guaranties being made. • Provisions for withdrawal, substitution, and termination. • Whether the client and the lawyer will mediate any fee disputes. Consult the professional liability insurance policy before suggesting any mediation or arbitration clause. • Who is not represented. This situation often occurs in the context of business formation or similar situations where more than one person appears with the client or is associated with creating the client. The engagement letter must also inform the client of the billing process. The billing should be automated and the system regularly monitored. Bills should be carefully reviewed before they are sent to the client, to ensure accuracy of work description, defined time, costs incurred, trust account transactions, and anything else to make the bill informative and understandable to the clients. All billing should be done on a monthly basis unless otherwise agreed or required. Finally, receipts should be carefully tracked to ensure prompt and timely payment. Do not let the client get behind in payments without addressing and handling the issue. Any delinquency should be immediately discussed with the client. If the client cannot keep up with payments, either make an alternative arrangement in writing or withdraw, if feasible.21 Both of these issues may be addressed in the fee agreement, thus providing helpful guidance. § 8.4.4—Trust Accounts Every lawyer should have a trust account for client funds. The client’s money is never the lawyer’s. This includes unearned portions of the retainer.22 Please review the COLTAF requirements.23 COLTAF is the acronym for the Colorado Lawyer Trust Account Foundation; it is a requirement of the Colorado Supreme Court for all lawyers and their trust accounts. COLTAF is not discretionary; it is mandatory. The funds of the client always remain the funds of the client. Any money that can be said to belong to the client can never, under any circumstances, be used for the lawyer’s own purpose. This money must never be kept in the office operating account or the lawyer’s personal account. Every deposit and withdrawal from the trust account must be documented and supported.24 The organizational entity may need to separate control over cash receipts and the books in which those receipts are recorded. In addition, accounting ledgers and books should be posted daily from the receivables and payables. The bookkeeping setup should be simple but complete, with systems of internal controls to make sure that bills are sent out, payments are accounted for, and all transactions are recorded. To practice law, a lawyer must run a business. Make that process simple and complete. Helpful software is available to provide even the sole practitioner dabbling as a bookkeeper with a sophisticated system of checks and balances.25

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§ 8.4.5

Lawyers’ Professional Liability in Colorado

§ 8.4.5—Fee Arrangements The engagement letters discussed earlier suggest some of the information required in any hourly or contingent fee arrangement. Read Colo. RPC 1.5. The fee must be reasonable and discussed with the client. Contingent fee agreements are particularly critical. Every contingent fee agreement must adhere to C.R.C.P. Chapter 23.3 and the rules governing contingent fees. Additionally, Forms 1 and 2 from Chapter 23.3 and the disclosure statement, reproduced in Exhibit 8A of this Chapter, must be signed by the client. If the contingent fee agreement does not adhere to the requirements of Chapter 23.3, the lawyer may not be permitted to recover the fee, and may be subjected to an investigation by attorney regulation counsel for failure to comply.26 At a minimum, any fee arrangement should include the client’s name, address, a description of services to be provided, how any percentage of recovery will be calculated, and how that calculation will be based. For instance, in a wrongful termination case, how will the lawyer be paid if the client negotiates a return to work and there are no monetary damages? Fee agreements, particularly contingent agreements, require thoughtful disclosure and discussion with the client. The fee agreement should also include an estimate of costs with any engagement in which costs will be incurred. The lawyer must obtain the client’s authorization to incur those costs. A lawyer must also follow up and request written authorization when the estimate of costs is exceeded. When the engagement is based on an hourly fee agreement, the agreement should include the date of representation, the client’s name, address, a specific description of the services to be performed, and a limitation of what will not be included in the legal service. The rate charged for all lawyer time, paralegal time, independent contractor time, legal assistants, and so forth should all be included. If other associate counsel or numerous lawyers are to be used, their rates should also be defined. Also, include the estimate of costs with the client authorizing a limit on costs. Any agreement should also recognize the initial deposit for costs and cost retainer to be maintained. § 8.4.6—Withdrawal And Termination When terminating or withdrawing from the client-lawyer relationship, be certain the client is fully informed. If litigation has been initiated, the provisions of C.R.C.P. 121 will apply. The client must be informed in writing of the termination of the relationship in all cases. The termination letter should inform the client that the representation has concluded, that the file is being closed, and that the client must be responsible for the matter from that point forward. This letter should include, depending on the circumstances, advisement to the client that the lawyer is taking no further action on the matter, that the client is advised to hire new counsel, that the non-corporate client may act as his or her own counsel, and that the client contact new counsel, successor counsel, or even opposing counsel for other tasks that need to be accomplished. If the lawyer is to do further work, specify exactly what it is that should be done. When the client needs additional legal work that the lawyer will not be performing, the lawyer should provide some guidance to help the client find another lawyer. When the lawyer has entered appearances in court, C.R.C.P. 121 or its counterpart must be followed.

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§ 8.4.7

§ 8.4.7—Establish Administrative Procedures Prior to opening a law practice, a lawyer should have administrative procedures in place, including phone messaging, electronic mail review, daily mail handling, accounting, docket control, and the calendaring of dates of meetings, trials, vacation plans, sick days, pay periods, etc. These procedures are simply part of good risk management. Client intake begins with the required conflicts check, definition of engagement, identification of client interests, and limitation of client expectations. The expectation should be fairly stated and never guaranteed or overstated. When accepting an engagement, the lawyer should establish the client’s identity and required financial information, check conflicts, open the file, write the engagement letter, and commence the work. Effective risk management should consider the following: • Procedures to ensure the use of engagement letters and fee agreements in every case. Every case requires a conflict check. • A checklist for the client interview. • Timely client reports and written confirmation of decisions. • Regular billing and collection practices. • Control of operating expenses. • Copies of correspondence must be immediately filed under the proper label. • “In” and “out” baskets. • Consistent client communication. • Docketing and calendaring. • Dual-entry calendar system. • A centralized administrative system. • Checklist of deadlines in Colorado and federal courts. • E-mail controls, including storage and distribution procedures. • If litigation, do simplified case procedures of C.R.C.P. apply? If not, will the lawyer timely file? • Sarbanes-Oxley issues. This is a specialized area of practice, and the reader is urged to read Chapter 25 of this handbook. • E-mail controls, including storage and distribution procedures. Read Zubulake v. UBS Warburg, LLC, 229 F.R.D. 422 (S.D.N.Y. 2004) (“Zubulake V”). • Understand what metadata means and how it can be used. “Delete” does not mean deleted forever. • Beware of portable storage devices. Have security locks/passwords for all portable computer devices. • Install or purchase automatic updates for all security, antivirus, spyware, and firewall protections. Do not let third parties into your system. • Implement a technology use policy that establishes guidelines and minimum requirements for the use of electronic storage and retrieval. • Make your passwords strong. “Bob” is bad. “Cu##2@By0o” is better.

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§ 8.4.7

Lawyers’ Professional Liability in Colorado

• Katrina-proof your office. Keep your backups off site. Have a fully implemented disaster reaction plan. Do you know where your staff will be in the event of a catastrophe? Who has access to your bank accounts? Where can you re-establish your practice if the physical office is gone? The reader is cautioned to read the Rules of Civil Procedure and local rules, and to check each line item in court orders setting forth docket control information, as individual judges and the parties may agree to change the deadlines.

§ 8.5 • CLIENT RELATIONS Simply put, it is the lawyer’s task to keep the client informed. The lawyer shall not ignore clients. The lawyer should return phone calls in a timely manner, provide status reports, and respond to the client’s concerns. This is pure customer service, and the best method to follow is consistent client communications that require the lawyer to: • Return phone calls. • Copy client on all letters and pleadings. • Maintain consistent client communications. • Communicate realistically. • Think twice before immediate response to e-mails. • Be cautious entering into business relations with clients. • Withdraw promptly when discharged.

§ 8.6 • PEER REVIEW FOR HEALTH CONCERNS The practice of law is stressful. Lawyers can suffer infirmities and disabilities of every sort, many of which can be caused or aggravated by the stress inherent in practicing law. Recently, the Colorado Supreme Court undertook the sponsorship of the Colorado Lawyer’s Health Program. This program was originally created by the Colorado Bar Association to assist lawyers who develop physical, emotional, or mental illnesses. As a matter of risk management, every group of lawyers should have a peer review program to monitor emotional wellness. This program should be written; should recognize federal and state laws, including the Americans With Disabilities Act; and should spell out how the lawyer will be treated during diagnosis and recovery. The document, regardless of its title, should inform the lawyer of the following: • Acknowledge the lawyer’s illness. • Allow business to act in a reasonable manner.

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§ 8.7

• Define what the lawyer must do before returning to work. • Allow referral to Colorado Lawyer’s Health Program. • Require the lawyer to follow all medical advice. • Require the lawyer to adhere to legal and ethical standards. • Specifically define any discipline. • Describe the condition. • Acknowledge the best interests of the lawyer, firm, and clients. A professional liability claim or complaint to the Office of Attorney Regulation is a stressful event. Practicing risk management will help you respond to the complaint if and when it is made.

§ 8.7 • CLAIMS REPAIR If you become aware of a claim, read and adhere to Formal Opinion 113, promulgated by the Colorado Bar Association Ethics Committee, appearing as Exhibit 8B of this Chapter. This is mandatory. Statistically, every lawyer has the chance of responding to a claim. Lawyers are attractive targets for litigation, and disappointed clients can sue or report their disappointments to the Office of Attorney Regulation. Responding to either is expensive for lawyers. Professional liability insurance is strongly recommended. Claims for conflicts of interest, second-guessing trial tactics, and missing deadlines are abundant in Colorado. What do you do if you make a mistake? Do not ignore the problem. React professionally. First, segregate the file and keep it safe. Open a new file for your communications with your carrier and your new lawyer. Read the policy, and comply with all notice requirements. Next, contact your insurance carrier. This does not mean a phone call to your broker; it means direct contact with your insurance company. Prepare written notice of the claim with details of how the problem arose. Be specific, do not generalize, and do not blame your client. Do not be concerned with a rate increase. Do not discuss the case with your client. Do not try to act as your own advocate. If you do not have professional liability insurance, find a lawyer to represent you. Your partner or a suite mate may not be a realistic choice; you may end up ghostwriting, and this is not recommended. Ask around and find someone who has experience representing lawyers. The Colorado Bar Association Lawyers Professional Liability Committee may have some suggestions. If you have professional liability insurance, your carrier may have a hotline that provides legal services for risk management. This generally is limited to a few hours of work and allows the claim to be analyzed and perhaps resolved. This is at no cost to you, so call the hotline.

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§ 8.7

Lawyers’ Professional Liability in Colorado

The issue to buy insurance should not be left to the future. Buy professional liability insurance; it is there to protect you and your assets. Many members of the bar regard professional liability insurance on the might-be-nice-to-have-but-not-essential list. Professional liability insurance is necessary. Statistically speaking, you will be sued or a claim will be asserted against you at some point in your career. It is absolutely necessary to protect yourself from catastrophic loss by buying professional liability insurance. Lawyers’ professional liability insurance is almost always a claims-made policy. This means that coverage only exists if the claims are made against the insured while the policy is in force. Unless you purchase extended reporting period (ERP) coverage, this type of policy covers claims that arise out of incidents only if they occur subsequent to a prior acts date. ERP coverage is sometimes referred to as “tail” coverage. If there has been a lapse in coverage, consider buying ERP coverage so that you are protected from past and current claims. Your first decision is to purchase insurance. After that decision, you must determine how much coverage is necessary. That decision should be based on a realistic evaluation of the work you perform. If you file lawsuits seeking millions of dollars in damages, then your coverage should be several million dollars. If you give advice on real estate transactions or probate matters, consider the value of the assets you are working with. You should also consider the form of your practice and how many partners/shareholders there are. You should be aware of aggregate limits for coverage. This is the maximum amount available to pay all claims that arise within that policy year. It is possible to have one claim exhaust a majority of the coverage. Lawyers’ professional liability insurance is there to protect you. Buy it.

§ 8.8 • LAWYERS SERVING ON BOARDS OF DIRECTORS § 8.8.1—Generally Lawyers are community minded, and many give their time to various causes and sit on 27 boards. Lawyers are frequently asked to sit on boards of both for-profit and non-profit corporations. These boards can be great resources for business referrals or they may be great places to help with your special talents. There are rewards and pitfalls when sitting on a board. The first rule is, if you sit on a board do not offer legal advice. If you offer legal advice, you may be sued. Before joining a board, make certain it has officer and director liability insurance. Check your own professional liability carrier to determine whether you will be covered by your policy if the board is sued. You may also be covered by your homeowners insurance or protected from liability by statute28 or indemnification by the corporation. However, read Model Rule 1.7, Comment 14, which describes how a lawyer should evaluate his or her role of lawyer and director. Lawyers contemplating sitting on boards should also read the Sarbanes-Oxley Act and the Colorado Corporation Code.

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§ 8.8.2

Realize that you will have certain duties as a board member. These duties may conflict with your duties as a lawyer. There are statutory and common law duties imposed on a director. These duties are non-delegable. Statutory and common law requires a director to discharge the duties of the position as director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.29 A director has fiduciary duties and is responsible to act in good faith and as an ordinarily prudent person in a like position would under similar circumstances. This includes the duty to act in accordance with the organization’s mission and applicable law. The director also has the duty of loyalty to act for the benefit or best interests of the corporation. Concerns usually arise in connection with conflicts of interest.30 In order to avoid such conflicts, the lawyer is encouraged to make timely disclosure in areas where a conflict may arise. If necessary, a lawyer may be required to abstain from a vote. However, think twice about being conveniently absent, when the prudent decision might have been resignation. You could be sharply criticized later. Please remember that your conduct as a lawyer is always subject to scrutiny by the Office of Attorney Regulation.31 The conflict of interest scenario can arise in various forms: for instance, doing business with the corporation, usurping a corporate opportunity, or competing with it. Your obligation is to the corporation or the association; do not confuse an opportunity to serve with an opportunity to personally gain. § 8.8.2—Serving On Boards Of Clients Being invited to sit on a client’s board is a great honor and suggests that the lawyer enjoys some professional accomplishments. The lawyer must not ever confuse his or her role as the lawyer with the role of director. If the position is offered, the lawyer should have a candid discussion with the client. In that discussion, the lawyer should advise the client that the lawyer possibly cannot continue to represent or advise the client. This goes for cases in litigation as well. A motion for disqualification would probably be made if the corporation were sued for malfeasance or improper business judgment. The client would need to be advised that there may be some waiver of the attorney-client privilege if the lawyer is part of the decision-making process. Familiarize yourself with the business judgment doctrine. If legal advice was given, there may be a waiver of the attorney-client privilege. Does the corporation engage in financial services? If so, there will be regulation by the federal and state governments. Make certain you understand all regulation by both. Obviously, a shareholder suit could be filed. Can the shareholders also allege malpractice if advice was given to the corporation? If you are serving on the board of a client, you should not give legal advice. A lawsuit will be a hard place to answer the question whether you gave legal advice. The lawyer should also understand any and all indemnification implementations.

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§ 8.8.2

Lawyers’ Professional Liability in Colorado

If the role is accepted, the lawyer is cautioned to end his or her legal relationship with the client. A letter discussing these subjects will help better define the role of director or lawyer. § 8.8.3—Serving On Boards Of Publicly Traded Companies Sarbanes-Oxley: it must be read and understood. Do not think that you can figure it out as you go along. This is an extremely complex piece of legislation. The law imposes regulations on the lawyer. For instance, 17 C.F.R. § 205.1 sets forth minimum standards of professional conduct for lawyers appearing and practicing before the Securities and Exchange Commission and in the representation of an issuer. Do not think you can sit on the board and advise the client at the same time. 17 C.F.R. § 205.3 should dispel this notion. It states that an “attorney appearing and practicing before the Commission in the representation of an issuer owes his or her professional and ethical duties to the issuer as an organization.” In this situation, there is no way to separate director responsibilities from legal advice. This section also contains the requirements for reporting up the ladder. It may be an honor to serve on a publicly traded corporation, but the lawyer should not continue to advise that client if the board position is accepted. § 8.8.4—Serving On Boards Of Closely Held Companies Whom do you serve? Friends and relatives ask many things. Unfortunately, serving on a closely held corporation may pit your independence as a lawyer against your loyalty as an officer. If you take on that role, make certain that you and your client and/or board understand your role and that the description is in writing. § 8.8.5—Serving On Boards Of Non-Profit Entities Many lawyers serve on boards of non-profits. Many lawyers serving on the board of a non-profit do so for altruistic and legitimate purposes. The same rules discussed above apply here. However, as noted above, some indemnification or liability exclusion may protect you. An example is the Federal Volunteer Protection Act of 1997, which limits liabilities for volunteers who act within the scope of their responsibility and, where required by state law, are licensed or certified. The act, of course, excludes willful or criminal misconduct, gross negligence, reckless misconduct, and flagrant indifference. Nothing is perfect. But risk management is a start.

§ 8.9 • THE RECAPITULATION OVERVIEW There are many risk management procedures a lawyer should consider. This is a nonexhaustive checklist of 30 ways to achieve risk management: 1) Obtain space and location most conducive to the type of practice and compatible with manageable economics. 2) Open two bank accounts: Trust (COLTAF) and Operating. 3) Utilize electronic or manual administration systems. 4) Establish a conflicts database with standardized client and file identification systems. 5) Establish client intake routines.

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Notes

6) Draft forms for client engagement letters. 7) Compose forms for declination of engagement letters to a client. 8) Prepare standard fee agreements.32 9) Establish client reporting and communication procedures. 10) Decide on timekeeping and work log procedures, systems, and practices. 11) Plan regular billing and collection practices. 12) Establish routines for mail handling and phone calls. 13) Join the Colorado and local bar associations and get involved with committee work. 14) Establish technical and professional support systems. 15) Plan to focus the direction of your specialty or expertise. 16) Establish marketing activities and objectives. 17) Create primary systems for docket and calendar controls. 18) Create a system to back up the system for docket and calendar controls. 19) Plan client file management. 20) Plan client property management and safekeeping. 21) Establish disengagement and withdrawal procedures. 22) Join professional activities and associations (e.g., ATLA, CDLA, and bar association practice sections). 23) Get a mentor. 24) Join and get involved with good community support organizations. 25) Decide on realistic and timely choice of CLE activities.33 26) Constantly reinforce routines and protocols you have established, and routinely read the Rules of Professional Conduct. 27) Sign up with the Metro Volunteers program. 28) Never go into business with a client.34 29) Obtain professional liability insurance coverage. 30) Maintain consistent client communications. 31) Read Colorado Bar Association Ethics Committee Formal Opinion 113 (see Exhibit 8B of this Chapter). 32) Create a “Katrina Plan” in case of catastrophe. 33) Carefully read §§ 11.2, 11.3, and 11.4, from Chapter 11, “Technology and the Practice of Law,” in this handbook for a thorough discussion of issues pertaining to wireless communication and digital information and security.

NOTES 1. In re Co-Operative Law Co., 198 N.Y. 479, 483, 92 N.E. 15, 16 (1910). 2. C.R.C.P. 201.1. 3. See www.abanet.org/legaled/statistics/living.html. 4. Final Report of the ABA Commission on Loan repayment and Forgiveness, “Lifting the Burden: Law Student Debt as a Barrier to Public Service,” available at www.abanet.org/legalservices/ downloads/lrap/lrapfinalreport.pdf. 5. Id. at 25.

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Notes

Lawyers’ Professional Liability in Colorado

6. C.R.C.P. 201.2, 201.5(3), and 201.6(1). 7. C.R.C.P. 260.2 and 260.6. 8. C.R.C.P. 201.3(2). 9. Available for purchase from the ABA by calling (800) 285-2221. 10. “1997 Annual Report of the Colorado Supreme Court Grievance Committee,” 27 Colo. Law. 17 (May 1998). 11. For a further discussion of insurance coverage issues, see Chapter 3. 12. C.R.S. § 24-35-301. 13. Only in C, and not S, corporations. However, if a C corporation is operating as a personal service corporation, the corporation can usually disburse most income out as salary. See Chapter 6, “Choice of Law Firm Entity.” 14. See People v. Dickinson, 903 P.2d 1132 (Colo. 1995). 15. Black’s Law Dictionary 1232 (4th Ed. 1951). 16. Model Rules of Professional Conduct, Rule 1.10, Official Comments. 17. Colorado Bar Ass’n Ethics Comm. Formal Ethics Op. 50 (1972). 18. Colorado Bar Ass’n Ethics Comm. Formal Ethics Op. 89 (1991). 19. The supreme court disciplinary decisions are filled with examples of mishandling of client funds and failure to account. See People v. Murray, 912 P.2d 554 (Colo. 1996). The number of cases handled by the disciplinary council arising out of economic distress is significant. See, e.g., People v. McIntyre, 942 P.2d 499 (Colo. 1997). 20. Colorado Bar Ass’n Ethics Comm. Formal Op. 24 (1962). 21. The Colo. RPC 1.16 should be followed when declining or terminating representation. See generally Olson and Brown v. City of Englewood, 889 P.2d 673 (Colo. 1995). See also Forness v. Blum, 796 P.2d 496 (Colo. App. 1990). 22. In re Sather, 3 P.3d 403 (Colo. 2000). 23. Colo. RPC 1.15. 24. Colo. RPC 1.15(2)(c). 25. Information about available software may be obtained from, among others, the Law Office Management Committee of the Colorado Bar Association. 26. The Colorado Supreme Court has held that a lawyer cannot recover a fee based upon quantum meruit or unjust enrichment, unless the contingent fee agreement provides notice to the client of the possibility of such a fee. Dudding v. Norton Frickey & Assocs., 11 P.3d 441 (Colo. 2000). Section (3) of the form “Contingent Fee Agreement,” which is a part of C.R.C.P. Chapter 23.3 and appears as Exhibit 8A to this Chapter, provides notice to the client of the possibility of a quantum meruit or unjust enrichment fee recovery. See also Jones v. Feiger, Collison & Killmer, 903 P.2d 27 (Colo. 1994), rev’d 926 P.2d 1244 (Colo. 1996); Joyce v. Elliott, 857 P.2d 549, aff’d 889 P.2d 43 (Colo. 1994). 27. The author would like to thank Bill Walters from Walters & Joyce for his help with § 8.8. 28. Cf. C.R.S. §§ 13-21-116(2)(b), 7-128-402(2), 7-128-402(1), and 13-21-115.7. 29. C.R.S. § 7-128-401. 30. C.R.S. § 7-128-501. 31. See P. O’Rourke, “Discipline Against Lawyers for Conduct Outside the Practice of Law,” 32 Colo. Law. 75 (April 2003). 32. See C.R.C.P. Chapter 23.3. See, e.g., People v. Maceau, 910 P.2d 692 (Colo. 1996). 33. See, e.g., People v. Dover, 944 P.2d 80 (Colo. 1997). 34. See Colo. RPC 1.8 (1998); See, e.g., People v. Silver, 924 P.2d 159 (Colo. 1996).

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Risk Management

Exhibit 8A

EXHIBIT 8A • C.R.C.P. CHAPTER 23.3, “RULES GOVERNING CONTINGENT FEES”

C.R.C.P. CHAPTER 23.3 “RULES GOVERNING CONTINGENT FEES” Rule 1. Definitions In this rule, the term “contingent fee agreement” means a written agreement for legal services of an attorney or attorneys (including any associated counsel), under which compensation is to be contingent in whole or in part upon the successful accomplishment or disposition of the subject matter of the agreement. Rule 2. Construction Unless expressly prohibited by this rule, no written contingent fee agreement shall be regarded as champertous if made in an effort in good faith reasonably to comply with this rule. The Colorado Rules of Professional Conduct may be considered in reviewing disputed contingent fee agreements. Rule 3. Prohibitions No contingent fee agreement shall be made (a) in respect to the procuring of an acquittal upon any favorable disposition of a criminal charge, (b) in respect of the procuring of a dissolution of marriage, determination of invalidity of marriage or legal separation, (c) in connection with any case or proceeding where a contingency method of a determination of attorneys’ fees is otherwise prohibited by law, the Colorado Rules of Professional Conduct, or governmental agency rule, or (d) if it is unconscionable, unreasonable, and unfair. Rule 4. Procedure (a) Before a contingent fee agreement is entered into the attorney shall disclose to the prospective client in writing: (1) The nature of other types of fee arrangements; (2) The nature of specially awarded attorney fees; (3) The nature of expenses and the estimated amount of expenses to handle the matter to conclusion; (4) The potential for an award of costs and attorneys’ fees to the opposing party. (5) What is meant by “associated counsel”; and (6) What is meant by “subrogation” and effect of any subrogation interest or lien. (b) Each contingent fee agreement shall be in writing in duplicate. Each duplicate copy shall be signed both by the attorney and by each client. One signed duplicate copy shall be mailed or delivered to each client within ten days after the making of the agreement. One such copy (and proof that the duplicate copy has been delivered or mailed to the client) shall be retained by the attorney for a period of six years after the completion or settlement of the case or the termination of the services, whichever event first occurs. (c) A written disbursement statement shall issue to the client at the time of final disbursement.

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Exhibit 8A

Lawyers’ Professional Liability in Colorado

Form 1 Disclosure Statement Type of Attorney Fee Agreements: I have been informed and understand that there are several types of attorney fee arrangements: (1) time based, (2) fixed, (3) contingent, or (4) combinations of these types of fee arrangements. “Time based” means a fee that is determined by the amount of time involved such as so much per hour, day or week. “Fixed” means a fee that is based on an agreed amount regardless of the time or effort involved or the result obtained. “Contingent” means a certain agreed percentage or amount that is payable only upon attaining a recovery regardless of the time or effort involved. I understand that not all attorneys offer all of these different types of fee arrangements, and I acknowledge that I have the right to contact other attorneys to determine if they may provide such other fee arrangements for my case or matter. After such consideration or consultation, I have elected the fee arrangement set forth in the accompanying contingent fee agreement. Specially Awarded Attorney Fees: I have been informed and understand that the court or an arbitrator may sometimes award attorney fees in addition to amount of recovery being claimed. I understand that the fee agreement I enter into with my attorney should contain a provision as to how any specially awarded attorney fees will be accounted for and handled. Expenses: I have been informed and understand that there may be expenses (aside from any attorney fee) in pursuing my claim. Examples of such expenses are: fees payable to the court, the cost of serving process, fees charged by expert witnesses, fees of investigators, fees of court reporters to take and prepare transcripts of depositions, and expenses involved in preparing exhibits. I understand that an attorney is required to provide me with an estimate of such expenses before I enter into an attorney fee agreement and that my attorney fee agreement should include a provision as to how and when such expenses will be paid. I understand that the fee agreement should tell me whether a fee payable from the proceeds of the amount collected on my behalf will be based on the “net” or “gross” recovery. “Net recovery” means the amount remaining after expenses and deductions. “Gross recovery” means the total amount of the recovery before any deductions. The estimated amount of the expenses to handle my case will be set forth in the contingent fee agreement. The Potential of Costs and Attorney’s Fees Being Awarded to The Opposing Party: I have been informed and understand that a court or arbitrator sometimes awards costs and attorney fees to the opposing party. I have been informed and understand that should that happen in my case, I will be responsible to pay such award. I understand that the fee agreement I enter into with my attorney should provide whether an award against me will be paid out of the proceeds of any amount collected on my behalf. I also understand that the agreement should provide whether the fee I am obligated to pay my attorney will be based on the amount of recovery before or after payment of the awarded costs and attorney fees to an opposing party.

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Risk Management

Exhibit 8A

Associated Counsel: I have been informed and understand that my attorney may sometimes hire another attorney to assist in the handling of a case. That other attorney is called an “associated counsel.” I understand that the attorney fee agreement should tell me how the fees of associated counsel will be handled. Subrogation: I have been informed and understand that other persons or entities may have a subrogation right in what I recover in pursuing my claim. “Subrogation” means the right to be paid back. I understand that the subrogation right may arise in various ways such as when an insurer or a federal or state agency pays money to or on behalf of a claiming party like me in situations such as medicare, medicaid, worker’s compensation, medical/health insurance, no-fault insurance, uninsured/underinsured motorist insurance, and property insurance situations. I understand that sometimes a hospital, physician or an attorney will assert a “lien” (a priority right) on a claim such as the one I am pursuing. Subrogation rights and liens need to be considered and provided for in the fee agreement I reach with my attorney. The fee agreement should tell me whether the subrogation right or lien is being paid by my attorney out of the proceeds of the recovery made on my behalf and whether the fee I am obligated to pay my attorney will be based on the amount of recovery before or after payment of the subrogation right or lien. I acknowledge that I received a complete copy of this Disclosure Statement and read it this ___ day of _____, 20__.

______________________________ (Signature) Alternative Attorney Compensation: I have been informed and understand that if, after entering into a fee agreement with my attorney, I terminate the employment of my attorney or my attorney justifiably withdraws, I may nevertheless be obligated to pay my attorney for the work done by my attorney on my behalf. The fee agreement should contain a provision stating how such alternative compensation, if any, will be handled. I acknowledge that I received a complete copy of this Disclosure Statement and read it this ___ day of _____, 20__.

______________________________ (Signature)

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Exhibit 8A

Lawyers’ Professional Liability in Colorado

Form 2 Contingent Fee Agreement (To be Executed in Duplicate) Dated ______, 20__ The Client ______________________________ (Name) ______________________________ (Street & No.) ______________________________ (City or Town) retains the Attorney ______________________________ (Name) ______________________________ (Street & No.) ______________________________ (City or Town) to perform the legal services mentioned in paragraph (1) below. The attorney agrees to perform them faithfully and with due diligence. (1) The claim, controversy, and other matters with reference to which the services are to be performed are: (2) The contingency upon which compensation is to be paid is: (3) The client is not to be liable to pay compensation otherwise than from amounts collected for the client by the attorney, except as follows: In the event the client terminates this contingent fee agreement without wrongful conduct by the attorney which would cause the attorney to forfeit any fee, or if the attorney justifiably withdraws from the representation of the client, the attorney may ask the court or other tribunal to order the client to pay the attorney a fee based upon the reasonable value of the services provided by the attorney. If the attorney and the client cannot agree how the attorney is to be compensated in this circumstance, the attorney will request the court or other tribunal to determine: (1) if the client has been unfairly or unjustly enriched if the client does not pay a fee to the attorney; and (2) the amount of the fee owed, taking into account the nature and complexity of the client’s case, the time and skill devoted to the client’s case by the attorney, and

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Risk Management

Exhibit 8A

the benefit obtained by the client as a result of the attorney’s efforts. Any such fee shall be payable only out of the gross recovery obtained by or on behalf of the client and the amount of such fee shall not be greater than the fee that would have been earned by the attorney if the contingency described in this contingent fee agreement had occurred. (4) The client will pay the attorney (including any associated counsel) ______percent of the (gross amount collected) (net amount collected) [indicate which]. (“Gross amount collected” means the amount collected before any subtraction of expenses and disbursements) (“Net amount collected” means the amount of the collection remaining after subtraction of expenses and disbursements [including] [not including] court-awarded costs or attorneys’ fees.) [indicate which]. “The amount collected” (includes) (does not include) [indicate which] specially awarded attorneys’ fees and costs awarded to the client. (5) Costs and attorneys’ fees awarded to an opposing party against the client before completion of the case will be paid (by the client) (by the attorney) [indicate which] when ordered. Any award of costs or attorneys’ fees, regardless of when awarded, (will) (will not) [indicate which] be subtracted from the amount collected before computing the amount of the contingent fee under this agreement. (6) The client is to be liable to the attorney for reasonable expenses and disbursements. Such expenses and disbursements are estimated to be $________. Authority is given to the attorney to incur expenses and make disbursements up to a maximum of $_______ which limitation will not be exceeded without the client’s further written authority. The client will reimburse the attorney for such expenditures (upon receipt of a billing), (in specified installments), (upon final resolution), (etc.) [indicate which]. WE HAVE EACH READ THE ABOVE AGREEMENT BEFORE SIGNING IT. Witnesses to Signatures:

______________________________ (Signature of Client)

______________________________ ______________________________ Witness to Client’s Signature (Signature of Attorney)

______________________________ Witness to Attorney’s Signature * [Here insert the percentages to be charged in the event of collection. These may be on a flat basis or on a descending scale in relation to amount collected.]

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Exhibit 8A

Lawyers’ Professional Liability in Colorado

(7) The client (authorizes) (does not authorize) [indicate which] the attorney to pay from the amount collected the following: (e.g., all physicians, hospitals, subrogation claims and liens, etc.). Where the applicable law specifically requires the attorney to pay the claims of third parties out of any amount collected for the client, the attorney shall have the authority to do so notwithstanding any lack of authorization by the client, but if the amount or validity of the third party claim is disputed by the client, the attorney shall deposit the funds into the registry of an appropriate court for determination. Any amounts paid to third parties (will) (will not) [indicate which] be subtracted from the amount collected before computing the amount of the contingent fee under this agreement. WE HAVE EACH READ THE ABOVE AGREEMENT BEFORE SIGNING IT. Witnesses to Signatures:

______________________________ (Signature of Client)

______________________________ ______________________________ Witness to Client’s Signature (Signature of Attorney)

______________________________ Witness to Attorney’s Signature * [Here insert the percentages to be charged in the event of collection. These may be on a flat basis or on a descending scale in relation to amount collected.]

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Risk Management

Exhibit 8A

FINAL DISBURSEMENT STATEMENT GROSS RECOVERY $______ Itemization of expenses incurred in handling of case: $ $ $ $ Total Expenses $______ Amount of Expenses Advanced by Attorney $______ Amount of Expenses paid by Client $______ NET RECOVERY $______ Computation of Contingent Fee: ______% of (Net) (Gross) Recovery = $______ Total Fee (and expenses advanced by attorney)* $______ DISBURSEMENT TO CLIENT__________ $______

______________________________ (Signature of Attorney)

______________________________ (Signature of Client) By signature of client acknowledges receipt of a copy of this disbursement statement.

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Risk Management

Exhibit 8B

EXHIBIT 8B • FORMAL OPINION 113, “ETHICAL DUTY OF ATTORNEY TO DISCLOSE ERRORS TO CLIENT”

113

ETHICAL DUTY OF ATTORNEY TO DISCLOSE ERRORS TO CLIENT Adopted November 19, 2005.

Syllabus As part of the general ethical duty to keep a client reasonably informed about the status of a matter, a lawyer should fully and promptly inform the client of material developments. Colo. RPC 1.4. This includes the ethical duty to inform the client of material adverse developments, including those resulting from the lawyer’s own errors. As part of this broad duty to report material developments, a lawyer has an ethical duty to make prompt and specific disclosure to a client of the lawyer’s error if the error is material, meaning that it will likely result in prejudice to a client’s right or claim. In these circumstances, the lawyer should inform the client that it may be advisable for the client to consult with independent counsel regarding the error. The lawyer need not and should not inform the client of the existence or merit of a legal malpractice claim against the lawyer, or of the desirability of terminating the lawyer’s representation. The lawyer may advise the client to seek independent advice regarding the statute of limitations on a claim for legal malpractice. A lawyer may continue to represent the client in these circumstances only in compliance with Colo. RPC 1.7(b). In many if not most circumstances, the interest of the attorney in avoiding liability will be consistent with the interest of the client in a successful representation. Continued representation may not be permissible if the lawyer’s interest in avoiding liability might influence the lawyer to pursue a strategy that would avoid liability for the lawyer at the expense of the success of the representation. Finally, the lawyer may not obtain a release of liability except in compliance with Colo. RPC 1.8(h). This opinion does not address whether the failure to disclose an error itself gives rise to a cause of action against the lawyer. See Colo. RPC, Scope, (“Violation of a Rule should not in and of itself give rise to a cause of action nor should it create a presumption that a legal duty has been breached.”). The lawyer should also consider the impact of disclosure of the error to the client on the lawyer’s malpractice insurance coverage. The lawyer should review and consider any applicable malpractice insurance contract provisions, including notice to the insurer of potential claims, disclosure on applications for insurance, and “cooperation clauses” in the lawyer’s policy.

Analysis Basis for the Duty in the Rules of Professional Conduct Lawyers must keep clients “reasonably informed about the status of a matter.” Colo. RPC 1.4(a). The lawyer’s explanation must be “to the extent reasonably necessary to permit the client

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Exhibit 8B

Lawyers’ Professional Liability in Colorado

to make informed decisions regarding the representation.” Colo. RPC 1.4(b). The ethical duty to inform the client extends to “material developments in the matters being handled for the client.” Comment, Colo. RPC 1.4. Material developments include matters adverse to the client’s interests and those resulting from the lawyer’s own actions, if the lawyer’s actions are likely to result in prejudice to a client’s rights or claim. This opinion addresses the lawyer’s ethical duty to advise the client of material adverse developments resulting from the lawyer’s own errors. In the context of this opinion, a breach of a duty of care that will likely result in prejudice to a client’s right or claim will be referred to as an “error,” and disclosing an error to a client will mean drawing a client’s attention to an error and not simply relying on the flow of paperwork sent to the client in the ordinary course of a representation. When, by act or omission, a lawyer has made an error, and that error is likely to result in prejudice to a client’s right or claim, the lawyer must promptly disclose the error to the client. “Error,” as used in this opinion, is not meant to include an act or omission that a reasonable lawyer would conclude would not likely result in prejudice to a client’s right or claim. This Committee expressed a similar opinion in its Informal Opinion V, dated April 27, 1974. Other jurisdictions that have considered the issue have reached similar conclusions.1 Informal Opinion V does not cite an ethics rule in support of this conclusion. Other legal authorities rely on the lawyer’s obligation under the equivalent of Colo. RPC 1.4(b) to “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Colo. RPC 1.4(b).2 Some authorities cite the lawyer’s obligation under the conflict of interest rules to obtain the client’s informed consent to continued representation, on the basis that the lawyer’s own interest in avoiding liability may materially limit the lawyer’s representation of the client.3 The conflict of interest rules would not apply, obviously, if the representation does not continue following the error. In addition, failing to disclose an error to a client may rise to the level of conduct involving dishonesty, fraud, deceit or misrepresentation under Colo. RPC 8.4(c). Colo. RPC 8.4(c) may apply if the lawyer actively and intentionally conceals the facts and circumstances of the error from the client,4 or misrepresents facts about the error, and the client loses a valuable right, such as a right of appeal,5 or releases a claim against the lawyer for legal malpractice.6

Nature of Conduct that Triggers the Duty to Disclose The more difficult determination is whether a particular error triggers an ethical duty to disclose it to the client. This determination is important because an over-broad interpretation of the ethical duty to disclose may needlessly undermine the trust and confidence essential to a healthy attorney-client relationship.7 Also, the ethical duty to disclose should remain primarily a basis for a lawyer’s self-assessment, not another arrow in the quiver of tactics employed in legal malpractice cases.8 Whether a particular error gives rise to an ethical duty to disclose depends on whether a disinterested lawyer would conclude that the error will likely result in prejudice to the client’s right or claim and that the lawyer therefore has an ethical responsibility to disclose the error. The failure to disclose an error does not (and should not), in and of itself, give rise to a cause of action against the lawyer, nor does it (or should it) create a presumption that a legal duty has been breached.

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Risk Management

Exhibit 8B

Professional errors exist along a spectrum. At one end are errors that, as stated above, will likely prejudice a client’s right or claim. Examples of these kinds of errors are the loss of a claim for failure to file it within a statutory limitations period or a failure to serve a notice of claim within a statutory time period. The lawyer must promptly inform the client of an error of this kind, if a disinterested lawyer would conclude there was an ethical duty to do so, because the client must decide whether to appeal the dismissal of the claim or pursue a legal malpractice action.9 Another example is the loss of a right of appeal for failure to file a timely notice of appeal. However, as discussed more fully below, the lawyer should be given an opportunity to remedy the error before disclosing it to the client. At the other end of the spectrum are errors and possible errors that may never cause harm to the client, either because any resulting harm is not reasonably foreseeable, there is no prejudice to a client’s right or claim, or the lawyer takes corrective measures that are reasonably likely to avoid any such prejudice. For example, missing a nonjurisdictional deadline, a potentially fruitful area of discovery, or a theory of liability or defense may constitute grounds for loss of sleep, but not an ethical duty to disclose to the client. As one commentator remarked regarding similar circumstances, “Unless there are steps that can be taken now to avoid the possibility of future harm, there is probably no immediate duty to disclose the mere possibility of lawyer error or omission.” 10 Lawyers should be given the opportunity to remedy any error before disclosing the error to the client. The later assertion of a legal malpractice claim does not mean that the allegedly negligent lawyer breached a duty to disclose the error to the client and the failure to disclose the error should not be construed as an independent claim against the lawyer.11 Whether a lawyer has an ethical duty to disclose depends on the facts and circumstances known to the lawyer once he or she has realized the error, not those that appear only through the prism of hindsight. In between these two ends of the spectrum are innumerable errors that do not fall neatly into either end of the spectrum and must be analyzed on a case-by-case basis. For example, it is ordinarily not necessary to disclose questions of professional judgment where the law was unsettled on an issue or the attorney “made a tactical decision from among equally viable alternatives.” 12 Under the doctrine of “judgmental immunity,” these types of decisions are not, as a matter of law, considered errors, below the applicable standard of care, or negligent conduct. However, when reasonable lawyers may disagree about whether the state of the law was unsettled or the available alternatives were equally viable, the lawyer should err on the side of discussing the available alternatives with the client before pursuing a course of action.13 The lawyer’s choice between equally viable alternatives should not be considered an error as defined in this opinion. Examples of potential errors that may give rise to an ethical duty to disclose include the failure to request a jury in a pleading (or pay the jury fee), the failure to include an acceleration provision in a promissory note, and the failure to give timely notice under a contract or statute. The Committee agrees with the New York State Bar Association that “whether an attorney has an obligation to disclose a mistake to a client will depend on the nature of the lawyer’s possible error or omission, whether it is possible to correct it in the pending proceeding, the extent of the harm resulting from the possible error or omission, and the likelihood that the lawyer’s conduct would be deemed unreasonable and therefore give rise to a colorable malpractice claim.” 14

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Exhibit 8B

Lawyers’ Professional Liability in Colorado

What to Tell the Client Although it can be difficult to determine whether a lawyer must call a client’s attention to an error, it is relatively easy to describe what to say to the client when the lawyer has made the decision to disclose. Candor is a given. The result may be a surprisingly appreciative and understanding client. The lawyer need not advise the client about whether a claim for malpractice exists, and indeed the lawyer’s conflicting interest in avoiding liability makes it improper for the lawyer to do so.15 The lawyer need not, and should not, make an admission of liability. What must be disclosed are the facts that surround the error, and the lawyer should inform the client that it may be advisable to consult with an independent lawyer with respect to the potential impact of the error on the client’s rights or claims. The Rules of Professional Conduct do not require the disclosure to be in writing, but failing to make a written record of it is imprudent and potentially defeating of one of the purposes of the disclosure: protection of the lawyer. The letter informing the client of the error should also recommend that the client consult independent counsel to discuss the consequences of the error. This notice may itself trigger the accrual of a legal malpractice claim and, hence, the relevant statute of limitations.16 Even if the lawyer genuinely believes that it is in the client’s best interests to continue the representation despite the error, the lawyer’s own interests prohibit him or her from advising the client on this issue.17 The lawyer should also consider the impact of disclosure of the error to the client on the lawyer’s malpractice insurance coverage. The lawyer should review and consider any applicable malpractice insurance contract provisions, including notice to the insurer of potential claims, disclosure on applications for insurance, and “cooperation clauses” in the lawyer’s policy. In addition, it may be advisable to inform the client that it may be advisable to consult with independent counsel regarding the statute of limitations on a claim for legal malpractice, especially if, notwithstanding the disclosure, the attorney-client relationship continues in the matter giving rise to the potential claim. However, the lawyer need not advise the client of the viability of a legal malpractice claim, but simply inform the client that it may be advisable to seek independent advice from a disinterested lawyer.

Conflicts of Interest in Continuing the Representation Continuing the representation is not an option if (a) the client terminates it, (b) the error effectively concludes it, or (c) the lawyer withdraws because the error creates a nonwaivable conflict of interest. If both lawyer and client desire to continue the representation, Colo. RPC 1.7(b) requires the lawyer to consider whether the lawyer’s own interests in avoiding liability may materially limit the representation. If the lawyer concludes that the lawyer’s own interests may materially limit the representation, continued representation is permissible only if the lawyer “reasonably believes the representation will not be adversely affected” and the client consents after consultation.18 Whether or not continued representation is permissible, either because there is no potential conflict or the potential conflict is waivable, depends on the nature of the error. In many if not most circumstances, the interest of the attorney in avoiding liability will be consistent with the interest of the client in a successful representation.19 Withdrawal is typically not required if the error likely can be corrected during the course of the representation; the error is not likely to

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Risk Management

Exhibit 8B

result in harm to the client’s cause; the error does not prejudice the client’s right or claim, or the error does not necessarily constitute an error at all.20 As one court stated: Many errors by a lawyer may involve a low risk of harm to the client or low risk of ultimate liability for the lawyer, thereby vitiating the danger that the lawyer’s own interests will endanger his or her exercise of professional judgment on behalf of the client. Even if the risk of some harm to the client is high, the actual effect of that harm may be minimal, or, if an error does occur, it may be remedied with little or no harm to the client. In those circumstances, it is possible for a lawyer to continue to exercise his or her professional judgment on behalf of the client without placing the quality of representation at risk.21 In any event, a lawyer may not procure a release of liability from the client except in compliance with Colo. RPC 1.8(h). That rule prohibits a lawyer from settling a claim for malpractice liability without first advising the client in writing that “independent counsel is appropriate in connection therewith.” 22 Colo. RPC 1.8(h) would be applicable, for example, if a lawyer agreed to handle the client’s appeal free of charge in exchange for a release of liability.23 In other situations, a waiver cannot be validly obtained, within the meaning of Colo. RPC 1.7(c), because the lawyer’s own interest in avoiding liability may materially limit the lawyer’s representation of the client, within the meaning of Colo. RPC 1.7(b), by influencing the lawyer’s strategy. For example, in a personal injury case arising from an automobile accident involving a Regional Transportation District bus, the plaintiff’s lawyer fails to give RTD timely notice of a potential claim against it as required by the Colorado Governmental Immunity Act. The plaintiff’s lawyer files an action against another driver, who is uninsured. The uninsured driver files a notice of nonparty at fault, identifying RTD. At trial, the plaintiff’s lawyer emphasizes the evidence against the uninsured driver and downplays the evidence against RTD. The jury returns a verdict assigning 75% fault against the uninsured driver and 25% against RTD. The judgment against the uninsured driver is uncollectible, and the plaintiff’s lawyer’s liability to his client is limited to 25% of the total damages. Another lawyer representing the plaintiff might have emphasized the evidence against RTD or proceeded directly to an action against the plaintiff’s lawyer for malpractice. The plaintiff’s lawyer thus violated Colo. RPC 1.7(b). His interest in limiting his liability to the client in a future legal malpractice claim caused him to adopt a litigation strategy that emphasized evidence that increased the fault attributable to the uninsured driver, thereby reducing the lawyer’s liability exposure to the client and increasing the uncollectible portion of the judgment. Another lawyer representing the plaintiff would have emphasized evidence that decreased the fault attributable to the uninsured driver, thereby increasing the lawyer’s liability exposure to the client and decreasing the uncollectible portion of the judgment. Under the circumstances, the plaintiff’s consent to the conflict was not validly obtained. It is seldom so clear that a lawyer’s independent judgment was materially limited by his or her interest in avoiding or reducing liability to a client. Indeed, the opposite problem may be more likely. To avoid the appearance of self-interest, a lawyer may be hesitant to adopt strategies

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Exhibit 8B

Lawyers’ Professional Liability in Colorado

that could leave that impression, including strategies that the lawyer genuinely believes to be in the client’s best interests. A lawyer should consider this complication in deciding whether or not he or she wishes to continue the representation. If the representation continues, the lawyer may be able to avoid the appearance of self-interest by conferring with another lawyer about strategies that may, in the hindsight of a legal malpractice action, be labeled self-serving. The lawyer may also suggest the retention of co-counsel.

NOTES 1. See Circle Chevrolet Co. v. Giordano, Halleran & Ciesla, 662 A.2d 509, 514 (N.J. 1995), relevant holding confirmed but decision abrogated on other grounds, Olds v. Donnelly, 696 A.2d 633, 642 (N.J. 1997); In re Tallon, 447 N.Y.S.2d 50 (App. Div. 1982); New Jersey Supreme Court Advisory Committee on Professional Ethics 684 (March 9, 1998); N.Y. State Bar Association Opinion 734 (Nov. 1, 2000); Association of the Bar of the City of New York Formal Opinion 1995-2 (Feb. 22, 1995). 2. See Circle Chevrolet, supra (New Jersey Rule 1.4); N.Y. State Bar Association Opinion 734 (Nov. 1, 2000) (New York equivalent of Colo. RPC 1.4); Pennsylvania Bar Association Informal Opinion 97-56 (June 6, 1997) (Pennsylvania equivalent of Colo. RPC 1.4). Accord Restatement (Third) of the Law Governing Lawyers § 20, Comment c; American Bar Association Informal Opinion 1010 (Nov. 18, 1967); 3. E.g., Circle Chevrolet, supra, 662 A.2d at 514. 4. CBA Formal Ethics Opinion 85, “Release and Settlement of Legal Malpractice Claims” (May 19, 1995). 5. E.g., Kentucky Bar Ass’n v. Cowden, 727 S.W.2d 403, 404-05 (Ken. 1987). 6. CBA Formal Ethics Opinion 85, “Release and Settlement of Legal Malpractice Claims” (May 19, 1995). Accord In re Tallon, 447 N.Y.S.2d 50, 51 (App. Div. 1982); see also People v. Good, 576 P.2d 1020, 1022 (Colo. 1978) (finding violation of former Code equivalent of Colo. RPC 1.8(h) where lawyer refunded retainer with check containing restrictive endorsement releasing claims against lawyer). 7. See N. Moore, “Implications of Circle Chevrolet for Attorney Malpractice and Attorney Ethics,” 28 Rutgers L.J. 57, 75 n. 85 (Autumn 1996) (suggesting that clients of lawyer, like patients of physician, do not want to “know every time the physician has doubts or second thoughts about any aspect of some ongoing treatment”) (hereinafter “Moore”). 8. See Preamble, Scope and Terminology, Colo. RPC (purpose of Rules of Professional Conduct “can be subverted when they are invoked by opposing parties as procedural weapons”; “nothing in the Rules should be deemed to augment any substantive legal duty of lawyers or the extra-disciplinary consequences of violating such a duty”); Colo. RPC 4.5(a) (lawyer shall not threaten or present, or participate in presenting, disciplinary charges to gain advantage in a civil matter); see also Weiss v. Manfredi, 639 N.E.2d 1122, 1124, 616 N.Y.S.2d 325, 327 (N.Y. 1994) (attorney’s failure to disclose malpractice does not give rise to fraud claim separate from customary malpractice action). 9. Moore, supra n. 7, at 73. See Cowden, supra, 727 S.W.2d at 404-05 (lawyer’s failure to advise client of dismissal of action for failure to file prior to expiration of statute of limitations was particularly important because dismissal may have been erroneous). 10. Moore, supra n. 7, at 74 11. E.g., In re Knappenberger, 90 P.3d 614 (Ore. 2004) (attorney had no immediate duty to alert client regarding potential malpractice claim arising from opposing party’s filing of motion to dismiss appeal as untimely where lawyer reasonably believed motion had little chance of success). 12. Merchant v. Kelly, Haglund, Garnsey & Kahn, 874 F. Supp. 300, 304 (D. Colo. 1995); Myers v. Beem, 712 P.2d 1092, 1094 (Colo. App. 1985).

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Risk Management

Exhibit 8B

13. See Cmt., Withholding Information, Colo. RPC 1.4 (lawyer “may not withhold information to serve the lawyer’s own interest or convenience”). 14. N.Y. State Bar Association Opinion 734 (Nov. 1, 2000). 15. New York City Opinion 1995-2 (Feb. 22, 1995); S. O’Neal, “If You Make a Mistake, When and What Should You Tell Your Client?,” 2000-FEB W. Va. Law. 24, 25 (Feb. 2000) (hereinafter, “O’Neal”). 16. O’Neal, supra n. 15, at 25; see New York State Opinion 275 (1972) (upon withdrawing from representation, lawyer should recommend that client obtain other counsel) (cited with approval in New York State Opinion 734 (Nov. 1, 2000). 17. O’Neal, supra n. 15, at 25. 18. See In re Lawrence, 31 P.3d 1078, 1084 (Or. 2001) (lawyer violated conflict of interest rule by failing to inform client in writing of potential conflict of interest caused by continuing representation of client in domestic relations matter following entry of default against client due to attorney’s neglect). 19. See D. Karpman, “A Twilight Zone of Inharmonic Convergence,” California Bar Journal 20 (February 2004) (“it is doubtful that any other lawyer in the entire world would be as motivated to make sure the client is successful” than the one who commits malpractice and continues the representation); Pennsylvania Informal Opinion No. 97-56 (June 6, 1997) (law firm’s interest and motivation in trying to win appeal from dismissal of case based on law firm’s negligence are same as client’s interest and motivation in trying to win appeal). 20. N.Y. State Bar Association Opinion 734 (Nov. 1, 2000). 21. In re Knappenberger, 90 P.3d 614, 622 (Ore. 2004). 22. Colo. RPC 1.8(h). 23. Formal Ethics Opinion 85, “Release and Settlement of Legal Malpractice Claims” (May 19, 1995).

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Section 6

C O L O R A D O B A R A S S O C I AT I O N CLE CLE in Colorado, Inc. is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association


SECTION 6 Life Cycle of a Malpractice Case: The Perspective of the Insured

Presented by John Palmeri, Esq. Gordon & Rees Denver, CO Robert Hinds, Esq. Robert T. Hinds & Associates PC Greenwood Village, CO


Notes: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________


LIFE CYCLE OF A MALPRACTICE CASE: THE PERSPECTIVE OF THE INSURED John M. Palmeri Robert T. Hinds

I.

Introduction

II.

Application of policy provisions to insured

III.

A.

Choice of counsel

B.

Deductibles

Lawyer as defendant A.

Discovery 1)

Records

2)

Deposition

B.

Experts

C.

Trial

IV.

Observations by lawyer and counsel

V.

Conclusion


Preventing Legal Malpractice  

Seminar on preventing legal malpractice

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