1. Why should I purchase malpractice or professional liability insurance?
Approximately 6% of all attorneys in the U.S. are likely to face an allegation of professional liability in any given year. Claims activity against attorneys has steadily increased in each of the past two decades, with no reason to believe the pattern will end. Lawyers in all parts of the country, all size firms, and all areas of practice are at risk every year. While not usually required by most bar associations, malpractice insurance is widely recommended for all practitioners. Carrying professional liability insurance is the responsible thing for lawyers to do to protect their clients in the event a mistake is made that causes damage. It also protects the financial assets of the firm. Even if you believe your clients would never sue you, you want to be covered for the costs of defending third-party claims. And while you may not intend to ever make a mistake, many non-meritorious or frivolous claims are filed for which defense can be costly and time consuming to defend. You may also be liable for the acts of other attorneys and/or staff. Most carriers exclude criminal and fraudulent acts, however, coverage is provided for innocent partners of the wrongdoers.
2. What risks does lawyers’ professional liability insurance typically cover?
Legal malpractice policies are usually designed to provide coverage for claims that arise from “wrongful acts” committed in the rendering of legal services (sometimes called “professional services”) in your capacity as a lawyer and generally provide both indemnification coverage and claims expense coverage, subject to specified deductibles and endorsements. In general, covered acts usually also include those committed in a variety of ancillary services regularly provided by lawyers as a natural offshoot of their regular practices, such as:
- Services as a notary public
- Services as a title agent and or title agency
- Acting as a trustee or executor of an estate in connection with representation of a client
- Acting as an officer, director, or member of a legal professional association
Broader coverage often can be added through amendment of various endorsements depending upon the lawyer’s circumstances and the carrier’s interest and capacity.
3. What is a claims made policy?
Most legal malpractice insurance policies are “claims-made” policies. A Claims-made policy differs from an Occurrence policy in that it only covers claims that are reported to the insurance carrier while the policy is in force. A Claims-made policy will respond to claims that arise out of incidents only if they occur subsequent to a prior acts date. The prior acts date may be the date of policy inception, or may be retroactive to the first day of practice or to your first Claims-made policy. An Occurrence policy covers incidents that occur during the policy year, regardless of when the actual claim is reported to the insurance carrier. When you purchase your Claims-made policy with full prior acts coverage, you are covered if a claim comes in during the policy year regardless of when the act which gave rise to the claim occurred. For instance, if you wrote a will two years ago and made an error which is not discovered until the will is probated — rather than having to determine where your coverage was two years ago, you may rely on your current policy to respond to the claim.
4. What is Prior Acts coverage?
Sometimes referred to as “retroactive” or “career” coverage, prior acts coverage is decided upon at the time you purchase a professional liability policy. It determines how far back an insurance company will cover your acts for any future claims that arise while the policy is in force. The prior acts date should be the date you began continuous Claims-made professional liability insurance coverage. If there have been gaps in coverage, a company may not agree to go back prior to such gaps.
5. What does Prior Acts coverage cost?
Your first Claims-made policy will start out at a lower rate since there would be no prior acts to cover. As you see more clients and your exposure increases, so does the premium — for the next several years until you are at a “mature” rate level. If an attorney who is changing from one Claims-made policy to another wants to cover any future claims arising from previous legal work, he or she would purchase prior acts coverage at a more mature rate level, and a higher premium, than a first year attorney. For example, if he or she wants prior acts coverage for nine years of previous exposure, they would be at a mature rate level and pay a premium of approximately twice that of a first year rate level. If there is no prior acts date shown on a Claims-made policy, it means you have “full prior acts” coverage.
6. What does defense inside the limits mean?
Some policies provide that amounts spent on defense will decrease the limits available to pay any settlement or verdict. Therefore, when deciding which limits to purchase with this type of policy, you need to consider not only the amount of any potential verdict on the files in your office, but also what defense costs might be incurred in order to arrive at the appropriate policy limits for your practice. If you are changing from a policy that offers limits in addition to or outside of the limits of liability to a policy with “defense within limits,” you should consider buying higher limits.
7. What are some of the factors that determine my premium?
These factors vary by individual insurance carrier. Generally, insurers start out with a base rate influenced by state-by-state experience. That rate is then modified by various factors reflecting the individual characteristics of the specific law firm, including areas of practice, past claims experience, risk management practices, other firm management and infrastructure factors, and the number of attorneys to be covered. The rate is further influenced by the limits and deductibles chosen and the breadth of coverage requested, including prior acts coverage, extended reporting periods, and tail coverage.
Another factor that influences premium price is the length of time covered attorneys have been in practice, or with the insured firm. The exposure that an individual attorney presents to the insurance carrier in any given year, increases for the first several years that an attorney practices as the number of potential plaintiffs increases with every matter the lawyer handles. After a certain point, the risk flattens out as statutes of limitations and other forces begin to lower the risk that past activities will give rise to claims. To properly underwrite against these varying levels of exposure, professional liability insurers typically use what is called “step rating” as part of the premium calculation. Policies that cover less than one year of exposure (newly admitted attorneys, for instance) are rated at the lowest step rate. In subsequent years the rate is automatically increased in set “steps” until exposure reaches maturity.
8. What amount of limits should I carry?
You will want to choose the limits of coverage that best suit the work you do. One of the best ways to determine this figure is to review the files in your office, both open files and recently closed files. Determine the maximum value of the file, i.e., if the work is transactional, determine the amount of the transaction, and then add in items such as potential interest. If the case is a personal injury matter, evaluate the maximum damages. Remember to consider all of the lawyers in the firm in order to choose the appropriate limits as all lawyers in the firm share the limits on the policy. Keep in mind that you will also have an “aggregate limit” of coverage which is the maximum amount available to pay all claims which arise within that policy year. One claim could exhaust not only your per claim limit, but also your aggregate limit for that policy year, leaving you at risk for personal exposure should other claims arise during the same policy year.
9. How do I determine an appropriate deductible to carry?
You simply need to decide what you can afford to pay in the event that a claim is made against you. Generally, the difference in premium for a lower deductible is not significant. Don’t buy a higher deductible assuming that you won’t have a claim — even a frivolous claim can generate defense costs. You should also inquire about a loss-only deductible (also referred to as First Dollar Defense) which will apply only if your defense is unsuccessful and a payment is made to the claimant.