Chubb Group of Insurance Companies
82 Hopmeadow Street
Post Office Box 2002
Simsbury, CT 06070-7683
Phone: (860) 408-2000 Fax: (860) 408-2002
December 17, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: SEC File No. 33-8150.wp
Implementation of Standards of Professional Conduct for Attorneys
Dear Mr. Katz:
On behalf of The Chubb Corporation, and its constituent insurance companies, we write to comment on the above-referenced proposed rule (the "Proposed Rule") establishing standards of professional conduct for attorneys who appear and practice before the Securities and Exchange Commission. Chubb is the 13th largest property and casualty insurer in the United States, and among the largest U.S. writers of professional liability insurance for law firms, in-house counsel to corporations (or "employed lawyers"), and corporate directors and officers. Chubb currently insures the malpractice liability of more than 60,000 attorneys in the United States.
The undersigned, Sean Fitzpatrick, serves as Chief Underwriting Officer of Chubb Specialty Insurance, the executive and professional liability division of Chubb. Mr. Fitzpatrick is a member of the bars of Connecticut, New York, and the District of Columbia. Our comments on the proposed rule are also informed by his academic work as a lecturer at the University of Connecticut School of Law, where he teaches in this field. Julianne Splain serves as Loss Prevention Counsel of Chubb Specialty Insurance, providing loss prevention services to the many law firms insured under Chubb's lawyers professional liability policies. Previously, as Chubb claims manager, she was responsible for the handling of malpractice claims against our insured law firms. Ms. Splain is a member of the bar of Connecticut.
While we commend the Commission on its efforts to clarify the duties of attorneys practicing in the securities area, the Proposed Rule raises many interesting and difficult questions, as noted in the commentary accompanying the Rule. We will, however, restrict the scope of our comments to those issues where we believe our views as an insurer of professional liability risks may be helpful to the Commission. In this connection, we will address three specific questions. First, what will be the likely impact of the Proposed Rule on the exposure of attorneys to professional liability claims? Second, what will be the likely impact of the Proposed Rule on the cost and availability of professional liability insurance for attorneys? Third, what mechanisms can be employed to ameliorate any unintended adverse consequences of the Proposed Rule?
The Impact of the Proposed Rule on Attorney Liability
In our view, the Proposed Rule's imposition of reporting, disaffirmance, and withdrawal obligations on attorneys will result in the expansion of professional liability claims against both outside and in-house counsel. Most obviously, the Proposed Rule will create exposure to regulatory enforcement liability more far-reaching than faced by lawyers in the past. We do not, however, believe this expansion will be limited to enforcement and disciplinary actions by the Commission, notwithstanding the Commission's observation that neither Congress nor the SEC intends to provide a private right of action against an attorney based on compliance or failure to comply with the Rule. See Implementation of Standards of Professional Conduct for Attorneys, 67 Fed. Reg. 71669, 71697 (Dec. 2, 2002). Rather, we expect that the requirements of the Proposed Rule, particularly as they may be either (a) misinterpreted by attorneys attempting to comply with them or (b) viewed as conflicting with existing standards of attorney conduct imposed by individual states, will give rise to civil suits against attorneys by clients and non-clients who rely on their work.
In our experience, an alleged violation of a state ethics rule is often the basis for a malpractice claim. Plaintiffs in this area will typically argue that violation of an ethical rule in and of itself establishes a breach of the attorney's duty of care. The American Bar Association recognized this reality in amending its Model Rules of Professional Conduct, observing that "since the Rules do establish standards of conduct by lawyers, a lawyer's violation of a Rule may be evidence of breach of the applicable standard of conduct." Model Rules of Prof'l Conduct, Scope para.  (2002).
Consider, for example, an attorney who mistakenly interprets his or her duties under the Proposed Rule and too hastily disaffirms a filing with the Commission and withdraws from representing a client. This becomes publicly known (as it almost surely will) and the client sustains economic harm. It is not only likely but virtually certain that the client (and perhaps its investors or creditors) will seek redress in the courts and will as the basis for the suit cite the attorney's alleged breach of duties of both loyalty and confidentiality imposed under state law. Federal preemption of state law does not appear to provide a clear solution to this problem, as the Commission has specifically forsworn any intention to "articulate a comprehensive set of standards regulating all aspects of the conduct of attorneys who appear and practice before the Commission" or to "supplant state ethics law unnecessarily." 67 Fed. Reg. at 71673. Indeed, even absent a conflicting state ethics requirement, an attorney's simple misinterpretation of his or her duties under the Proposed Rule could give rise to malpractice liability.
In sum, we believe the Proposed Rule will increase both the frequency and severity of malpractice claims against attorneys, both by creating a higher volume of regulatory enforcement actions by the Commission and by creating the basis for more traditional malpractice claims.
The Impact of the Proposed Rule on the Cost and Availability of Insurance
Different issues arise in connection with insurance coverage for different groups of attorneys affected by the Proposed Rule, including (i) outside counsel, (ii) employed attorneys who are corporate officers, and (iii) employed attorneys who are not corporate officers. Issues of insurance availability and cost in this context will be played out in the midst of the "hardest" insurance market in 15 years; that is, attorneys and others seeking professional liability insurance are already facing substantially increasing premiums in response to expanding claims activity in the corporate sector in recent years.
With respect to outside counsel, the Commission should note that the vast majority of lawyers professional liability ("LPL") policies specifically exclude from the definition of a covered claim "disciplinary or grievance proceedings" and further exclude from the definition of covered loss "fines, sanctions, costs, or penalties." See, e.g., Executive Risk Indemnity Inc., Lawyers Professional Liability Form C21138 (2/97 ed.), available at http://csi.chubb.com/products/pdf-files/c21138.pdf ; Ronald E. Mallen, Law Office Guide to Purchasing Legal Malpractice Insurance 86-87 (2001). Accordingly, firms will not have coverage for the costs of defending disciplinary proceedings by the Commission under the Proposed Rule, nor for any penalties assessed in such proceedings. Such coverage would be available, if at all, only for substantial additional premium, particularly for a law firm with an active practice before the Commission. Further, public policy limitations likely exist on the ability of insurers to indemnify companies for regulatory fines or penalties, as opposed to defense expenses, even if they are inclined to offer such coverage.
In addition, the risk of "traditional" malpractice claims arising out of misinterpretations of the Proposed Rule or conflicts with requirements of state law, as discussed above, is likely to give rise to new exclusions in LPL policies to address claims arising in connection with the Proposed Rule, but not brought by the Commission itself. Again, given the uncertainty surrounding this exposure, insurance underwriters are likely to demand substantial additional premium in order to accept this risk.
Attorneys practicing in-house may seek insurance for exposures created by the Proposed Rule from two sources: directors and officers ("D&O") insurance if they are corporate officers or employed lawyers professional liability ("ELP") insurance, which will provide professional liability coverage to any attorney employed "for the purpose of providing legal services" to the insured company. See, e.g., Executive Risk Indemnity Inc., Employed Lawyers Professional Liability Policy Form C21901 (11/96 ed.), available at http://cber.chubb.com/products/pdf-files/c21901.pdf.
D&O policies, like LPL policies, typically exclude coverage for "fines and penalties." Again, as in the case of LPL, the new potential exposures created by the Proposed Rule will likely lead to the development of more specific exclusions limiting or removing entirely coverage for claims against corporate officers arising out of their duties as attorneys under the Proposed Rule. As such "professional liability" exposures have traditionally been viewed as outside the normal duties of a director or officer for purposes of D&O insurance, there will be a significant reluctance on the part of underwriters to include this type of risk in D&O coverage absent substantial additional premium. See International Risk Management Institute, Inc., "Provisions of Typical D&O Policies," D&O Maps (2002) at §3.022 ("By the same token, the Vice President for Legal Affairs will be insured in his capacity as a vice president, but may not be insured if acting as corporate counsel for some wrongful act of a "legal malpractice" nature....").
Employed Lawyers Professional Liability insurance is specifically designed to address the malpractice risks faced by in-house counsel, whether or not officers of a corporation, but is purchased by only a small fraction of the corporations regulated by the Commission. Some ELP policies include coverage for defense costs incurred in defending disciplinary proceedings of various kinds, although indemnification for actual fines, sanctions and penalties is typically excluded (as is probably required by public policy in any event, as noted above). See, e.g., Executive Risk Indemnity Inc., Employed Lawyers Professional Liability Policy Form, supra. Other ELP policies include broad "SEC exclusions," which would remove all coverage for claims arising out of practice before the Commission. In any event, enactment of the Proposed Rule in its present form will undoubtedly result in substantial increases in the premiums charged for defense coverage against regulatory claims, as the risk that such costs will be incurred is increased substantially by the new requirements of the Rule.
In-house counsel will, like their brethren in outside law firms, also face increased risk of traditional malpractice suits by their own employers, successors such as bankruptcy trustees, and investors or other third-parties as a result of the Proposed Rule. While this exposure has long existed, enactment of the Proposed Rule will expand the bases for in-house counsel liability in this context. See, e.g., Escott v. Barchris Construction Corp., 283 F. Supp. 643, 686-87 (S.D.N.Y. 1968).
It should also be noted that the scope of coverage of ELP policies does not extend to attorneys employed in a non-legal capacity within a corporation - but only to those employed "for the purpose of providing legal services" - although such attorneys could be considered to be "appearing and practicing" before the Commission under §205.2 of the Proposed Rule and hence subject to liability. Accordingly, while these non-legal capacity attorneys may be equally exposed under the Proposed Rule, they do not enjoy the same access to ELP coverage.
In sum, the existing executive and professional liability insurance coverages available to attorneys practicing before the Commission will generally not respond to the new direct liabilities that will arise as a result of the Proposed Rule, and are likely to be revised to exclude or require substantial additional premium for consequential malpractice liability that may result. Premium increases of 10-50% are likely to be imposed by those underwriters who do not decide to exclude these exposures entirely, depending on the nature of the individual risk presented.
How Can the Proposed Rule be Amended to Promote the Availability of Insurance?
From the perspective of reducing the economic costs of the Proposed Rule to lawyers and their employers, the single most helpful addition to the Commission's draft regulation would be a safe harbor providing protection from malpractice suits to attorneys who act in good faith in attempting to fulfill their responsibilities under the Rule. Such a provision would limit the exposure of attorneys to "consequential" malpractice liability not intended, but nonetheless promoted, by the current draft of the Proposed Rule. A safe harbor provision would prevent attorneys from being caught between the "rock" of Sarbanes-Oxley and the "hard place" of state ethics rules and standards of professional care. The final Rule should expressly prohibit private actions challenging an attorney's decision to take, or not to take, action under the Rule, when taken in good faith. There is precedent for such a safe harbor in the securities legislation governing auditors. See 15 U.S.C § 78j-1(3)(c). A safe harbor provision would limit the increase in suits against lawyers, and thus limit the additional costs law firms, issuers, and their employed lawyers will face as a result of enactment of the Rule.
Thank you for the opportunity to comment on this important new regulation.
Sean M. Fitzpatrick
Chief Underwriting Officer
Chubb Specialty Insurance
Loss Prevention Counsel
Chubb Specialty Insurance