DBR Daily Business Review
Guidelines for Selecting Legal Malpractice Insurance
J. Randolph Evans and Shari L. Klevens , Daily Business Review
April 21, 2015
Over the last several years, the regulations applicable to Florida attorneys have expanded significantly. Malpractice lawsuits are also on the rise, making malpractice insurance a critical need for every type of law firm.
Selecting malpractice insurance that adequately balances a law practice’s unique malpractice risk factors against the price of coverage is not a simple undertaking. To find the right fit at the right price, attorneys need to consider many factors other than price.
This article discusses the process for selecting the right policy from the right insurer, which includes: (1) evaluating the risk of a malpractice claim; (2) reviewing and understanding the key policy terms; and (3) selecting the “right” insurer.
Evaluating Malpractice Risk
Although many law practices have things in common with other firms, there are also unique differences that insurers do, and attorneys should, consider in evaluating the risk of a legal malpractice claim.
As the data confirms, some practice areas have a higher frequency of claims (like residential real estate and plaintiffs’ personal injury). Other practices have fewer claims, but with much higher severity (like intellectual property and securities).
Malpractice insurers are mindful of the types of cases attorneys and law firms handle and, as purchasers of insurance, attorneys and law firms should be as well. The American Bar Association Lawyers’ Professional Liability Standing Committee maintains data regarding legal malpractice claims, which law firms can use to see how they stack up on both frequency and severity of claims . Visit their website at: https://www.americanbar.org/groups/lawyers_professional_liability.
Reviewing Policy Terms
Although every term is important, attorneys should pay careful attention to five that can have catastrophic consequences if not carefully analyzed: (1) the policy limits; (2) the scope of coverage; (3) the retroactive dates; (4) innocent partner coverages; and (5) exclusions.
Coverage Limits
Policies typically include both an “aggregate” and a “per claim” limit of liability. If the coverage amounts are too low, the law practice is underinsured and may not have enough coverage when a claim occurs.
The “aggregate limit” of an insurance policy is the maximum an insurer will pay for all malpractice claims during any one policy term. For law firms with a high frequency of claims activity, the aggregate limit can be very important. Attorneys in these practice areas need enough aggregate coverage to pay all claims that may arise.
The “per claim” limit is the maximum amount an insurer will pay for a single claim. For high severity risk firms, the per claim limit may need to be equal or close to the aggregate limit.
In determining the amount of coverage, attorneys should consider the amount at issue in the average matter that the practice handles. For example, a practice principally handling residential real estate closings with assets worth $500,000 should consider that boundary in deciding the per claim policy limit. The amount of coverage should be directly related to the size of the matters that the law firm handles.
The Scope of Coverage
Many law firms engage in a number of law-related activities and services, including notary services, offering of title insurance, or others and should make sure the scope of coverage in the policy includes those activities. The key is to match up the scope of services with the coverage the policy provides.
On the other hand, some policies contain provisions that provide a single limit of liability for both defense and indemnity. These provisions allow defense costs to erode or liquidate the policy limits, reducing the amount available to pay for a settlement or judgment.
While certainly less expensive, policies with eroding defense costs are typically not worth the risk. Because legal malpractice claims inevitably involve experts and other extra expenses, defense costs can increase rapidly, causing the policy limits to be insufficient to settle a claim or pay a judgment.
Retroactive Dates
Three dates are important when it comes to a legal malpractice policy: (1) the retroactive date; (2) the inception date; and (3) the expiration date. Before purchasing insurance, it is important to understand the significance of each.
Typically, legal malpractice policies cover claims made after the inception date and before the expiration date. Policies can also cover claims arising out of acts, errors, or omissions occurring before the inception date but after the retroactive date. Basically, the claim must be made during the term of the policy, but may arise from conduct occurring after the retroactive date. Other than for new attorneys, it is rarely advisable to purchase a policy with a retroactive date that is the same as the inception date, as doing so could cause a gap in coverage between the date when the prior policy expires and the new policy begins.
Innocent Partner Coverage
In some instances, claims arise not from a mistake, but from a rogue partner who engages in conduct that is intentional, dishonest, or illegal. This conduct is typically excluded from malpractice coverage. Nonetheless, plaintiffs may assert a negligent supervision claim against innocent partners, who will need protection from such claims.
Innocent partners can be covered as a result of three other provisions. First, such coverage can be addressed in an innocent partner clause. Second, innocent partners can be excepted from intentional misconduct exclusions. And third, the policy application can be severable, meaning that representations by any one partner will not adversely impact any other partner.
Exclusions
Exclusions vary greatly from one policy form to another. Yet, exclusions take away the very coverage that many law firms need. Thus, one of the most important steps for any law practice is to carefully review and analyze the actual policy exclusions. If a policy includes an exclusion for the type of work performed by the law practice, the practice can ask that it be deleted by an endorsement. If the insurer refuses, attorneys can move on to another insurer, as it makes no sense to purchase a policy that does not insure the work performed by the practice.
Selecting the “Right” Insurer
Once a law practice narrows its policy choices, the next step is to select the “right” insurer. The most readily recognized distinction between insurers is price. But price alone should not be the determining factor in selecting a malpractice policy.
Some insurers specialize in providing coverage much in the same way law firms specialize in practice areas. Other insurers offer unique coverage enhancements and expansions. It is the total package that matters, which requires a comparison of not only price, but also scope of coverage.
In addition, the reputation and financial stability of the insurer is important. Malpractice insurers are rated by two primary companies: Moody’s and A.M. Best. Law practices should compare the most recent ratings received by the insurers it is evaluating and the coverage policies to compare apples to apples.
An insurance company that is nonresponsive to inquiries or is difficult to work with during the policy evaluation process will likely be worse when a claim is made. To avoid that circumstance, consider these issues when comparing insurers.
Finally, if all other things are equal, consider add-ons that some insurers offer. For example, many insurers offer resources to law practices, including free CLE credit, loss prevention newsletters, and toll-free hotlines, which may be particularly valuable to the law practice. Or, the insurer may allow input in the selection of defense counsel.
Be smart. Consider all of these factors before making a final purchase decision.