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Who's Minding the Prepaid Legal Service Plans?


Picture your opponent in tennis doubles hitting the ball between you and your partner. You wait for your partner to go for it, he waits for you. Neither of you swings, and your opponent scores by default.

Now picture the California Bar Assn. and the California Insurance Department playing on one side of the net, and the prepaid legal services companies on the other. As bar and insurance officials each wait for the other to swing at the ball, the result has been what one bar official called "a murky little mess."

An estimated 18 million Americans subscribe to prepaid legal service plans either individually or through union or company benefits. An estimated 50 plans operate statewide, generally promising discounted or free, albeit limited, access to legal services.

Because these plans are not contractual obligations between a client and his lawyer, "There is no requirement that [the plans] register with the bar," said a California Bar official who requested anonymity. Rather, she said, the plans fall under Insurance Department regulations.

But James Holmes, senior counsel for the Insurance Department, said many plans operate similarly to auto service warranties, through which a customer pays a dealer in advance to take care of future problems. Because they are thus considered service rather than insurance plans, which entail third party payments, they fall outside Insurance Department regulations. In fact, he said, auto service warranties are "better regulated" than are legal plans.

And yet, largely unaware of this regulatory purgatory, many customers are hooked in by brochures such as the one from the Oklahoma-based Pre-Paid Legal Services Inc.

In bright red ink, the four-page brochure loosely resembles a formal "Notice of Lawsuit," then warns, "Get sued without this protection, and risk losing everything that matters to you and your family." For $25 a month, however, the plan promises: 75 hours of attorney time for personal asset protection; unlimited phone consultations with attorneys on personal and business matters; unlimited review of up to 10-page contracts; the free drawing up of a comprehensive will, with yearly updates; defense of vehicular manslaughter or vehicular homicide; up to 50 hours of attorney time against an IRS audit and a "nationwide network of attorneys" for representation on traffic tickets.

Paul M. League, head of the firm's Beverly Hills office, admitted the brochure "tries to shake people a little." League, who said his company has saved its clients $100 million in attorney fees, calls the benefits "truly amazing. . . . You are getting the best level of legal help. We're talking about top-rated law firms here . . . [with a] rigorous screening process and an ongoing, constant evaluation process. . . . You would not do better privately."

Alec Schwartz, executive director of the Chicago-based American Prepaid Legal Services Institute, the trade association for the nationwide plans, concurred that more than 90% of subscribers are "satisfied" with their plans. The plans are growing at a rate of 10% a year and have been endorsed by most state bar associations, he said.

Which brings us back to California, where the bar association is waiting for the Insurance Department to return the ball. The Insurance Department, in turn, has "long felt that [the state plans] are operating as unlicensed insurers," Holmes said. The department is thus engaging representatives of the plans in "ongoing negotiations," he said, headed by senior co-counsel Michael Bayless.

In a separate phone interview, however, Bayless said the department is engaged in no negotiations because the plans are regulated by the state bar. Told of the bar's position, Bayless said, "That's unbelievable. That's news to me. I've repeatedly referred calls to the bar and never had them come back."

Virtually any individual not convicted of a felony can become a legal services "sales associate" in California, League said with a laugh. Meanwhile, Southland attorney Tom Stolpman, who sits on the California Bar Assn. Committee on Legal Services, insists many plan subscribers are being misled.

Thus, he said, many plans that seemingly provide free services instead offer legal discounts. Otherwise, he said, for $25 a month minus administrative costs, "You're getting one hour of lawyer time a year. The economics of it just don't work." Committee chairman Joseph Bell, who for three years participated in a United Auto Workers-sponsored plan, is equally skeptical of the plans. With the UAW, "The participants usually were retirees who didn't understand the plan's limitations," the Grass Valley attorney said.

Thus, the UAW plan paid him the equivalent of half an hour's work when it took him a few hours to properly draw up a will. The result is that an attorney "gets caught between a rock and a hard place," forced to either cut corners with his clients or work unpaid hours.

"These plans certainly are not the answer for the high costs of litigation in general. . . . But many people seemingly realize only at the last minute that their coverage isn't what they think it is. I've had those experiences, and I finally decided that I no longer want the work," Bell said.

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