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Arbitration Can Kill Malpractice Coverage

Posted 4/10/08  

It’s ironic that many lawyers routinely put arbitration clauses in their engagement letters with clients. Here you have a profession that is quite literally the foot soldiers in the third branch of government, charged by our professional oath to be officers of the court. And yet, in contracts with clients, these attorneys opt out of the court system by obligating clients to take any dispute with them to arbitration.

The subtext of that conduct seems clear to me: lawyers don??t trust the court system to treat them fairly and prefer the private dispute resolution process of arbitration to court. Call me crazy, but that certainly sounds out of whack. It’s kind of like a doctor saying, “If I get sick, whatever you do, do not take me to a hospital.”

So, what are the real differences between arbitration and a lawsuit in a court of law that have caused so many businesses, including law firms, to prefer arbitration to court? To start with, arbitration is private: there are no public records for others to read. In arbitration, there will be few, if any, depositions.  Discovery is pretty much limited to document production, with a limited right to ask written questions, similar to interrogatories. There is no enforceable subpoena power: if people don’t want to testify, they just don’t show up. There is no judge to refer a witness to the DA for perjury or a lawyer to the disciplinary committee. Motions for summary judgment are almost never granted. Statutes of limitations are more advisory than binding, and few cases are even thrown out as time-barred. It is extremely rare for any evidence to be excluded.

Like with a bench trial, the rules of evidence go more to the weight of the evidence than admissibility. There is no absolute right of cross examination and it is not uncommon for affidavits to be admitted as evidence, for whatever weight the arbitrator wants to give them. Most people feel arbitrators tend to “split the baby,” by giving compromise awards and denying both sides an out-and-out win. And when the arbitration case is over, there is virtually no right of appeal.

This trend of lawyer fee contracts with arbitration clauses has generated some appellate decisions, most of which have dealt with the question of whether a legal malpractice claim is a claim for personal injuries. If it is a claim for personal injuries, an arbitration clause would not be enforceable unless it is signed both by the parties and their counsel. Texas Appellate Courts have gone both ways on that question, but the trend seems to be that a legal malpractice claim is not a claim for personal injuries and, therefore, your arbitration clause in your engagement letter, signed by the client, is enforceable.

While it may seem ironic that lawyers are running for protection to arbitration clauses, there is an even bigger surprise waiting for lawyers who opt out of the court system. Keep in mind that the arbitration clause in your engagement letter obligates your client to pursue the malpractice claim against you in arbitration instead of in court. It therefore obligates your insurance carrier to have its liability for your malpractice determined in arbitration. It turns out, though, that insurance companies actually like jury trials and are not always all that fond of arbitration. Lawyers who force their clients into arbitration and then get an arbitration case for malpractice are now routinely receiving a “reservation of rights” letter from their insurance carrier, threatening to deny insurance coverage because the lawyer deprived the insurance company of its right to a jury trial.

Next time you are tempted to show your distrust for the court system by including an arbitration clause in your fee contracts, keep in mind that you may have just cancelled your malpractice insurance policy. 

Randy Johnston, Johnston ~ Tobey