There are several revisions to the PLF Plan for 2018. These revisions address: (1) the applicable Plan Year when a Covered Party is aware of a potential claim but does not report the potential claim to the PLF until a subsequent Plan Year; (2) the treatment of expenses incurred for representation regarding a deposition or subpoena where no claim against a Covered Party has been alleged; (3) the applicable Plan Year for claims that are “Related” under the PLF Plan; and (4) the addition of an escrow exclusion to discourage lawyers from acting in the role of an escrow agent.
1. Awareness of a Potential Claim Triggers Plan Year
Under the PLF Plan, the Plan Year in effect when a Covered Party becomes aware of the likelihood of a claim is the applicable Plan Year for the potential claim. This is the case even if the Covered Party does not report the potential claim to the PLF until the next Plan Year. In order to make this intent more apparent, the PLF has added language to the 2018 Plan.
Covered Parties should be aware that there is a duty under the Plan to report a potential claim as soon as the Covered Party learns of facts or circumstances that reasonably could result in a claim. Sometimes, if the PLF has timely notice of a potential claim, it is able to take action to assist in preventing a claim or in mitigating any potential harm. Further, timely notice may be important for other reasons, including allowing the PLF to advise the Covered Party regarding appropriate disclosure of any error. Lack of appropriate and timely disclosure to a claimant can compound a mistake and result in ethics problems. Further, if a Covered Party does not provide timely notice to the PLF and this prejudices the ability of the PLF to prevent, mitigate, or defend the claim, this may result in lack of PLF coverage.
2. Allocation of Deposition and Subpoena Expenses
Although the PLF is not required to do so, it will often provide defense counsel to a Covered Party who has received a subpoena or notice of a deposition, even if no one has asserted a claim against the Covered Party. The PLF does this to determine whether there may be a potential for a claim, to assist in preventing a claim, and/or to help the Covered Party navigate privilege issues relating to providing information regarding the representation of a client. Under the 2018 Plan language, the PLF allocates claims expenses for this type of representation to the Plan Year in which it incurs the expenses. If, however, an actual claim arising from the same matter is made in a later Plan Year, the PLF then reallocates these deposition or subpoena expenses to the Plan Year applicable to the claim.
3. Applicable Plan Year Regarding Related Claims
Under the PLF Primary Plan, Covered Parties share a single $300,000 limit for claims that are “Related,” as defined in the Plan. When claims are “Related,” Covered Parties may not only share a limit with lawyers in their own firm, but they may also share a limit with lawyers in other firms.
Under pre-2018 Plan language, if there were “Related Claims” against Covered Parties in two or more separate firms, regardless of when the various firms performed the work at issue, the applicable Plan Year for all claims was the year that applied to the first of the “Related Claims.” Under the revised Plan language, different Plan Years may now apply where the Covered Parties sharing a limit were not working together as “Associated Attorneys” on the underlying matter(s). In these circumstances, the PLF determines the applicable Plan Year for a Covered Party independently of which Plan Year is applicable to the lawyers who are not “Associated Attorneys.”
This change in applicable Plan Year does not change the longstanding policy that, under the PLF Primary Plan, all Covered Parties share a maximum limit of $300,000 regarding all Related Claims. This shared single limit applies regardless of when the Related Claims are made and regardless of how many Covered Parties or firms are involved. Consequently, it is important that Covered Parties protect themselves against the risk of diminished limits for Related Claims by purchasing excess coverage.
4. Exclusion for Escrow Services
The PLF has encountered a number of claims in which the lawyer has been acting in the role of an escrow agent. These claims result from the release, or failure to release, funds held in escrow. Because the PLF believes that serving as an escrow agent presents unreasonable risks for lawyers, the PLF has added an exclusion to the Plan that precludes coverage for engagements in which the lawyer is performing the function of an escrow agent.
Acting as an escrow agent exposes a lawyer to heightened risks arising from actual or alleged conflicts, and is not the type of “professional service” the Plan is intended to cover. Taking on the role of an escrow agent is unreasonably risky if the lawyer is representing one of the parties in the transaction. In this case, the lawyer is in a position of conflict and is in violation of ethical rules when purporting to act as a neutral. See Formal Opinion No. 2005-55.
When the lawyer is supposed to be acting only as a neutral and does not represent any of the parties, there is no attorney-client relationship to create the type of liability for legal malpractice that is within the proper scope of the PLF Plan. In addition, even when the lawyer does not actually represent any of the parties in such a transaction, there is a risk of confusion. One or more of the parties may subjectively believe that the lawyer was representing one or more of the parties.
The Escrow/Holding Exclusion in the Plan applies to cases in which the lawyer is doing the type of work that the PLF believes should be performed by a title company or professional escrow agent. The exclusion does not apply to a lawyer holding funds for settlement purposes or to the situation, for example, where a domestic relations lawyer is applying funds held in trust to make payments pursuant to a judgment.
The Escrow/Holding Exclusion in the 2018 Plan provides as follows:
The following illustrative examples, not intended to be exhaustive, are provided for the purpose of assisting a Covered Party or court in interpreting the PLF’s intent as to the scope of Exclusion 21:
Example 1: Lawyer is hired to act as a neutral third party to hold money in a transaction between non-clients. The parties do not provide written instructions, but agree that the lawyer should determine when it is appropriate to release the money and deliver it to one of the parties. Claims arising from this engagement are excluded. Even if the parties agreed upon and provided the lawyer with written instructions regarding when the money should be delivered, the claims are excluded.
Example 2: Lawyer represents one party to a transaction with another party and pursuant to instructions from both parties, holds money or other property to disburse in accordance with those instructions. Claims arising from this engagement, including the wrongful disbursement or withholding of money or property, are excluded.
Example 3: Lawyer represents one party in a dispute and, upon settlement of the dispute, receives settlement proceeds from the adverse party’s lawyer with instructions not to distribute the funds until various contingencies have occurred. Because of an innocent mistake, Lawyer incorrectly believes all contingencies are satisfied and distributes the settlement funds prematurely. Exclusion 21 does not apply to a claim based on this distribution. (But note that Exclusions 2 and 14 would apply to knowingly wrongful distributions or conversion of settlement funds.)
Example 4: Lawyer represents the trustee of a trust and is holding money to be distributed to the trust beneficiaries pending the payment of debts owed by the trust. After payment of the debts, and distribution to the beneficiaries, one of the beneficiaries claims the lawyer negligently paid a debt that was not owed. This claim is not excluded by Exclusion 21 because the lawyer has not “entered into an express or implied agreement with two or more parties to a transaction” within the intended meaning of Exclusion 21.
Madeleine S. Campbell