Camila Azevedo
BARRILERO SPS
For some time, the scope and extent of a lawyer’s civil liability for acts or omissions committed in the course of professional practice and capable of causing harm to a client — or, more exceptionally, to third parties with whom the lawyer interacts in the context of that professional activity — has been the subject of debate.
The discussion has focused primarily on breaches of duties of diligence, competence, information and proper management of the retainer, particularly the failure to comply with procedural deadlines, the omission of acts essential to the protection of the rights and interests entrusted to the lawyer, and the extensively debated issue of loss of a procedural opportunity. These are generally situations in which the lawyer, without intending to cause the harmful outcome, breaches or improperly performs obligations inherent in the professional engagement.
At the same time, the scope of lawyers’ professional indemnity insurance has been widely discussed, particularly the collective insurance policy taken out by the Portuguese Bar Association (Ordem dos Advogados). Among other issues, debate has focused on its classification as compulsory insurance, the validity and enforceability of claims-made clauses, the temporal scope of cover, and exclusions relating to facts or circumstances previously known to the insured.
More recently, however, the courts have been confronted with a significant increase in a different type of situation from those that have traditionally given rise to professional liability. These cases no longer concern simply a lawyer who allows a deadline to expire, fails to commence proceedings or provides incorrect or inaccurate information. Rather, they involve situations in which the professional, taking advantage of the trust inherent in their position and the asymmetry of knowledge that exists in the relationship with the client, deliberately engages in conduct that may amount to criminal offences: forging documents, fabricating judicial or administrative proceedings, claiming non-existent fees, costs or charges, providing false information about proceedings that were never commenced, or misappropriating sums entrusted to them by the client.
This raises a question at the intersection of civil liability, criminal law and insurance law: can compulsory professional indemnity insurance cover the financial consequences of intentional and criminally relevant conduct by a lawyer?
The answer is far from straightforward or undisputed.
First and foremost, the fact that someone is a lawyer does not mean that every act they perform constitutes a professional act. Professional indemnity insurance is not a general insurance policy covering the lawyer as a person; it covers only risks that are functionally connected with the exercise of the insured professional activity.
It is true that the core activities of legal practice include legal representation and legal advice. However, professional practice also encompasses ancillary or instrumental activities, including the receipt of funds on account, the management of sums entrusted by clients, the payment of taxes, court fees, costs or other charges, and the provision of information regarding the progress of matters entrusted to the lawyer.
It is precisely this broader functional dimension that makes cases involving fraud particularly difficult to classify.
A lawyer who receives funds on account for the purpose of commencing legal proceedings is clearly acting within the scope of their professional activity. But can the same be said where the lawyer fraudulently fabricates the existence of such proceedings, claims fictitious legal costs or creates non-existent procedural steps for the purpose of enriching themselves at the client’s expense?
At first sight, it could be argued that the practice of law has merely served as a pretext and that the lawyer’s professional status has been used as an instrument for committing an independent financial fraud. From this perspective, the case would not involve the defective performance of a professional engagement, but rather criminal conduct unrelated to the insured professional risk.
The opposing argument, however, is undoubtedly significant. The funds are handed over precisely because a lawyer-client relationship exists. It is the trust placed in the professional, the technical authority associated with their role and the natural asymmetry of knowledge that make the financial disposition possible. Although the acts invoked are false, they are presented as legal or instrumental acts carried out in connection with the professional engagement. The fraud does not arise independently of the professional relationship; it makes use of that relationship, is structured around it and produces its effects within it.
The decisive criterion should therefore not be limited either to the professional status of the person responsible or to the fact that they came into contact with the injured party in the context of a professional engagement. What is truly relevant is whether the harmful conduct is functionally connected with the practice of law, or whether the professional relationship merely constitutes an artificially constructed setting for the misappropriation of assets with no genuine connection to the provision of legal services.
Furthermore, the criminal nature of the conduct is not, in itself, sufficient to exclude insurance coverage. Article 14(1)(a) of the Portuguese Legal Framework for Insurance Contracts (Regime Jurídico do Contrato de Seguro), approved by Decree-Law No. 72/2008 of 16 April (the RJCS), prohibits insurance contracts covering criminal, administrative punitive or disciplinary liability. The reason is clear: the sanction must retain its personal nature and preventive function. A lawyer cannot transfer to the insurer a criminal penalty, fine, administrative sanction or disciplinary penalty imposed upon them.
However, paragraph 2 of the same provision expressly excludes from this prohibition any civil liability that may arise from the offence. The distinction is fundamental: what is insured is not the offence itself or the sanction resulting from it, but rather the potential civil obligation to compensate the victim for the damage caused.
This distinction is particularly important in the context of compulsory insurance. Under Article 148(2) of the RJCS, unless otherwise provided by law or regulation, compulsory insurance covers intentional acts or omissions by the insured. The protection of the injured party may therefore justify the intervention of the insurer, without prejudice to the insurer’s right of recourse against the insured who intentionally caused the damage, under the terms provided for in Article 144 of the same legal regime.
The system seeks to reconcile two competing interests: preventing the injured party from being left without protection precisely where the professional’s conduct is most blameworthy, while ensuring that insurance does not become a mechanism allowing the perpetrator to neutralise the financial consequences of their wrongdoing.
In practice, however, this balance is fragile. The insurer’s right of recourse is legally coherent but may prove economically ineffective where the lawyer has dissipated the funds received, concealed their assets, ceased practising or become insolvent. In such cases, the insurer compensates the injured party but may find it difficult to recover the amounts paid from the insured.
This highlights the need to classify precisely the nature of the payment sought from the insurer. Under Article 137 of the RJCS, liability insurance covers the risk that an obligation to compensate third parties may arise in the insured’s estate. However, an obligation to compensate is not necessarily the same as an obligation to make restitution.
If a lawyer allows a right to lapse and, as a result, the client suffers loss, the payment due is compensatory in nature: it is intended to repair the damage caused by the lawyer’s professional conduct. If, on the other hand, the lawyer receives a sum of money for a specific purpose, fails to carry out the assignment and retains the amount received without lawful justification, the resulting obligation may be restitutory in nature: its purpose is to deprive the lawyer of a financial benefit that they should never have retained.
The distinction is subtle but decisive. From the client’s economic perspective, both situations result in a financial loss. Legally, however, the function of the payment is different: in one case, it compensates for damage; in the other, it restores an improperly obtained benefit.
It is true that case law has increasingly emphasised the protective function of compulsory insurance and the need to avoid leaving an injured party without redress in the face of particularly blameworthy professional conduct. Nevertheless, some decisions have recognised the significance of this distinction, particularly where, alongside claims for compensation based on loss of opportunity or breach of the professional engagement, the claimant also seeks the repayment of legal fees, funds paid on account or sums provided for actions that were never carried out.
In such cases, the solution rests on a simple, though legally significant, principle: liability insurance should not serve to restore to the client money that was paid directly into the insured’s estate and from which the insured obtained a personal benefit. Civil liability cover should not be confused with a guarantee for the restitution of the benefit obtained by the perpetrator of the wrongful act.
The appropriate approach requires a substantive analysis of the function of the payment claimed. It is necessary to determine whether the claimant seeks to have the insurer compensate for independent losses resulting from the intentional conduct — such as additional expenses, loss of rights, financial charges, loss of opportunities or non-material damage — or whether the insurer is instead being asked to take the lawyer’s place in returning the financial benefit that the lawyer obtained directly and incorporated into their own assets.
The intentional or criminal nature of the conduct should not automatically exclude coverage, as this would undermine the protective purpose of compulsory insurance. At the same time, however, it does not appear acceptable simply to transfer to the insurer the obligation to return what constitutes the direct financial proceeds of the wrongful act.
The real challenge, therefore, lies in finding an appropriate balance: ensuring that a client who has suffered harm is not left unprotected in the face of intentional misconduct by a legal professional, while preventing the lawyer from transferring to the insurer the obligation to restore assets that the lawyer has unlawfully appropriated.
