Spotlight: regulation of liability for key professions in USA

All questions

Specific professions

i Lawyers

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.22 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 States Trademark and Patent Office, which has its own Office of Enrolment and Discipline.23 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.24 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.25 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.26 However, to qualify for limited liability, firms may be required to carry minimum coverage limits.27

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, therefore, are 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.28 Some use a combined approach limiting both certain categories of damages and the total award.29 Some states limit or bar punitive damages altogether.

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’.30 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, and (3) try to resolve the case via out-of-court settlement.31

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.

Securities regulation

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.32 These exchanges offer a 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.

Commodities regulation

The Commodity Futures Trading Commission (CFTC) regulates the nation’s derivatives markets and exchanges.33 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.

Financial advisers

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 a 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.

Banking

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.

Liability

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.34 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.35 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.36 A leading treatise argues that most practitioners in computer consulting, design and programming do not fit a model that creates malpractice liability.37 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.’38

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.39 The HITECH Act’s final regulations were published in January 2013 as the HIPAA Omnibus Final Rule in (the Omnibus Rule).40

There are personal information security breach reporting statutes in all 50 states and territories.41 The California Consumer Privacy Act (CCPA), which came into effect on 1 January 2020, may be the most sweeping.42 The frequency of claims under the CCPA continues to soar.43 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.44 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.45

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’.46 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.47

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.48 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.49

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. In 2021, the cost of litigating claims against design professionals and claim severity increased.50

Claims against design professionals are typically for 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.51 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.52 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.53 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.54

vii Accountants and auditors

As at 2022, there were 665,612 certified public accountants (CPAs) in the United States.55 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 financial statement preparation engagements (i.e., compilations, reviews, audits), income tax return preparation and planning services, and consulting engagements.

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 200256 to oversee accounting professionals who perform financial statement audits for publicly owned and traded companies.57 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 accountants are typically for professional negligence. The issue of whether an accountant owes a duty to non-clients is governed by state law. Many states apply a ‘privity of contract’ requirement, which bars actions for civil damages by those who were not parties to the retainer.58 An expert is required to establish breach of the standard of care.

The exposure in accounting malpractice claims often turns on the plaintiff’s ability to establish a realised pecuniary loss caused by the accountant’s alleged error. For example, if an accountant prepares an income tax return understating a client’s tax liability that results in a deficiency assessment by the taxing authority, the increased tax assessment is generally not recoverable because the tax is owed regardless of any error in preparing the return. In some tax return cases, penalties and interest attributable to the preparer’s error could be recoverable. The fees paid to another accountant to rectify errors in a prior return are often sought as damages. Similarly, a misstatement in a financial statement is not a recoverable loss in and of itself. Misstating a receivable balance does not necessarily impact on the collectability of the receivable. To be actionable, the misstatement must cause an actual loss. Plaintiffs often attempt to recover speculative lost profits allegedly caused by errors in financial statements. Most states do not altogether bar punitive damages, but their availability is limited to cases of gross negligence, recklessness or fraud.

A claim can sound in either tort or contract, but plaintiffs are limited to single recovery.59 Unlike other professional relationships, a fiduciary relationship is not presumed between accountant and client.60 This is because ethical standards pertaining to some of the most-fundamental ‘accountant’ services are antithetical to those of a fiduciary. Certain financial statement engagements, 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.61 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.62 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.63 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.64 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.65

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.66 An exception exists with respect to intended beneficiaries of the insurance contract, such as the beneficiary to a life insurance policy.67

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