Issue: August, 2009
Author: Mark Bassingthwaighte, Esq.
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What You Need to Know Before You Shop for Legal Malpractice Insurance
I have yet to read an insurance policy that I would consider a great read, so let’s admit it—insurance can be a rather boring topic for most folks. There’s nothing necessarily wrong with this, as long as your policy covers you for what you think it should when you need it to. But what happens when that isn’t the case? What happens when there is a provision in your policy that excludes coverage for something that you assumed was covered? This was a problem for many post-Hurricane Katrina. A number of homeowners thought they had coverage for damage resulting from a hurricane but failed to understand that the flooding that hurricanes often bring was excluded from coverage. For me, this represents the classic problem of running with assumptions.
I am not trying to convince you to run to your insurance file and read all your policies cover to cover. Trust me; that will put all but the heartiest of souls to sleep. I am, however, hoping to have you appreciate that running with assumptions about what your malpractice policy covers is a risky play, because even in malpractice settings, sometimes “hurricanes” happen. With this in mind I have listed a number of pointers to assist you in the purchase of a legal malpractice insurance policy shared with the intent of removing assumptions.
All legal malpractice insurance policies are claims-made products, and “claims-made” is one of those terms that is frequently misunderstood. Under a claims-made policy, an attorney is afforded coverage for claims made and reported to the insurance company while a policy is in force. Further, and this is the important piece, the act, error or omission upon which the claim is based had to occur after the policy’s retroactive date. The retroactive date is usually the inception date of the first claims-made policy purchased as long as there has not been a gap in coverage. Malpractice policies provide coverage for one year, and in order for an attorney to have coverage in force at all times, a policy must be purchased (or renewed) every year. Finally, an attorney can only purchase or renew malpractice coverage while in active practice.
Sometimes an attorney or firm will fail to understand the significance of the retroactive date (and what we’re really talking about here is prior acts), and purchase a policy that makes the retroactive coverage date and the policy inception date the same date solely to save significant premium dollars. Unfortunately, this savings brings with it a significant gap in coverage. The premium is less in this situation because the policy is not going to provide coverage for any prior acts. In short, a business decision was made to start fresh because the attorney or firm did not understand that premiums naturally increase over time. The reason for this is the longer one is in practice, the greater the risk as the policy is insuring a longer and longer period of time under prior acts coverage. The very nature of prior acts coverage dictates that premiums should increase over time because the covered attorney has ever increasing exposure. In other words, more and more work is covered with each additional year one is in practice. Now, please note that such increases do not continue indefinitely. In general, companies tend to establish rates that reflect the differences in risk between an attorney who purchases his first policy and one who has been in practice for a period of years and has fully matured in terms of risk. Rates rise for a period of years and then tend to level out as attorneys finally reach a fully mature risk rating.
- Being thorough and neat counts. Quite frankly a sloppy or incomplete application says something about a firm’s attention to detail. One of the benefits of providing thorough answers in the insurance application comes from taking advantage of the opportunity to explain all the loss prevention measures a firm has taken. Insurance carriers want to know the frequency with which a firm uses letters and/or other writings to confirm the existence, non-existence, or end of an attorney-client relationship. Effective calendaring and docket control systems are just as important. In fact, firms that handle a significant amount of litigation should maintain three independent calendar/docket control systems. The presence of a rules-based calendaring system would be even better. If such systems are in place, report this in some detail in your application. If the firm has a claims history, carriers will also want to know what steps the firm has taken to prevent the reoccurrence of a claim similar to the one or ones reported on the claims supplement. Glib responses such as “that attorney is no longer working here” are not convincing.
- Don’t submit an application at the last minute. When a firm has had its renewal application for 90 days but ends up not returning it until just before the renewal deadline, a concern about how the firm’s lawyers treat critical deadlines associated with client files is raised.
- Be truthful and never withhold information. Dishonesty or withholding damaging information at the application stage can result in the carrier voiding the policy at a later date leaving you without coverage. Yes, carriers can and will make this decision when appropriate and necessary.
- Add a cover letter to your application in order to provide details about the image, reputation, and operation of your firm. Try to differentiate your firm from all the others. In short, explain why an underwriter should feel comfortable insuring the risk that your firm represents. This kind of information can positively affect the premium that will be quoted.
Before purchasing a policy, make certain that you understand just what it is you are about to purchase. Significant price variances between two seemingly similar policies are often due to policy differences that are not always readily apparent. Here are key features to look for and make certain that you understand.
- Policy Limits
This is arguably the most important part of any malpractice policy. Identify the per claim and the aggregate limits which are normally expressed in a per claim/aggregate manner. For example, policy limits may be expressed as $250,000/$500,000. This would mean that the covered attorney (or firm) would have $250,000 in indemnity coverage for each claim filed in a given policy period and up to a total of $500,000 per given policy period for all reported claims.
- Defense Costs
Defense costs can be deceiving. Make certain that you understand just what you are getting for the quoted price because lower quotes are often a signal that defense costs are inside the limits of liability. Policies such as these are often referred to as self-liquidating or cannibalizing polices. In short, if defense costs are inside policy limits, then each dollar spent on defending a claim will reduce what will be available to pay any settlement or judgment by a dollar. The end result is that a policy with defense costs inside limits really means that you are purchasing a policy that will often result in drastically reduced amounts of available indemnity coverage. In other words, a $250,000/$500,000 policy with defense costs inside the limits really isn’t what it first appears to be.
A better alternative is a policy that provides for a claims expense allowance. This basically means that defense costs are outside of policy limits. The claims expense allowance will have set limits and policy terms will vary, but significant defense costs will be paid by the carrier before the policy limits begin to self-liquidate. These policies will be more expensive because additional coverage comes with the policy. Here, a policy with $250,000/$500,000 limits is just what it appears to be in all but the most costly of claims in terms of defense costs.
Most policies contain deductible clauses, and the specific terms can vary greatly. Make certain that you understand when and why you may have to pay your deductible because policies can be canceled or nonrenewed for nonpayment of the deductible. Look for policies that provide for “first dollar defense,” otherwise known as loss only deductibles, which means that the obligation to pay the deductible only arises if and when a settlement is reached or an adverse judgment is entered. Given that a majority of claims with defense costs still resolve without a loss payout, this can be an attractive benefit. Other options worth looking for might include reduced deductibles for claims resolved through mediation and a limit on the number of deductibles that must be paid in a given policy period.
- Specific Policy Features and Coverage Concerns
It is extremely important that you know just what is and is not covered under your policy. While there will be differences in coverage definitions, most policies provide coverage for your services as an attorney, mediator, arbitrator, trustee, executor, and notary public. Note, however, that coverage is often conditioned upon the service being provided to clients of the named insured which is usually the firm. For example, this would mean that coverage is excluded for services that an attorney performed while moonlighting.
Does the policy provide coverage for work done on behalf of the firm by former attorneys? This is important to know in order to determine whether it’s possible and under what circumstances departing attorneys can purchase an extended reporting endorsement (a tail) to protect them from claims arising as a result of prior acts while at their soon to be former firm. Sometimes an extended reporting endorsement may not even be called for.
Does the policy provide directors and officers coverage for firm attorneys who sit on corporate boards? In the for-profit arena, the answer to this question is usually no. However, limited coverage may be extended to attorneys sitting on not-for-profit boards. Look for this benefit if firm attorneys have a desire to give back to the community in this fashion.
A perk sometimes provided to solo attorneys is a free extended reporting endorsement in the event of death, disability, or full and permanent retirement if the solo attorney was continuously insured with the carrier for a given number of years prior to death, disability, or retirement. This benefit can result in significant savings and is worth factoring in when making purchasing decisions near retirement.
Is coverage available for disciplinary proceedings? Given the high number of disciplinary complaints made each year, don’t run with assumptions. Many attorneys are surprised to learn that policies generally exclude coverage for disciplinary matters. That said, such coverage may be available and usually the cost is quite reasonable. If this is a concern, ask for it.
Is there innocent-insured coverage? Sometimes there is a bad actor within a firm and this individual commits a crime or fraud. While policies exclude coverage for such acts as they relate to the person who committed the act, claims can and will arise and coverage may be available for the innocent members of the firm if the policy so provides. Look for this coverage, as theft of client funds and sex with clients are just two examples of a number of problems that occur with greater frequency than many are aware.
Understand the policy’s consent to settle clause. Is it what is commonly referred to as a “hammer clause?” Policy language typically requires that an insurer seek an insured's approval prior to settling a claim for a specific amount. If the insured does not approve the recommended figure, however, a hammer clause will state that the insurer will not be liable for any additional monies required to settle the claim or for the defense costs that accrue from the point after the settlement recommendation is made by the insurer. In other words, such clauses tend to force an insured to accept the carrier’s recommendation. Look for policies that have no hammer clause thereby allowing meaningful participation in settlement decisions. A policy that allows for meaningful participation in the selection of mutually acceptable defense counsel would be similarly advantageous.
Not only should one be aware of what is covered, it is equally important to know what isn’t covered. Again, policies differ but most exclude dishonest, fraudulent, malicious, and criminal acts. In addition, workers’ comp, bodily injury, property damage, sexual harassment, and discrimination claims are excluded.
Services provided to family members, disciplinary matters, and acts or omissions of an attorney that occurred while serving as an officer or director of a business not owned or controlled by the firm are also normally excluded. Note, however, that coverage for these situations may be available under enhanced policies or through the payment of additional premium.
This list is not meant to be a comprehensive list of exclusions. Every policy will have its own unique list of exclusions so it is important to carefully read and understand just what is and is not covered prior to purchasing your policy.
- Policy Obligations
Finally, understand your obligations under the policy because failure to follow through with them can easily result in the denial of coverage. Generally, policies require that the insured provide timely notice of all claims and potential claims. Understand what triggers your obligation to report. The obligation to report is often not limited to when a past client has actually filed suit. As an example, blowing a statute of limitations date, even absent client awareness, typically triggers the obligation to report. Other things worth looking for include the following: Is there a requirement that you, as the insured, assist and cooperate with the carrier and defense counsel in defending claims? Are there other reporting obligations such as attorney arrivals and departures? Knowing your obligations up front may prevent a very serious problem from ever arising down the road.
Mark Bassingthwaighte, Esq. is the Risk Manager with Attorneys Liability Protection Society, Inc., a Risk Retention Group, in Missoula, Montana. Currently Mr. Bassingthwaighte’s responsibilities include developing and delivering new risk management and CLE products and services, risk management consulting, law firm risk evaluations, and publishing the company’s e-newsletter, the ALPS Risk Management Report. In his tenure with the company, Mr. Bassingthwaighte has conducted over 850 law firm risk management assessment visits, presented numerous continuing legal education seminars throughout the United States and written extensively on risk management and technology.
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