Concept
Firm Liability and Insurance
Civil liability to client, including malpractice
Firm Liability and Insurance
A client who proves duty, breach, causation, and damages holds a judgment, and a judgment is worth only what can be collected on it. The elements come from ordinary negligence law. Under Restatement (Second) of Torts § 281, an actor is liable for invading another's interest when the interest is protected against unintentional invasion, the actor's conduct is negligent with respect to the other, the conduct is a legal cause of the invasion, and the other has not disabled himself from bringing the action.1
Every one of those elements looks at the actor's conduct, and in a malpractice case the actor is the lawyer who did the work. That lawyer answers personally, whether practicing alone or employed by a large firm. But an individual lawyer may lack the assets to satisfy a serious judgment, and the lawyer is seldom the only person with a stake in the claim. Two questions remain once liability and damages are settled: who else answers to the client, and what pays.
The first is a question of vicarious liability, the responsibility the law places on an organization for the wrongful acts of someone acting on its behalf. The second is a question of insurance, which can supply the money behind a recovery. The two subsections below take them in order, and they connect, because the exposure that makes a firm a defendant is the exposure a malpractice policy is written to cover.
Vicarious Liability
The Restatement (Third) of the Law Governing Lawyers makes a law firm liable for injuries legally caused by any wrongful act or omission of a principal or employee who was "acting in the ordinary course of the firm's business or with actual or apparent authority."2 That is vicarious liability, and the rule gives a client two routes to it. The first asks whether the misconduct fell within the ordinary course of the firm's business. The second asks whether the wrongdoer acted with actual or apparent authority, meaning authority the firm conferred or led others reasonably to believe it had conferred. Either route suffices, so a firm may answer for a wrong that no one at the firm approved.3
The Restatement rests this liability on respondeat superior, the principle that an employer answers for the torts its people commit within their jobs, or on enterprise liability, which charges the organization that does the work with the risks the work creates. It adds a practical reason. Many law firms are thinly capitalized, so the vicarious liability of principals helps assure compensation to those who may have claims against the principals of a firm.4
"Ordinary course of business" reaches beyond the practice of law itself. It covers the practice of law and the activities normally related to it, so a firm is liable for legal malpractice by any firm lawyer, for debts staff incur in buying services or supplies, for misapplication of funds in the custody of the firm or its personnel, and for torts committed within the scope of employment, such as the negligent driving of an employee on firm business.5
Not every wrong by a firm lawyer lands on the firm. The lawyer's state of mind does not decide the question. The connection between the conduct and firm business does. Conduct that does not advance firm business, such as a lawyer's entry into a venture unrelated to representing firm clients, ordinarily should not expose the firm or its principals to vicarious liability. Some intentional conduct, such as knowingly representing clients with conflicting interests or padding bills, may still expose the firm, because it may fall within the ordinary course of the firm's business as one of the normal risks incidental to operating a law firm.6
The client's claim against the firm adds to the claim against the individual lawyer and does not replace it. An individual tortfeasor and the firm can be held jointly and severally liable even though the agent's conduct was within the scope of firm business, so the client may collect the full judgment from either.7 The Supreme Court of Ohio held in National Union Fire Insurance Co. of Pittsburgh, PA v. Wuerth that a firm cannot commit legal malpractice directly, because the firm does not engage in the practice of law.8 On that view a firm's exposure runs through the wrongful acts of its lawyers and other agents.
Whether the firm's principals are personally exposed for another lawyer's malpractice depends on how the firm is organized. Even when the firm is treated as an entity, partners are not personally liable for a judgment unless they are named and served as parties, and if innocent partners are named, the usual rule requires a plaintiff to exhaust partnership assets before reaching their personal assets.9 Limited liability forms change the result. In most jurisdictions the statutes governing them eliminate vicarious liability for all types of claims, so a creditor is not entitled to a judgment against a principal based solely on the person's status as a principal in the firm. Some states did not adopt this full shield and protect principals only against claims arising out of errors and omissions of another agent of the firm, which makes the theory the client pleads relevant to a principal's exposure there.10
The shield removes liability that rests on status alone. It does not excuse the lawyer who committed the wrong, who remains liable for that lawyer's own conduct. Whatever form the firm takes, a judgment against the firm and its lawyers is worth only the assets behind it, which is the point at which insurance enters.
Malpractice Insurance
The negligence judgment that § 281 permits, resting on conduct that is negligent with respect to the client, is worth only what the client can collect on it.13 Legal malpractice insurance often supplies that money. Under a malpractice policy the insurer must provide a defense for claims the policy covers and must indemnify, meaning reimburse, the insured for covered claims. The policies are meant to cover insureds for claims arising out of legal services rendered to others, subject to exclusions and limitations.14
For the lawyer, a policy means a place to turn when a covered claim arrives. That assurance matters most when the lawyer handles a very complex transaction or ventures into a new area of practice, and it matters for routine work too, because policies protect the firm and its lawyers when a claim arises from the acts and omissions of someone, such as a paralegal, acting on their behalf. The insurer may also hire defense counsel to advise insureds on possible claims, and experienced counsel can be invaluable in avoiding or reducing the consequences of a claim.15
The client's interest runs deeper than the lawyer's comfort. Unless the lawyer has significant non-exempt assets, meaning property a judgment creditor may reach, a successful malpractice plaintiff may go uncompensated if the lawyer has no insurance. Lawyers meet their responsibilities as accountable professionals by maintaining enough insurance to cover civil liability claims.16
That gap explains why insurance can be made mandatory. Oregon became the first state to do so, enacting legislation in 1978 that requires lawyers in private practice to purchase it.17 On an exam, treat coverage as a fact the stem must supply and do not presume it.
Even a lawyer who carries a policy has coverage with edges. Common policy exclusions eliminate coverage for intentional torts.18 A careless missed deadline fits within a typical policy, while knowing misappropriation of client funds typically does not. To improve the chance of recovering policy proceeds, plaintiffs' attorneys therefore often include at least one covered claim, such as negligence or breach of fiduciary duty, that the policy does not exclude.19 Adding that count costs the plaintiff little, because the negligence and fiduciary labels ordinarily make no substantive difference, although in some states the choice may affect the statute of limitations. For professional responsibility purposes a malpractice claim can generally be treated as one for negligence.20
The same line between intentional and negligent wrongs affects what happens when the lawyer cannot pay. Debts resulting from willful and malicious injury are not dischargeable in bankruptcy, so a malpractice judgment is likely to survive if the lawyer misappropriated entrusted funds, while a judgment for negligent handling of trust funds may be discharged.21 Intentional wrongs are the ones a policy commonly excludes and bankruptcy may not erase, and negligent errors are the ones a policy covers and bankruptcy may discharge.