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Newark, N.J.—Legal malpractice insurers are still assessing the new exposure risks wrought by the Sarbanes-Oxley Act, but lawyers who make professional liability, risk management and insurance coverage a specialty say it’s only a matter of time before litigation hits. The lawyers foresee a new kind of civil action stemming from the 2002 statute, which will have a palpable effect on premiums for lawyers who advise corporations. “Sarbanes imposes a whole series of new requirements that extend from duties that have gotten a lot of attention, like blowing the whistle, to providing an accurate legal analysis to a client’s auditors,” said Ronald Mallen, a partner in Chicago-based Hinshaw & Culbertson’s San Francisco office who is co-author of a legal malpractice treatise. “That exposure will ultimately translate into civil litigation in which clients and nonclients can use expert testimony to establish a standard of care.” Two sections of Sarbanes-Oxley promise to be at the center of the projected outbreak of suits: Section 307, which mandates up-the-ladder internal reporting of corporate misconduct; and Section 303(a), which makes it unlawful for a director or an officer of issuers of financial statements that are being audited-or anyone acting under their direction-to “fraudulently influence, coerce, manipulate or mislead” an auditor. Rules proposed by the Securities and Exchange Commission would extend the section’s reach by adding the words “directly or indirectly.” Because lawyers are dealing with auditors more than before, they face new exposure and could be subject to SEC enforcement actions or civil suits for negligent misrepresentation. “When the plaintiffs’ bar learns how to use the section, corporate lawyers will see more complaints” in which they are named as defendants, said Jeffrey M. Smith, a shareholder in Greenberg Traurig’s Atlanta office who is Mallen’s legal malpractice treatise’s co-author. “It took 10 years for plaintiffs’ lawyers to figure out how to use Section 10b of the 1934 Securities Exchange Act. It took five years for them to figure out how to use [the Racketeer Influenced and Corrupt Organizations Act]. It may take them three, four, maybe five years to figure out how to use [Sarbanes]. It’s na�ve to believe there will be no civil ramifications,” Smith said. Even though Sarbanes was carefully crafted so as to leave it to the SEC to police lawyers, the question becomes, Smith said, “Has the language itself become a standard of conduct?” The professional liability insurance companies are understandably wary. “Because the [Sarbanes-Oxley] Act is new, there is no body of experience from which to run a rate analysis,” said Ariel Hessing, executive vice president of The Walnut Advisory Corp. in Watchung, N.J. “Reinsurers of legal professional liability coverage are already skittish about underwriting insurance coverage for corporate and securities lawyers,” Hessing said. “They know it’s among the most difficult to underwrite under the best conditions. The advent of [Sarbanes] only adds to their skittishness.” Anthony Greene, a director of Herbert L. Jamison & Co. in West Orange, N.J., said he’s already seen Sarbanes-related changes on legal professional liability applications. Some insurers are now sending out supplemental forms with questions that specifically address Section 307 of Sarbanes. Greene said there has been a dramatic rise in the demand from in-house lawyers seeking broader insurance protection from potential Sarbanes suits, especially in fear of 307. “There’s no question that firms doing compliance consulting have unique exposures,” he said, referring to the supplemental application on Section 307 that firms are now being asked to complete. “The supplemental form . . . gets into, ‘Are you sure your people know about Section 307, is there a common understanding of what kind of situation triggers lawyers to move forward? Are lawyers clear about the triggers of litigation for reporting?’ Any inconsistency will be bad news.” Greene said underwriters are more concerned about the extent to which law firms invest in training staff on procedures to handle Section 307 situations. “The underwriters need to talk to firms to see how they’re going about these things,” he said. “We’re also focusing on client intake; underwriters say 70% of the problems could have been picked up at client intake. We ask to what extent law firms are keeping financial tabs on clients. When there’s a major change in a client’s financial condition, clients have to share it with underwriters. Law firms have to pay more attention than ever to the financial condition of clients.” Greene said another issue is whether lawyers are going to see more claims against them when clients go bankrupt. He poses the question: “Is there going to be more litigation where lawyers get sued and how are courts going to treat them?” Robert Hille of Waters, McPherson, McNeill in Secaucus, N.J., who defends legal malpractice cases, said fear alone can drive up insurance prices. “The critical thing is not whether the floodgates open. It’s the fear that they’ll open that drives spikes in insurance pricing, especially in a tight market like we’ve got now,” he said, adding that those spikes are more likely to be seen at large firms that handle securities class actions and Employee Retirement Income Security Act claims.

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