Protection Reflection: The Supreme Court Rules Allow Partners To Limit Their Liability
By Joseph R. Marconi & Brian C. Langs Johnson & Bell, Ltd. Chicago
The future ain’t what it used to be.
— Yogi Berra
Many lawyers are still unaware that effective July 1, 2003, our Supreme Court promulgated rules which conferred protection from professional liability in certain circumstances. Illinois Supreme Court Rules 721 and 722 allow lawyers in Illinois to protect themselves against vicarious liability for legal malpractice committed by other lawyers at their firm provided that the law firm (1) maintains one of the business forms enumerated by Rule 7211 and (2) maintains the minimum amount of malpractice insurance or other proof of financial responsibility required by Rule 722.
Conditions for Limited Liability Protection
While Rule 721 extends limited liability protection to non-Illinois licensed lawyers and entities who are shareholders, members, or partners of a law firm with an Illinois office, that limited liability protection is conditioned on at least one partner being a member of the Illinois bar. This provision requires a limited liability law firm in Illinois to have at least one partner who is a natural person licensed to practice law in Illinois. Further, an authorized limited liability entity may only practice law in Illinois or maintain an office in Illinois for that purpose after being issued a certificate of registration by the Illinois Supreme Court. A certificate of registration will continue in effect until it is suspended or revoked subject to annual renewal on or before January 31st of each year.
Finally, Rule 721 eliminated vicarious liability for legal malpractice committed by other lawyers at a limited liability law firm as long as the law firm maintains minimum insurance or proof of financial responsibility pursuant to Illinois Supreme Court Rule 722. To evidence proof of minimum insurance or financial responsibility, an authorized shareholder, member, or partner of a limited liability entity must provide an affidavit or a verification by certification under §1-109 of the Illinois Code of Civil Procedure with each application for registration or renewal.
Minimum Insurance or Proof of Financial Responsibility
Rule 722 defines "minimum insurance" as "a professional liability insurance policy applicable to a limited liability entity, and any of its owners or employees, for wrongful conduct." Minimum insurance must exist, "in one or more policies, with respect to claims asserted during an annual policy period due to alleged wrongful conduct occurring during the policy period and the previous six years." The minimum amount of insurance is "$100,000 per claim and $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 $5,000,000 per claim and $10,000,000 annual aggregate."
Alternatively, an Illinois law firm may enjoy limited liability status by submitting proof of financial responsibility. To do so, it must evidence funds equaling at least the minimum required annual aggregate for minimum insurance referenced above. Proof of such funds may be in any of the following forms: (1) deposit in trust or in bank escrow of cash, bank certificates of deposit, or United States Treasury obligations; (2) a bank letter of credit; or (3) a surety bond. These funds must be "specifically designated and segregated for the satisfaction of any judgments" against the law firm.
Rules 721 Has No Bearing on Individual Ethical Conduct
Rule 721(b) emphasizes that the Rule "does not diminish or change the obligation of each attorney engaged in the practice of law on behalf of the corporation, association, limited liability company, or registered limited liability partnership to conduct himself or herself in accordance with the standards of professional conduct applicable to attorneys licensed by [the Illinois Supreme Court]."
Regardless of the business form, a lawyer will always be liable for his own acts or omissions arising from professional legal services. Additionally, a lawyer is liable for acts or omissions of those individuals under his supervision or control. Furthermore, shareholders, partners, managers, or members should take care to strictly comply with entity formalities to avoid individual liability through piercing of the limited liability veil.
The Supreme Court of Illinois provides forms and guidance with regard to firm registration and annual renewal at the following internet address:
https://www.state.il.us/court/SupremeCourt/Prof_Serv/default.asp (last visited April 28, 2015).
Ill. Sup. Ct. R. 721 allows a firm to organize as any one of the following business forms: a professional corporation (P.C.), a professional association, a limited liability company (LLC), or a registered limited liability partnership (LLP). Limited partnerships (LPs) and limited liability limited partnerships (LLLPs) are not enumerated in Rule 721, and these business forms are therefore unavailable.