A question that comes up from time to time, usually after an attorney has read a news story about missing funds in a local law firm’s trust account, concerns insurance coverage for the event. This is a particularly troublesome concern due to the nature of the problem. Trust account funds are other people’s money and, as a result, having appropriate coverage for a theft out of this account is a serious issue. The ramifications of discovering such a loss are nightmarish. Not only can the necessity of having to replace the missing funds in order to prevent harm to any client be more than a firm may be financially able to cover; but the firm’s reputation will certainly take a hit and trust me, bar counsel and/or discipline counsel will make their presence known.
With all this in mind, the question asked of me is often prompted by a growing fear that the caller’s firm may not be covered for such a loss and there is a strong desire to have me assure them otherwise. Unfortunately, I can’t. The caller’s fears are legitimate because most general commercial liability policies and legal malpractice insurance policies exclude coverage for the theft of client property. Theft is not going to be a covered act because theft is an intentional act. In addition, many insurance policies specifically exclude a loss of this type just to make sure it’s clear.
Sometimes the caller will then say, “Wait, we have a malpractice policy that has innocent insured coverage and that means that those of us who were not involved in the theft would be covered. Right?” Again, remember that policy language can specifically exclude coverage for these kinds of losses. However, let’s assume that the policy language doesn’t. As I see it, this coverage question boils down to can the firm, other than the individual who took the funds, truly be innocent when a misappropriation occurs? I would argue that in many situations the answer would be no. Our professional conduct rules mandate that we properly train and supervise all staff who will handle client property. The rules also require that attorneys accept accountability for all client property that is in their possession. This includes implementing practices and procedures that are designed to minimize the possibility of anyone misappropriating funds.
By design our rules require the continuous and meaningful oversight of other people’s property. An attorney cannot simply turn over the books and all responsibility for client funds to a non-attorney and say, “Thanks for helping me with this; I really dislike these administrative back office tasks.” By the same token, a firm cannot turn a blind eye to the warning signs of an attorney or staff member who is going rogue. Failure to take our ethical requirements to heart and affirmatively act to prevent a misappropriation is not the same as being innocent should the worst happen. Therefore, the failure to anticipate and to follow through with the creation and implementation of appropriate practices and procedures intended to prevent such an outcome does passively create the circumstances that can allow a misappropriation to occur. In other words, a blind eye is not the same as being truly innocent and there’s the rub. If there are no preventative measures in play at your firm, the time to rethink that decision is now because should the worst ever happen, when it comes to coverage for the loss, you may find that you aren’t as innocent as you might think.
Mark Bassingthwaighte, Esq. is a Risk Manager with Attorney’s Liability Protection Society, Inc. (ALPS). In his tenure with the company, he has conducted over 1,000 law firm risk management assessment visits, presented numerous continuing legal education seminars throughout the United States, and written extensively on risk management and technology. Mark received his J.D. from Drake University Law School and his undergraduate degree from Gettysburg College. He blogs at www.alps411.com. Mark can be contacted at: email@example.com.