The Professional Negligence Law Review: USA
i Legal framework
The duty of a professional is to adhere to the reasonable standard of care of a well-qualified professional acting under the circumstances presented. In simple terms, this means providing services with reasonable care and skill. Generally, the duty of reasonable care arises from the retainer. Most professional liability claims are tort arising from contract. The scope of duty can be limited in the retainer or by the scope of the undertaking. Although the duties are terms implied in the contract, professional liability could flow to third persons based on principles of reliance or the provision or information of services for the benefit of third persons.
There is no uniform national regulation of professions. Professions are regulated and licensed by the individual 50 states and territories. Professional liability law is an amalgam of common law principles of legal precedent and state regulation. Lawyers are governed by rules of conduct and disciplinary agencies administered by their respective state supreme courts. Lawyers admitted to practise in the federal courts are also subject to discipline in those courts. However, all other professional regulation and discipline is managed by state boards or agencies.
A professional licensed in one state can practice in another state only by permission of the other state. Tolerance of crossing state or national borders is becoming relaxed, but individual states hold a monopoly over the right to regulate and discipline their own professionals and 'foreign' professionals operating within their boundaries. In addition, there are federal regulatory schemes that apply to the conduct of the professionals in their endeavours that fall under federal jurisdiction, such as in banking, securities, financial services, consumer rights and data privacy.
Professional negligence can be based on acts, errors or omissions and very often results from the failure to provide sufficient information for the client or patient to make informed decisions regarding a course of action. Liability is based not on the highest standard of care, rather on that which professionals will ordinarily apply under like circumstances as shown by the evidence. A simple way to define professional negligence is to examine a state's court-approved jury instructions given in professional negligence cases.2
A professional who is a specialist in his or her field may be held to the standard of care of a specialist.3 A professional's decisions are given latitude in matters of judgement and strategy. Thus, many jurisdictions accept a theory of judgemental defence or immunity.4
In addition to claims in tort or contract, professionals face liability for breach of fiduciary duties, meaning the highest duties of loyalty, honesty, integrity and good faith. Breach of fiduciary duty claims arise from contract, are equitable in nature and attach to professionals who stand in a special trust relationship, such as an attorney to a client. The damages are typically compensatory but may include disgorgement of fees or restitution of money or property.
Professional liability seeks to make the injured party whole. Compensatory damages and 'special' damages for past or reasonably certain future outlay of money are recoverable if they are proximately caused by the professional's mistake. Damages for future expenses are reduced to a 'present cash value'. In rare cases, exemplary or punitive damages may be awarded in cases of a professional's wilful breach or fraudulent conduct.
ii Limitation and prescription
Limitation periods for professional negligence claims vary among the 50 states. Typically, a cause of action for professional negligence accrues when the client or patient is injured and either knew or should have known of his or her injury and that it is wrongfully caused. This is generally described as a 'discovery rule' and is illustrated in the statutes below. Many states also have outside time limits, which are absolute, or a 'repose' date by which a claim must be filed. Limitation and repose periods can be extended based on the age of minority, incapacitation, disability, military service and by acts of 'fraudulent' concealment of the cause of action by the professional.
States may have different limitations for different professions. In California, the limitation period is one year for an action against an attorney, other than for fraud arising from professional services. The one year commences when the client, through use of reasonable diligence, should have discovered the facts constituting the wrongful act or omission, or four years from the date of the wrongful act or omission, whichever occurs first. A wrongfully convicted criminal has two years after he or she achieves a post-conviction exoneration.5
New York state has a three-year statute of limitations for all professional malpractice other than medical, dental or podiatric malpractice, whether the theory is based in contract or tort.6 The limitation for medical, dental or podiatric negligence is 2.5 years from the date of accrual.7 In Illinois, limitations for accounting, legal, real property design professionals and medical malpractice are covered by separate statutes, but the limitation periods expire two years from the date the person bringing the action knew or reasonably should have known of the injury for which damages are sought.8
Other states may mimic the limitations on contracts that could be in the range of five to six years from discovery. For example, in Wisconsin limitations for breach of contract and for legal negligence are both six years.9
Limitations can be extended by agreement and limitation tolling agreements are commonplace to defer or resolve claims without litigation.
iii Dispute fora and resolution
Professional liability claims are typically brought as actions at law in the states' civil courts and are triable before a lay jury. The right to a jury trial in a civil trial is guaranteed by the United States Constitution and this right is followed by states.10 A 12-person jury is commonplace, but the Constitution guarantees a minimum jury of six jurors for a civil trial.11 States' constitutions also guarantee this right.12 The right to a jury may be waived, but in California the right cannot be waived by contract prior to a court proceeding.13 In cases of waiver, a judge decides all issues. Cases qualifying for federal court jurisdiction, for example, because of diversity of citizenship among the litigants, may proceed in a United States district court.14 The district courts are the general trial courts of the United States federal judiciary.
The plaintiff's burden of proof in professional negligence cases is typically a 'preponderance of the evidence', based on a level of probability greater than 50 per cent. Lay jurors are not considered qualified to determine whether professional negligence has occurred without relying on the testimony of qualified expects in the field. Experts testify to the ultimate issues of professional negligence and linkage to the damages. An expert is unnecessary, however, in cases applying a 'common error exception' such as a missed deadline or obvious mistake.
A client may have contributed to his own injury. Most states allow the jury to apportion fault among parties under a doctrine of comparative fault, which is a partial defence to negligence. Alabama, Maryland, North Carolina and Virginia continue to use contributory negligence, which is a complete defence to negligence.15 States differ on the calculus, but in states ascribing to 'pure comparative fault' the jury will prorate the percentage of fault, and the recovery is reduced by the proration. Pure comparative fault applies in Arizona, California, Florida, Kentucky, Louisiana, Mississippi, Missouri, New Mexico, New York, Rhode Island and Washington. Other states 'modify' comparative fault to hold that if a plaintiff's contributory fault is at least 51 per cent then the professional prevails. The 51 per cent bar rule applies in Delaware, Hawaii, Illinois, Indiana, Iowa, Massachusetts, Michigan, Minnesota, Montana, Nevada, New Hampshire, New Jersey and Ohio.16 The 50 per cent bar rule states are Arkansas, Colorado, Georgia, Idaho, Kansas, Maine, Nebraska, North Dakota, South Carolina, Tennessee, Utah and West Virginia.
A professional has rights of contribution or indemnity against other persons, including professionals, responsible for the clients' injuries. These are typically brought as 'cross claims' or third-party claims within the principal case. States have differing statutes and limitations governing third-party practice that are difficult to generalise. Nevertheless, typically, there is a method to claim recoupment of a settlement or adverse judgment if it can be proven to exceed a defendant's fair share. A common feature is that a professional settling in good faith will be discharged from the case with prejudice, and the non-settling parties will benefit from an offset for the sum paid in the settlement.17
Retainers may specify alternative dispute resolution methods, commonly private mediation, arbitration or both. Courts will enforce arbitration clauses made at arm's length. The parties are free to choose the level of formality of the arbitration process. Many select the American Arbitration Association, which has formalised rules and procedure.18 A court may enter and enforce an arbitration award as a binding judgment. By rules of professional conduct, a lawyer may not contract to prospectively limit liability to a client unless the client has independent representation.19
iv Remedies and loss
With certain exceptions where federal law conflicts with or pre-empts state law, such as federal securities regulation, professional liability and remedies are matters of state law. Arriving at legal policy where precedent is lacking may involve consideration of divergent majority and minority views among sister states. In any case or controversy brought before one of the district courts, federal courts generally will look to tort law of the state where the act or omission occurred, to determine substantive law.
Except in limited situations, such as medical negligence, there are no universal pre-action protocols beyond reasonable and good faith inquiry into the facts and law. In the absence of a fee-shifting contract, a statue or a court sanction imposing monetary penalties for false or meritless claims, the prevailing party is not entitled to recover its fees.20 This is familiarly called the 'American Rule', which reasons that a plaintiff should not be deterred out of fear of prohibitive costs.
Lawyers' liability follows the general principles described above, with some variances. An action may be pleaded in tort, contract or theory such as breach of fiduciary duty, but the damages are typically only pecuniary in nature. Non-economic damage, such as emotional distress, is an exception found in peculiar cases involving a fiduciary who has reason to know emotional injury is likely to occur from the breach.21 Cases are compound in that a plaintiff must prove not only that the lawyer erred, but also that he or she would have fared better in the underlying case within the case. Causation can be daunting because the plaintiff needs to win two cases. In transactional errors, plaintiff must prove he or she would have achieved the better deal. He or she may need to prove he or she would have collected the missed debt.
The role of qualified legal experts is paramount because the jurors must rely on them. They testify on the standard of care, breach and also on how the breach caused the damage. Experts testify on direct examination and must stand cross examination.
Each state supreme court maintains the right to license, regulate and discipline all lawyers practising within its boundaries. The chief disciplinarian may hold the office of administrator, bar counsel, disciplinary counsel or general counsel or similar title. A few states delegate discipline to a state bar association. District courts also have authority to admit, regulate and discipline lawyers admitted to practise in federal courts. Further, patent and trademark lawyers are concurrently admitted to practise before the United State Trademark and Patent Office, which has its own Office of Enrolment and Discipline.22 Also, the United States Department of Justice and military branches maintain their own disciplinary agencies.
Despite the disparate systems, all jurisdictions have substantially, if not verbatim, adopted the American Bar Association Model Rules of Professional Conduct as the standards of conduct, ethics and discipline for American lawyers.23 The violation of a Rule is grounds for discipline. The Rules do not give rise to a cause of action, but are admitted in a civil case, usually by an expert describing their relevance to the standard of care. Each Rule contains comments that provide context, guidance and interpretation of the Rules.
Lawyers and law firms are not universally required to carry professional indemnity insurance and unfortunately many solo practitioners do not. A few states do require insurance. Some states require that lawyers without coverage place their clients on notice of this.24 Twenty-three states require lawyers to disclose in their annual registration statement (which is available to consumers online) whether they carry professional liability insurance or not.25 However, to qualify for limited liability, firms may be required to carry minimum coverage limits.26
ii Medical practitioners
Individual state medical boards regulate the activities of more than 1 million healthcare professionals in the United States, inclusive of physicians, nurses, dentists, chiropractors, podiatrists and others.
Medical malpractice claims comprise a very significant component of personal injury litigation in terms of aggregate claim volume and loss exposure. The theory of recovery is almost uniformly negligence. Doctors often form independent entities that contract their services to hospitals. Agency issues are often litigated when the plaintiff seeks to hold a hospital vicariously liable for on-site care provided by independent contractors, as opposed to in-house employees. Whether an institution is liable often turns on the degree of control over the independent medical contractor's work or a reasonable apprehension of apparent agency.
The standard of care must be established through the opinion of a professional qualified in the medical discipline at issue. Professional associations and academic and research institutions across the nation contribute to the development of medical care standards. Hospital policies and procedures may also inform the standard of care.
Compensatory damages include sums for mental anguish, disfigurement, future medical expenses, future lost wages, long-term physical pain and suffering, loss of consortium and loss of enjoyment of life. Some of these damages are easy to quantify and project through medical bills, rehabilitation expenses and earnings records. Others are more difficult to monetise and are therefore subject to the collective wisdom, views and personal experiences of the jury analysing the evidence.
As part of ongoing tort reform, damages limits, or caps, are seen in medical malpractice cases. Several states' statutes limit damages recoverable in an attempt to alleviate the increasing cost of malpractice insurance. State supreme courts act as checks on state legislatures, occasionally striking down statutory limits as unconstitutional. The form, scope and applicability of the caps vary greatly among the states. Some states cap certain types of damages such as non-economic damages (e.g., pain and suffering), while others place one hard cap on the total amount of an award.27 Some use a combined approach limiting both certain categories of damages and the total award.28 Some states limit or altogether bar punitive damages.
Seven states require physicians and health professionals to maintain a minimum level of professional indemnity insurance. These are Colorado, Connecticut, Kansas, Massachusetts, New Jersey, Rhode Island and Wisconsin. Mandatory coverage limits vary greatly. Premiums vary by location and specialty, with higher premiums for the higher-risk specialties such as surgeons, obstetricians and gynaecologists. Most physicians and health professionals are insured. Many hospitals, however, are self-insured.
Several states have pre-action protocols. Illinois, Florida and other states require an affidavit of merit as an attachment to the complaint. This affidavit certifies that the claimant has consulted with a qualified healthcare professional who, upon review of the care, believes there to be 'reasonable and meritorious cause'.29 Florida's pre-action requirements are more stringent than other states, requiring claimants to (1) notify each prospective defendant at least 90 days before filing a lawsuit, (2) turn over and release relevant medical records, (3) and try to resolve the case via out-of-court settlement.30
iii Banking and finance professionals
The regulatory framework for banking and finance sectors is complex and expansive. It is derived from a confluence of statutes, regulations and industry standards from: (1) the federal government, (2) state and local governments, and (3) private sector self-regulatory organisations (SROs). The federal government plays a strong role, both directly and through federally appointed SROs, in regulating these sectors because of their macroeconomic impact both nationally and globally. As a corollary, the myriad of professional disciplines within these sectors tend to be regulated on a national level more so than in other professions. These professions include commercial bankers, investment bankers, broker dealers, investment advisers, certified financial planners and mortgage lenders.
The Securities and Exchange Commission (SEC) is an independent federal agency and the principal authority for regulating the securities industry, including the nation's stock and option exchanges.31 These exchanges offer an number of investment vehicles in publicly traded corporations, both individually (e.g., stocks, bonds and stock options) or in aggregated funds (e.g., index funds, mutual funds and exchange trade funds). Disclosure laws and regulations for public companies are monitored and enforced by the SEC. The securities industry provides the capital markets essential to powering the national economy across industries. The SEC has delegated authority to promulgate and enforce certain industry standards and requirements for equity brokerage activities to Financial Industry Regulatory Authority (FINRA), a non-governmental SRO. FINRA provides a private forum for investors and parties in the securities industry to resolve disputes through arbitration or mediation.
The Commodity Futures Trading Commission (CFTC) regulates the nation's derivatives markets and exchanges.32 The derivatives markets includes the trading of futures contracts, foreign exchange contracts, swaps and certain kinds of options. The CFTC has delegated certain rule making and enforcement activities to the National Futures Association (NFA), a private SRO. The CFTC and NFA are very much the derivative market counterparts to the SEC and FINRA in the securities industry. Like the FINRA, the NFA provides a forum for alternative dispute resolution for investors and industry participants. While still significant to the overall regulatory scheme, the CFTC is less influential than the SEC. To the extent there is any overlap, the SEC generally reigns.
Individuals or firms in the business of providing securities-related investment advice in exchange for a fee are regulated as 'investment advisers' under the Investment Advisers Act of 1940. This statute defines the role and responsibilities of an investment adviser and protects consumers against misleading and fraudulent investment advice. There are state and SEC registration requirements for investment advisers that vary depending upon the amount of assets under management. A commodity trading adviser (CTA) is a particular type of investment adviser, either an individual or firm, retained to provide advice regarding the buying and selling of commodities and other derivatives. CTAs are regulated through registration with the CFTC and membership in the NFA. Investment advisers are often considered fiduciaries and subject to the traditional fiduciary responsibilities of undivided loyalty and serving clients' best interests.
The Federal Deposit Insurance Corporation (FDIC) was created by the 1933 Banking Act to restore confidence in the banking system by, among other things, insuring deposits up to a certain amount at federally insured banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is the most recent piece of comprehensive federal legislation in the financial sector, passed in 2010 in response to the 2008 financial crisis. Dodd-Frank implemented significant changes affecting the oversight and supervision of systemically important financial institutions and related components, including commercial and investment banks. Dodd-Frank increased the amount the FDIC insures for deposits in member banks up to US$250,000 per ownership category.
Claims against banking and finance professionals are rarely brought in negligence due in large part to the limits of tort to restore purely economic losses for unfulfilled commercial expectations.33 Intentional torts, however, such as aiding and abetting, fraud, interference with contract or prospective economic advantage do permit recovery of economic losses. Thus, the typical theories of recovery against banking and finance professionals include intentional torts and breach of contract. Because investment advisers are fiduciaries, they face added exposure for putting self-interests before investors. Civil remedies, including money damages and possible penalties, are also available for violations of federal and state statutes and regulations that provide a private right of action. Importantly, many of these statutory schemes include attorney fee awards to prevailing plaintiffs.
Because claims often involve questions of federal law or include litigants from diverse states, the most common forum for dispute resolution is federal district court. Many disputes find their way to specialised commercial courts at the state level. Arbitration and other alternative dispute resolution options through SROs (e.g., FINRA or NFA) or private arbiters (e.g., AAA) are commonplace and often preferred, depending on the activity or contract at issue.
iv Computer and information technology professionals
States have yet to hold computer and IT professionals subject to professional liability remedies.34 This distinction is important because a professional is responsible for a higher standard of care beyond ordinary care, and losses for ordinary negligence may not allow recovery of purely economic losses.35 A leading treatise argues that most practitioners in computer consulting, design and programming do not fit a model that creates malpractice liability.36 Although IT practitioners require a high degree of skill, unlike traditional professions they are not restricted or regulated by state licensing laws or rules of ethics. 'If anything, programming skills have proliferated throughout the general public during the past decade and become less, rather than more, the exclusive domain of a profession specially trained and regulated to the task. Unlike traditional professions, while practitioner associations exist, there is no substantial self-regulation or standardisation of training within the programming or consulting profession.'37
Claims against computer and IT practitioners are governed by principles of contract under state law. There may also be general tort liability of ordinary care to avoid foreseeable injuries, which in the area of faulty programming and systems design for lost or corrupted data can be very substantial losses of business revenue and reputation.
Information technology services may extend to data protection and cybersecurity. These are related but separate concepts. Both encompass the protection of confidential information. Cybersecurity, however, has a more targeted focus and addresses how confidential or sensitive information can be compromised or 'hacked' through the use of technology. Data protection addresses the security of information in any format.
Unlike the comprehensive approach to personal data privacy adopted General Data Protection Regulation (GDPR) there is no single federal law or regulation that broadly protects the privacy of sensitive personal information. The United States has taken what some have described as a 'sectoral' approach to data privacy and protection. Various federal statutes, and accompanying regulations, involving the healthcare and financial services industries attempt to broadly protect personally identifying, medical and financial information.38 The HITECH Act's final regulations were published in January 2013 as the HIPAA Omnibus Final Rule in (the Omnibus Rule).39
There are personal information security breach reporting statutes in all 50 states and territories.40 The California Consumer Privacy Act (CCPA), which came into effect on 1 January 2020, may be the most sweeping.41 The CCPA is often compared to the GDPR but they differ in scope and definitions. The CCPA protects personal information supplied by the consumer, but not information purchased or acquired by third-party persons. The CCPA grants consumers the rights: (1) to know what personal information is collected, shared or sold; (2) the right to delete personal information held by any business; (3) the right to opt out of the sale of personal information with special provisions as to children; and (4) the right to non-discrimination in terms of price or exercise of any privacy right granted under the CCPA.42 Organisations are required to 'implement and maintain reasonable security procedures and practices' in protecting consumer data. The statute permits private remedies, including actions by the consumer for injunction and business damages on an individual or class action basis.43
Cybersecurity organisations create voluntary best practice standards. These include the International Organisation for Standardisation, the National Institute of Standards and Technology, a unit of the US Commerce Department and the Center for Internet Security (CIS). In 2014 the California Attorney General issued a data breach report indicating the CIS 20 'Critical Security Controls', which identify a minimum level of information security, were reasonable measures and a 'failure to implement all of the controls that apply to an organisation's environment constitutes a lack of reasonable security'.44 Security professionals may be certified by several non-government organisations, including the International Information System Security Certificate Consortium and the International Security Audit and Control Association.
Clearly, personal information protection will continue to be a growing area of claims for service providers and organisations.
v Real property surveyors
Commercial and residential real estate transfers require the participation of multiple real property professionals such as real estate agents, brokers, property managers, appraisers and title professionals. Most of these professionals face some form of regulation. Real estate brokers and title agents, for example, are regulated by state statute that requires brokers and agents to meet certain educational requirements and pass a written examination before obtaining their licence.45
Common claims against real estate professionals include fraudulent misrepresentation, negligent misrepresentation, breach of fiduciary duty, violation of state consumer fraud statutes, violations of state regulatory statutes and the unauthorised practice of law. Fraudulent and negligent misrepresentation claims often relate to a failure to disclose pertinent information about the property or intentionally providing inaccurate or misleading information. Other claims may arise when a real estate agent acts for both the buyer and the seller or causes an inadvertent breach of client privacy, or when defects in title are discovered after the closing of the property. Depending on the jurisdiction, both compensatory and punitive damages are recoverable.
The duties of a real property professional are often set out by statute. In Illinois, for example, the Real Estate Licensing Act of 2000 sets out specific duties owed by a broker to the client, such as the duty to present in timely fashion all offers to and from the client, keep private all confidential information received from the client and exercise reasonable skill and care in the performance of brokerage services.46 The duties of other real estate professionals, such as closing agents, are derived from common law. The specific duties vary between states but some jurisdictions have held that closing agents owe fiduciary duties to all parties of the transaction.47
Occasionally, a real estate professional may face allegations of the unauthorised practice of law. While brokers are generally allowed to fill out some transactional documents, such as an offer of purchase or contract that was drafted by an attorney, they cannot prepare other legal instruments, such as deeds and mortgages. This is deemed to be the unauthorised practice of law because these services require the skill of an attorney. While many states do not allow for a private right of action for damages against the broker for the unauthorised practice of law, some statutes permit injunctive or contempt sanctions. Such a sanction could lead to disciplinary proceedings initiated by the state's real estate professional regulatory authority.
While the nature of real estate transactions leaves real estate professionals subject to a litany of claims, insurance coverage is not compulsory for most real estate professionals. Notably, however, clients often require their real estate professionals to have insurance.
vi Construction professionals
Real property construction and design professionals, such as architects and structural engineers, are regulated by state law. Each state's regulatory authority and statutes require design professionals to obtain licences after meeting certain qualifications. These qualifications include passing an examination. These licences must be renewed periodically and many states require continual education courses and recertification.
Individual design professionals are not required to obtain professional liability insurance, although it is highly recommended. While claims in 2018 against design professionals remained stable, the cost of litigation and claim severity has increased.48
Claims against design professionals are typically in breach of contract or professional negligence, although claims for personal injury, property damage, negligent or intentional misrepresentation or fraud may be warranted under certain circumstances and in certain jurisdictions. The nature of the claims against design professionals depends largely on whether the plaintiff is a client or a non-client.
The scope of the duties owed to a client by a design professional are typically set out in the contract for professional services, and any breach of the duties set out in the contract usually results in a breach of contract claim. Clients may also assert claims for negligence against design professionals for damage to other property or personal injury proximately caused by his or her negligence. Unless the written contract expressly outlines a specific standard of care, states' respective laws on the applicable standard of care will apply.
Claims brought by non-clients are usually brought under a theory of professional negligence and often seek damages for personal injury or property damage. If, for example, an engineer caused structural damage to a neighbouring property because he or she did not allow for proper adjacent support of the neighbouring property when performing excavation work, the engineer may be liable to the third party under a theory of negligence.
The economic loss doctrine has a significant impact on the nature of the claims allowed to proceed against a design professional.49 While the economic loss doctrine has been adopted by the majority of states in the United States, its applicability differs greatly by jurisdiction. Some jurisdictions apply the traditional definition of the economic loss doctrine such that a party cannot seek recovery in tort for strictly economic losses arising out of a contract.50 Notably, this would not apply to claims seeking recovery of damages for personal injury or other property damage. Other jurisdictions hold that privity of contract is a necessary element to recover economic losses in torts.51 A number of other states have adopted a traditional tort analysis to determine whether a legal duty of care exists to protect third parties from economic loss.52
vii Accountants and auditors
As of 2019, there were over 654,000 certified public accountants (CPAs) in the United States.53 CPA is an accreditation given to accountants who have passed the rigorous CPA exam and have met educational and work experience requirements. The CPA exam is formulated and scored by the American Institute of Certified Public Accountants (AICPA) and is used by all 50 states and US territories for CPA licensure. The disciplines of a CPA are wide-ranging, including performing audits and other reviews of financial statements, tax preparation and planning services, and general business advisory services.
Accounting and auditing standards are promulgated and regulated by the federal government, state and local governments, and by private sector SROs and professional associations. The various regulatory frameworks cater to the differing informational needs of stakeholders in the different sectors of the economy.
The Financial Accounting Standards Board (FASB) is a non-profit, private organisation officially recognised by the SEC to oversee and set accounting standards for the profession – the two foremost being generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS). The Public Company Accounting Oversight Board (PCAOB) – another private-sector, non-profit corporation – was created by the Sarbanes-Oxley (SOX) Act of 200254 to oversee accounting professionals who provide independent audit reports for publicly owned and traded companies.55 The PCAOB is responsible for the registration, standard setting and disciplinary proceedings for accounting firms that audit publicly traded companies. Registration and discipline of the individual CPAs is carried out on the state level. Other standard setting and oversight authorities exist for federal, state and local governments.
Claims against an accountant are typically for professional negligence. The issue of whether an accountant owes a duty to non-clients turns on 'strict privity of contract', with many states barring actions for civil damages by those who were not parties to the retainer.56 An expert is required to establish breach of the standard of care and, when appropriate, to aid understanding of economic loss damages models.
The exposure in accounting malpractice claims often turns on the plaintiff's ability to establish a realised pecuniary loss caused by the alleged accountant's error. For example, if an accountant understates a client's tax liability that results in a deficiency assessment by the Internal Revenue Service (IRS) or state taxing authority, the increased tax assessment is generally not recoverable because the tax is owed regardless of any error in preparing the tax filing. Penalties and interest attributable to the preparer's error would be recoverable, as well as the professional fees incurred to rectify the error, but those are typically much less than the deficiency itself. Similarly, a misstatement in a financial statement is not a recoverable loss in and of itself. Misstating a receivable balance does not necessarily impact the collectability of the receivable. To be actionable, the misstatement must cause an actual loss. Plaintiffs often attempt to recover creative lost business opportunities caused by the alleged accounting error. Most states do not altogether bar punitive damages but their availability is limited gross negligence, recklessness or fraud.
A claim can sound in either tort or contract, but plaintiffs are limited to single recovery.57 Unlike other professional relationships, a fiduciary relationship is not presumed between accountant and client. This is because ethical standards pertaining to some of the most-fundamental 'accountant' services are antithetical to those of a fiduciary. Audits and financial reviews, for example, require the accountant to make an objective and independent assessment of a client's financial condition, while a fiduciary must serve the client's best interests. Thus, the existence of a fiduciary relationship between accountant and client is often a factual dependent inquiry driven by the nature of the services provided. And, unless the accountant provides tax planning or other business advising services for the clients, the accountant–client relationship typically does not rise to fiduciary status. Courts are less inclined to imply duties beyond the express undertakings in the engagement agreement. The existence of a fiduciary relationship will also dictate whether the accountant's conduct is assessed under a fiduciary standard, the highest standard of care under the common law or merely a reasonableness standard.
There are no state or federal laws or regulations requiring CPAs or CPA firms to carry professional indemnity insurance.
viii Insurance professionals
Insurance agents and brokers are required by state statute or by state regulatory authorities to obtain a licence before they can sell or negotiate insurance.58 To obtain a licence, an agent or broker is required to complete an educational course on insurance and pass the state's licensing exam. Although highly encouraged, individual brokers and agents are not required by state or federal law to be insured.
A large number of the brokers' and agents' alleged errors or omissions arise out of their failure to procure adequate insurance coverage. Most of these claims are brought under theories of negligence or breach of contract, although a limited number of states allow claims for breach of fiduciary duty.59 An insurance agent or broker may be liable for procuring inadequate liability insurance if the insured requested certain liability insurance coverage and the agent or broker procured coverage less extensive than that requested. In these cases, the causation or proximate cause element to the negligence claim depends on whether the omitted coverage was available at the time the agent or broker procured the policy.
Some jurisdictions in the United States recognise a common law distinction between insurance agents and insurance brokers.60 This distinction is significant as the duty owed to the insured by an agent can differ greatly from the duties owed by a broker. Generally, an insurance agent represents insurance companies to sell an insured a policy. Consistent with the rules of agency, an agent's conduct may be attributable to the insurer as the agent's conduct is within the scope of his or her employment.61 Conversely, an insurance broker represents the insured in procuring a policy and the broker's primary duty is to the insured in their search for a policy.
A handful of states recognise a fiduciary relationship between insurance procurers and insureds. Most states recognise an elevated duty under the 'special relationship' test. Some of the factors the courts consider include whether there is a long-standing relationship between the agent or broker and the insured, whether the agent or broker presented himself or herself as an insurance specialist, and whether the insured relied on the advice of the agent because of the complexity of the policies.62
Claims against insurance agents and brokers by third parties are less successful. Most states hold that the duty of care is owed to the insured who retains the agent or broker for professional services and not to third parties.63 An exception exists with respect to intended beneficiaries of the insurance contract, such as the beneficiary to a life insurance policy.64
Year in review
Two recent developments are noteworthy: one affecting all professions and business organisations, and another affecting the legal profession and civil justice system. Both relate to the rights of private citizens and consumers and both appear to be taking hold in California. They are the laws securing and affecting the privacy of consumer personal information and a critical look into the rules that govern the state of the legal market, use of technologies and business models to enhance productivity and access to justice.
The year 2020 ushered in the California Consumer Privacy Act of 2018, which reaches all businesses transacting business in California. Organisations are required to implement and maintain reasonable security procedures and practices in protecting consumer data.65 The statute permits private remedies, including actions by the consumer for injunction and business damages on an individual or class-action basis.66 At the time of writing it remains to be seen how these privacy provisions will be applied in the courts. Undoubtedly, claims will be forthcoming. Those professions in a fiduciary position and all professionals holding client information will have new obligations and added potential liability exposure if a data breach occurs.
In the legal services arena, there is growing evidence that a large number of clients and potential clients are being underserved. Recognising this, states' supreme courts have commissioned studies on 'access to justice' that are mounting a case for lawyer regulatory reform. The State Bar of California contracted with a leading legal ethics expert to conduct a landscape analysis of the current legal services market, including new technologies and business models used in the delivery of legal services, with a special focus on enhancing access to justice.67 The report reveals that the legal profession is divided into two segments, one serving individuals ('people law') and the other serving corporations ('organisational clients'). The people law sector is increasingly served by legal publishers such as LegalZoom, Rocket Lawyer and many others that provide access to tech-enabled forms. The report observed a consumer do-it-yourself culture where it is difficult to combine high-quality, low-cost forms with legal advice. In the organisational client sector, in-house lawyers have become a substitute for law firms. Alternative legal service providers are a partial substitute for both. The report concludes that the negative effects of 'cost disease' occur because of lags in productivity by the profession and by the courts. The study proposes better support and a regulated expansion of access through the use of technology in a manner that balances the goals of public protection and increased access to justice. At the time of writing there is growing thought being given to alternative legal business structures.
Outlook and future developments
It is inevitable that the professions will continue to grapple with the application of artificial intelligence and technology in delivery of services. The standard of care of all professions will require as much.68
The legal profession will be observing with interest the adaptation by the United Kingdom to non-lawyer ownership of law firms through alternative business structures, although rapid or universal change is far from certain. There will be a need to eliminate or modify Model Rule 5.4, which mandates lawyer 'independence' and among other restrictions prohibits a lawyer from (1) sharing fees with a non-lawyer; or (2) forming a partnership or professional corporations with a non-lawyer; and (3) having a non-lawyer director, if the activities entail legal services.69 Arizona, Utah and California have undertaken studies to loosen or eliminate Rule 5.4 to enable non-lawyer investment, ownership and to provide non-legal services, to varying degrees. It is possible that reforms enabling alternative business structures in some form may be realised in Arizona in 2021. Other states will follow.
A final thought for the future is the uncertainty and risk that will be caused by the 2020 covid-19 pandemic. All professions will need to address and adapt to the new reality of the workplace, the risks of disease, the increased reliance on virtual communications and more. The strain and enhanced risk placed on the medical professions is highly evident. As emergency measures, states have relaxed licensing standards to allow healthcare practitioners to render treatment, cross borders and accelerate accreditation. Possible legislation will be necessary to protect frontline medical professionals from claims related to the emergent conditions caused by pandemic. As seen in the wake of the 2008 financial collapse, the expected financial downturn will spawn hindsight criticism of professionals, directors and officers who supplied financial or business advice or services. As with the 2008 financial decline, bankruptcies and receiverships are bound to follow, and failed enterprises and investors will make claims. In that environment, the future outlook for increased claims is very high.
1 Thomas P McGarry and Katherine G Schnake are partners and Michael G Ruff is a senior associate at Hinshaw & Culbertson LLP. The information in this chapter was accurate as at June 2020.
2 See the California non-medical professions standard of care jury instruction 600 Standard of Care: 'An [insert type of professional] is negligent if [he/she] fails to use the skill and care that a reasonably careful [insert type of professional] would have used in similar circumstances. This level of skill, knowledge, and care is sometimes referred to as “the standard of care”. You must determine the level of skill and care that a reasonably careful [insert type of professional] would use in similar circumstances based only on the testimony of the expert witnesses[, including [name of defendant],] who have testiﬁed in this case.' CACI No. 600.
3 Wright v. Williams, 47 Cal. App. 3d 802, 810, 121 Cal. Rptr. 194 (1975).
4 See Nelson v. Quarles and Brady, LLP, 2013, IL App (1st) 123122.
5 Cal. Code Civ. Proc. §340.6.
6 NY CLSCPLR §214.
7 NY CLSCPLR §214-a.
8 735 ILCS 5/13-214.2 public accountants; 735 ILCS 5/13-214.3 attorneys; 735 ILCS 5/13-214 construction, design related to real property; 735 ILCS 5/13-214.4 insurance producers; 735 ILCS 5/13-212 physicians, hospitals, medical professions.
9 Wis. Stat. Ann. §402.725 (2016); Wis. Stat. Ann. §893.43 (2016) contracts; Wis. Stat. Ann. §893 (2016) lawyers.
10 U.S. CONST. Amend VII.
11 Colgrove v. Battin, 413 U.S. 149 (1973).
12 See, e.g., CA CONST. art. 1, §16.
13 California Code of Civil Procedure, CCP §631.
14 28 U.S. Code §1332.
15 See, e.g., VA. Code §8.01-58.
16 The Illinois 51 per cent bar does not apply to legal malpractice because it applies literally to actions on account of death, bodily injury or 'physical damage to property', whereas legal malpractice is an injury to inchoate property rights. 735 ILCS 5/2-1116.
17 An example is the Illinois Tortfeasor Contribution Act, and procedure 740 ILCS 100/2.
19 ABA Model Rule 1.8 (h)(1).
20 Rule 11 of the Federal Rules of Civil procedure is the primary example of a court sanctions rule to deter meritless lawsuits. FRCP 11.
21 See Doe v. Roe, 289 Ill.App.3d 116 ( 1st. Dist. 1997).
23 The ABA Model Rules are available on their website http://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct.html.
24 In Alaska, Ohio and New Hampshire, lawyers must notify clients in writing if they have no malpractice insurance, or if their coverage is less than US$100,000 per claim and US$300,000 aggregate. Clients must also be notified if insurance coverage is terminated or if coverage drops below the US$100,000/US$300,000. South Dakota lawyers must specify on their letterhead if they have no malpractice insurance or if their coverage is less than US$100,000 per claim. https://www.americanbar.org/groups/bar_services/publications/bar_leader/2003_04/2804/malpractice/.
26 See Illinois Supreme Court Rule 722, which requires a minimum amount of insurance of US$100,000 per claim and US$250,000 annual aggregate, times the number of lawyers in the firm at the beginning of the annual policy period, provided that the firm's insurance need not exceed US$5 million per claim and US$10 million annual aggregate for limited liability registration.
27 See e.g., California: Cal Civ Code § 3333.2 ('In no action [for medical malpractice] shall the amount of damages for noneconomic losses exceed two hundred fifty thousand dollars ($250,000)'); Kansas: K.S.A. 60-19a02; Maryland: Md. Cts. & Jud. Proc. Code Ann. § 11-108; Michigan: Mich. Comp. Laws Ann. § 600.1483; Nevada: Nev. Rev. Stat. Ann. § 41A.035; Utah Code Ann. § 78-14-7.1; W.Va. Code 55-7B-8. See also West Virginia: W. Va. Code 55-7B-8; N.J. Stat. Ann. 2A:53A-B.
28 Colorado: CO Rev Stat § 13-80-102.5 (US$300,000 noneconomic damages US$1 million total damages).
29 Illinois: 735 ILCS 5/2-622.
30 Florida: Fla. Stat. § 766.106.
31 The SEC was established by the Federal Securities Exchange Act of 1934, enacted in response to the stock market crash of 1929 and the depression of the 1930s.
32 The CFTC was created by Commodity Futures Trading Commission Act of 1974, which made extensive changes to the Commodity Exchange Act (CEA) of 1936.
33 The economic loss doctrine prohibits a party 'from seeking to recover in tort for economic losses that are contractual in nature'. Graham Constr. Servs., Inc. v. Hammer & Steel Inc., 755 F.3d 611, 616 (8th Cir.2014) (quoting Autry Morlan Chevrolet Cadillac, Inc. v. RJF Agencies, Inc., 332 S.W.3d 184, 192 (Mo.Ct.App.2010).
34 See, Ferris & Salter, P.C. v. Thomas Reuters Corp. d/b/a West Publishing Corp., d/b/a Findlaw, 889 F.Supp.2d 1149 (2012). (A federal court held that Minnesota had no precedent and there was no persuasive argument to hold that a malpractice claim may lie against computer consultants for errors in designing and maintaining a law firm's website.); Accord, Superior Edge, Inc. v. Monsanto Co., 44 F.Supp.3d 890 (2014).
35 See footnote 33.
36 Raymond T. Nimmer, The Law of Computer Tech. (4th ed., Thomson Reuters 2012).
37 id., § 9.30.
38 In 1996 Congress enacted the Health Insurance Portability and Accountability Act (HIPAA), Pub.L 104-91, Aug. 21, 1996, 110 Stat. 1936, which set a federal privacy floor for personally identifying information in health records. Subsequently, in 2009 Congress adopted the Health Information Technology for Economic and Clinical Health Act ('HITECH Act'), Pub.L. 111-5, Div. A, Title XIII, Div. B, Title IV, 123 Stat. 226, 447, which among other things, extended the HIPAA obligations of physicians, hospitals, group health plans and other 'covered entities' to protect PHI ('Protected Health Information') to 'Business Associates'.
39 See Gramm-Leach-Bliley Act ('GLB Act'), Pub.L. 106-102, 113 Stat. 1338. The GLB Act's Privacy Rule encompasses many businesses not typically considered 'financial institutions'.
40 See National Conference of State Legislatures (NSCL) Security Breach Notification Laws, 8 March 2020, https://www.ncsl.org/research/telecommunications-and-information-technology/security-breach-notification-laws.aspx.
41 The California Consumer Privacy Act of 2019 §§1798.100 – 1798.199.
42 See California Consumer Privacy Fact Sheet, CA Dept. of Justice, Office of the Attorney General, https://oag.ca.gov/system/files/attachments/press_releases/CCPA%20Fact%20Sheet%20%2800000002%29.pdf.
43 The California Consumer Privacy of 2019 §1798.150.
44 California Data Breach Report 2012-2015, February 2016, https://oag.ca.gov/sites/all/files/agweb/pdfs/dbr/2016-data-breach-report.pdf; the CIS Critical Security Controls are available at https://www.cisecurity.org/controls/.
45 For example, see 225 ILCS 454/5-15; Insurance § 626.8473.
46 225 ILCS 454/15-15(a).
47 Dingle v. Dellinger, 2014 Fla. App. LEXIS 4261 (Dist. Ct. App. Feb. 27, 2014).
48 Ames & Gough, 2018 Architects and Engineers Professional Liability Insurance Market Survey.
49 See footnote 33.
50 Blake Constr. Co. v. Alley, 233 Va. 31, 353 S.E.2d 724 (1987).
51 Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, 451 Md. 600, 155 A.3d 445 (2017).
52 Danforth v. Acorn Structures, Inc., 608 A.2d 1194, 1200 (Del. 1992).
54 SOX was a significant piece of legislation meant to address a series of accounting scandals at the turn of the 21st century, such as the Enron scandal where several executives were charged with conspiracy, insider trading and securities fraud, and which resulted in the largest bankruptcy to date.
55 SEC regulations require public companies to undergo an annual audit of their financial statements and make them publicly available to current and potential investors, among other business and financial disclosure requirements.
56 See, e.g., Illinois Public Accounting Act, 225 ILCS 450/30.1. The aim of such statutes is to limit accountant exposure to an endless class of potential third-party malpractice claimants that may review and rely on the client's financial statements.
57 Some of the other civil causes of action brought against accountants involve intentional misrepresentation or fraud, to the text of the note the Racketeer Influenced Corrupt Organisations Act (RICO), to the text of the note Section 10b-5 of the Securities Exchange Act, state Blue Sky statutes, state consumer protection statutes, breach of contract, defamation, intentional infliction of emotional distress and interference with business relations.
58 For example, in the State of California, the agency responsible for issuing licences is the California Department of Insurance. In the state of New York, the New York Department of Financial Services is responsible for issuing the licence. In the State of Florida, the Florida Office of Insurance Regulation issues the licence.
59 Loyle, LLC v. Greater New York Mut. Ins. Co., 2017 WL 3861289 *17 (N.J. App. Sept. 5, 2017).
60 Krumme v. Mercury Ins. Co., 123 Cal.App.4th 924, 928–929 (2004); Ins. Code, §§ 31, 33, 1621, 1623.
61 Lippert v. Bailey (1966) 241 Cal.App.2d 376, 382.
62 He v. Norris, 415 P.3d 1219, 1221 (Wash. App. 2018); Perreault v. AIS Affinity Ins. Agy., Ins., 93 Mass. App. 673 (Aug. 2, 2018).
63 Conquest v. WMC Mortg. Corp., 247 F. Supp. 3d 618, 635 (E.D. Pa. Mar. 30, 2017); Mosqueda v. Aristin Dev. Grp., 2018 N.Y. Slip Op 31715 (Mar. 26, 2018).
64 Vestal v. Pontillo, 158 App. Div. 3d 1036 (N.Y. 2018).
65 See footnote 42.
66 California Consumer Privacy Act of 2018 § 1798.150.
67 Legal Services Landscape Report (058) State Bar Study of Online Delivery of Legal Services, William D. Henderson, 22 July 2018, https://www.legalevolution.org/2018/07/legal-market-landscape-report-058/.
68 See ABA Model Rule 1.1, which requires lawyers to keep abreast of changes, benefits and risks of relevant technology.
69 ABA Model Rule 5.4.