Darren D. Driscoll[1]
A Critique of Legislative
Reform of
Prepaid Legal Services[2]
in Iowa
Economics of Law Practice
Seminar[3]
October 17, 2001
I.
Leveling the Playing Field
There are a variety of injustices that result from the disparity of wealth and resources between the rich and the poor.[4] Not the least of which is the American legal system’s inability to deliver equal justice.[5] The fact that “laws grind the poor, and rich men rule the law”[6] has been apparent for centuries. However, little has been accomplished to remedy the double standard.[7]
One example of progress was the United States Supreme Court’s 1966 decision in Miranda v. Arizona,[8] holding that a person charged with a serious criminal offense has a right to the assistance of legal counsel, because it is implicitly protected under the Fifth Amendment.[9] It is considered so important it is now required that a criminal defendant be informed, or warned, upon arrest of his rights to legal counsel and to have legal counsel provided should he be unable to afford the services of an attorney.[10] The Miranda Court stated:
The financial ability of the individual has no relationship to the scope of the rights involved here… The need for counsel in order to protect the privilege exists for the indigent as well as the affluent. In fact, were we to limit these constitutional rights to those who can retain an attorney, our decisions today would be of little significance… While authorities are not required to relieve the accused of his poverty, they have the obligation not to take advantage of indigence in the administration of justice.[11]
Even though every American citizen has the Constitutional right to appointed counsel upon arrest in a criminal matter, this does not mean that the criminal justice system is blind to wealth. Court appointed attorneys are likely to be less experienced on average than paid counsel. Further, talented court appointed attorneys are often hindered in their ability adequately to represent their clients due to financial constraints imposed by courts. Courts may be unwilling to pay for such essential elements of a defense as expert witnesses.[12] As the highly publicized criminal trial of former National Football League star, O.J. Simpson, illustrates, the amount of justice a person can obtain in the criminal justice system, as well as in the civil system, all too often appears to be proportional to how much money they can afford to spend.[13] In a society based upon the rule of law, civil justice should not be considered less important than criminal justice.
Support for prepaid legal services could substantially improve the availability of legal resources to economically disadvantaged households. By relaxing current laws, the ability of courts to deliver justice could be significantly improved. The purpose and effectiveness of laws that limit the ability of attorneys to advertise and share revenues with non-attorneys should be reexamined. Laws providing tax incentives to prepaid legal service providers and subsidies to prepaid legal service plan members from low-income households should also be considered.[14]
The purpose of this paper is to present an analysis of the strengths and weaknesses of prepaid legal services, also known as legal insurance, and their capacity to provide affordable legal services to a broad range of low to middle income consumers. It discusses the potential consequences of the Iowa Legislature’s repeal of the laws regulating prepaid legal services in the State of Iowa, and argues in favor of continued state support for such services.
II. Prepaid Legal Services in the United States
A. A Brief History of Prepaid Legal Services in the United States
A man named Harlan Stonecipher created the concept of prepaid legal services “by accident” in the aftermath of a life-threatening automobile collision in July of 1969.[15] Stonecipher was seriously injured and yet subsequently sued by the driver who had actually caused the accident! (She had pulled in front of his vehicle).[16] The costs defending her frivolous lawsuit added insult to Stonecipher’s serious injuries. He decided that the financial burden of his legal defense was unacceptable and that he would find a way to protect his family from the costs of future litigation.[17]
Stonecipher’s solution was the creation of a legal insurance network. The company he created, Pre-Paid Legal, reported annual revenue growth from $60 million in 1996 to $160 million in 1998.[18] It is now a stock traded on the New York Stock Exchange.[19] The legal insurance products Pre-Paid Legal offers, starting at $14.95 per month, include unlimited access to an attorney for an entire family[20]
A 1989 American Bar Foundation study reported that
18% of U.S. households (then 43 million people), reported at least one member
of a prepaid or group legal service plan.[21] In February, 1998, the National Resource
Center for Consumers of Legal Services estimated there were 105 million people
eligible to use at least one such plan (including the armed services’ legal
assistance plans), by then 39% of the population.[22]
At its inception, the prepaid legal services industry had a number of significant obstacles to overcome. Some are still a significant cause for concern.[23] They include ethical rules prohibiting attorneys from sharing revenues with non-attorneys for fear of compromising professional independence or permitting the unauthorized practice of law.[24] Other problems included the anti-trust theory that the monthly fee schedule could be characterized as price fixing, as well as the application of the Employee Retirement Income Security Act of 1974 (ERISA).[25]
There is also the significant startup cost and risk associated with retaining a sufficient number of attorneys to provide service before the issuance of any contracts – frequently required by law.[26] Other troubling issues include an attorney’s potential conflict of interest in the event that a beneficiary of the plan wishes to file a lawsuit against the plan provider (is the attorney’s loyalty to the client or to the insurance provider?). There are ethical issues when an insurance consumer’s freedom of choice of attorney is limited, might the insurance provider be susceptible to malpractice litigation? Where is the line drawn between funding legal services and providing legal services?[27]
This paper analyzes both group plans[28] and individual (or voluntary enrollment) plans.[29]
B. Group Plans
“Group plan,”[30] as used in this paper, means prepaid legal services, sponsored by an intermediate party between the insurance provider and the ultimate recipient of benefits. This intermediary is most often an employer or a union.
Group plans come as “true” group plans (in which all members must participate) and “voluntary enrollment” plans.[31] Voluntary enrollment plans are the more common for a variety of reasons. For example, there is an increased cost to the organization if the plan must be provided to members of the organization. There may be employee concerns regarding potential increases in dues or lack of funds to pay for the program.[32]
There are numerous benefits to employers who provide legal insurance in addition to other standard benefits such as medical insurance and retirement plans. It gives them a competitive advantage when recruiting prospective employees. However, the advantage may be short-lived as competing companies also begin to offer legal insurance to stay competitive.
Of course, providing legal insurance to employees as a true group benefit will increase costs for a business or other organization. If the competitive advantage gained is only short term, the organization may decide the added cost is unjustified.
The insurance provider’s motivation for marketing prepaid legal services is the same as the motivation to market every other variety of insurance… profit. This is true whether the product is a group or individual insurance plan.
C. Individual Plans
“Individual plan,” as used in this paper, means prepaid legal services provided by contract between an insurance provider and the ultimate consumer.
The primary benefit of legal insurance is its ability to provide competent legal assistance to persons who are financially incapable of paying a substantial retainer in advance of receiving legal services for which they had not perceived a need. The cost spreading nature of insurance is a proven and effective method for increasing the availability of necessary, expensive, and unanticipated services.
There are numerous reasons why legal insurance is an essential element of any overall effort to achieve the goal of equal access to legal services. The most obvious is that those who need such assistance are people of low to middle incomes, people in jobs that pay low wages and offer few if any benefits.
Of course, a legal insurance provider could saturate its product in the group insurance market and still leave an entire class of citizens uncovered. If a person working for the minimum wage at a fast food restaurant wants to obtain medical or legal insurance, when their employer provides neither, they will have no option other than individual plans.
However, there is an inherent problem with attempting to market legal insurance to persons without the financial means to acquire insurance benefits. In cases such as these, where a citizen is below the poverty line, government programs designed to provide health benefits to these citizens would act as a useful guide for designing state-funded programs to subsidize legal insurance.
D. Plan Benefits
Prepaid legal service plans are structured to offer a variety of legal services. Most legal insurance providers offer a number of plans, designed to provide choices to the consumer. The trend in legal insurance has not been “one size fits all,” but rather there are plan packages with varying costs and options. Most base plans start around fifteen dollars per month.[33] For example, the base package offered by Pre-Paid Legal “provide[s] coverage for a broad range of preventative and litigation-related legal expenses.”[34] Pre-Paid Legal divides its most popular plan, the “Family Legal Plan,” into five categories with prices ranging from $14.95 to $25.00, depending on the options selected.[35]
First, Preventative Legal Services: This title includes coverage for unlimited phone consultations with an attorney via a toll-free telephone number for personal or business related legal matters.[36]
Second, Motor Vehicle Legal Services: This title includes “immediate” consultation with an attorney upon issuance of a traffic ticket to the insured, legal representation for moving traffic violations and for certain motor vehicle-related criminal charges, as well as 2.5 hours of legal assistance for driver’s license matters and the collection of automobile related personal injury or property damage collection assistance.[37]
Third, Trial Defense Services: This title includes coverage for seventy-five attorney hours of legal defense for the member or the member’s spouse in the event that they are faced with a civil lawsuit or job-related criminal charge. Additional (in excess of the seventy-five hours provided at no cost) pre-trial and trial services are discounted twenty-five percent. As an added incentive, the longer a plan participant is enrolled in a plan, the more hours of legal services they accrue. For example, a five-year member will have three hundred and thirty-five total hours[38] of attorney time as opposed to a first year member who will have access to only seventy-five.[39]
Fourth, IRS Audit and Legal Services: This title includes fifty attorney hours. This includes one hour for consultation and advice should the customer receive notice of an audit from the IRS. If the audit process lasts longer than 30 days, two and one-half hours of attorney consultation time is provided. The remaining forty-six and one-half hours of attorney time may be used for trial representation.[40]
Fifth, Other Legal Services: This title includes a provision that the plan attorney will assist the member with all legal issues not covered by the plan at a twenty-five percent discount from the attorney’s standard billable rate. This discount extends a twenty-five percent discount from the plan attorney’s standard corporate rate to any business related legal expenses if the member owns his or her own business.
E. The Role of the Attorney
Due to the unique structure of legal insurance plans (where the service is provided to the consumer through an intermediary who collects premium and refers clients), it would not be necessary for the Iowa Legislature (by statute) or the Iowa Supreme Court (by revising the Iowa Code of Professional Responsibility for Lawyers) to completely revamp regulations regarding the specific conduct of attorneys. The general laws pertaining to insurance, already in place, would be better suited to manage legal insurance providers and their methods of advertising, etc.[41]
The role that the attorney plays as a participant in a legal insurance program is limited, at least in the sense that the attorney can concentrate on what he or she does best, practicing law. Prepaid plans as they exist today generally involve a simple contract for service between the plan provider and the attorney.[42] However, attorneys can take on administrative duties within the legal insurance providers’ network. In order to simplify the regulation of pre-paid legal services in Iowa, it would be advisable for legal insurance regulations to restrict attorneys contracted to provide legal services from having any involvement in the administration of a legal insurance business. This would avoid numerous conflicts of interest that could arise for attorneys, due to their dual interest in satisfying an employer and the duty to zealously represent clients.
F. Marketing of Plans
The marketing of prepaid legal services directly to individuals, not thorough an employer, union or other organization, has been less successful than marketing to organizations.[43] One practical explanation for this is that when a business with multiple employees contracts for a group plan, the insurance provider acquires numerous customers in a single transaction, while it takes several individual sales transactions to acquire a similar number of consumers.
However, this illustration appears to be at odds with the experience of providers of other types of insurance. For example, automobile insurance is primarily sold directly to the end user. Health insurance is also frequently sold directly to the insurance consumer without an intermediary. Why then has legal insurance experienced such difficulty in marketing directly to the ultimate consumer?
One problem is that the members of the potential market for individual legal insurance are often unaware of the likelihood that they will become involved in litigation,[44] and further they are unlikely to spend money on monthly premiums absent a compelling case. Effective marketing is essential to the success of any legal insurance product. “Prepaid plans do not sell themselves. They must be sold.”[45] This is another reason why the state legislature should either adopt the less restrictive standards of the American Bar Association’s Model Rules of Professional Conduct,[46] or pass laws to loosen restrictions on attorney advertising.
III.
The Status of Prepaid Legal Services in the State of Iowa
Recently the Iowa Legislature repealed a statute[47] intended to increase the availability and stability of legal insurance (or prepaid legal services) in Iowa.[48] The repealed act read, in part:
Title of Act: An Act relating to legal expense insurance by regulating the sale of contracts providing reimbursement for legal expenses in consideration of a specified payment for a period of time, establishing a premium tax, and providing penalties.
This chapter shall be liberally interpreted in order to do the following:
1. Encourage the development of effective and economically sound methods for
making legal services more readily available.
2. Protect the interests of the users of legal services and of the public of
this state with a minimum of restriction on experimentation with new forms of
organization, administration, or benefits.
3. Place the risk inherent in experimentation by new plans on promoters rather than on the consumers.
4. Permit and encourage the provision of legal services through persons other than professional insurers subject to practical and reasonable financial and regulatory requirements.
5. Permit and encourage fair and effective competition among the various systems of financing legal services.
6. Maintain a high level of quality and conformity to professional standards in the performance of legal services.[49]
Given the clear imbalance of access to legal services in America between high income and low to middle income citizens, coupled with the apparent ability of prepaid legal services to improve access to legal representation for this segment of the population, the decision of the Iowa Legislature, repealing chapter 523F (supporting prepaid legal services), is perplexing. While chapter 523F may (arguably) have fallen short of its goal to significantly increase the availability of prepaid legal services in Iowa, the merit in this objective has not diminished.[50] According to the American Bar Association, "Americans have come to view legal assistance as a necessity. The best way for the majority of Americans to be able to assure themselves of legal assistance when they need it... is through a prepaid legal plan." [51]
The need for equal justice for all economic classes has not decreased since the chapter was adopted. In fact, “while the use of legal services [has] increased for all income groups, it grew at the highest rate among the moderate income segment of the population.”[52] Therefore, instead of repealing the chapter, the legislature should have amended it. The legislature’s decision, if unchanged, may inadvertently perpetuate this inequality, whose essence was captured by George Orwell when he wrote, “all…are equal but some are more equal than others.”[53]
If the original
intent of the Iowa Legislature in passing Chapter 523F was to “[e]ncourage the
development of effective and economically sound methods for making legal
services more readily available,”[54]
as the statute states, the legislature should considerer whether this goal is
legitimate (which this paper argues it is) and whether this goal has been
met. This goal has most certainly not
been met.
Chapter 523F was a
step in the right direction, but in and of itself it did not and could not have
been expected to do all of the work to make quality affordable legal services
more accessible to the public.
Entrepreneurs and insurance providers must do this, for it is not the
responsibility of the state to manage private industry, the incentive of
profitability is motivation enough.
However, without an
alternate plan to replace 523F, the repeal of the chapter is a step in the
wrong direction, which may have an unfortunate impact. In the absence of Chapter 523F, which
provided for regulation of the legal insurance industry, there are a number of
important issues left unanswered. What
will become of the Iowans who enroll in prepaid legal service plans before the
repeal becomes effective on January 1, 2002?
Will their plans be terminated?
Will the industry be unregulated in Iowa or will legal insurance
providers be unable to continue their service within the state? These are all legitimate and unanswered
concerns.
Leaving the legal
insurance industry without regulation within the state is unacceptable and
leaving citizens who rely on legal insurance within the state unprotected is
equally unacceptable. Surely the
legislature did not intend to make enrollment in legal insurance programs more
confusing and difficult for low to middle income citizens. In order to reestablish the requirements for
operating a legal insurance business within the state, and to continue to
protect legal insurance consumers, the Iowa Legislature should readopt Chapter
523F or draft a comparable chapter which will satisfy the original intent
behind the chapter as well as the concerns which led to its deletion.
IV. Concluding Remarks
It is apparent that prepaid legal services have many advantages that could, if properly regulated, provide solutions to many of the inequities built into the current system of American jurisprudence. These solutions, such as the ability to level the playing field between wealthy and impoverished potential litigants and to provide competent legal counsel to a greater percentage of criminal defendants, would be as beneficial to citizens of the State of Iowa as it is to Americans in general. In light of this fact, the recent law passed by the Iowa Legislature, repealing Chapter 523F of the Iowa Code (designed to promote the availability and stability of prepaid legal services in the state), was ill advised. Accordingly, the Iowa Legislature should reconsider its vote repealing Chapter 523F of the Code of Iowa.