Do’s, Dont’s and Nuances You May Not Be Aware of
Whether you are a solo practitioner or managing partner at a law firm, you’ve made the wise decision to purchase lawyers’ professional liability (LPL) insurance, often referred to as malpractice insurance, to protect your firm from suits arising from your professional services as an attorney.
What’s next? The next step is to secure a professional liability insurance application and begin the arduous task of completing the form. As you begin completing the application you ask yourself, “I’m an attorney, I don’t understand why this particular question is being asked?” “Do I need to answer it?”
The answer in short is, YES. You need to answer in the most accurate way possible. The malpractice insurance application is most often drafted and written by insurance underwriters. Insurance underwriters evaluate the risk and exposures of potential insureds. They decide how much coverage the client should receive, how much they should pay for it, or whether to even accept the risk and insure them.
Every question on the application is designed to help the underwriter with the risk evaluation. The answers you give on the application help determine the premium. So it’s important these answers are truthful, accurate and to the best of your knowledge. You should err on the side of disclosing too much rather than too little.
After tackling the basic information such as firm name and address, you will come to the areas of practice grid. This grid will list the majority of legal areas of practice into different groups. Not every grid is the same, so make sure you really take the time to focus on the different areas of law. The grid asks the applicant firm for a breakdown of its overall practice into the percentages of specific areas of law being practiced.
You might not have thought about the affect these percentages might have on the firm’s premium, but every area of practice is given a risk factor that is put into the formula to calculate the premium. Certain areas of practice are given higher risk factors than others. For instance, plaintiff personal injury, intellectual property, securities law, environmental law and more recently real estate and firms handling larger estates and trusts are rated higher. Meanwhile, criminal law, family law, insurance defense and immigration are perceived as safer and less risky.
Commonly you will see an instruction to base your percentages on hours worked or gross revenue in that particular area of law. Here’s an important tip: you might assume that having small percentages in several, less risky, areas of practice might keep the premium down. This is considered “dabbling” by an underwriter and will often have the unintended consequence of increasing the premiums.
The reason is simple. Have you ever heard someone use the phrase jack-of-all-trades, master of none? An underwriter applies this to a law firm. If the firm does not concentrate on a few particular areas of law, then its attorneys might lack the expertise or specialization in any one particular area of law.
This lack of focus and knowledge can often be attributed to the firm trying to handle too many areas and aspects of the law. In-turn, the perception is that there is a likelihood of increasing the chances the firm will make an error in its representation. Forty-seven percent of the most common claims come from mistakes, like misunderstanding the law and procedural errors. The key here is to make sure to complete the grid and focus only on those areas of practice the firm is actually either billing hours in or generating revenues.
Keeping with the theme of minimizing risk, the next set of important questions on the application deal with firm’s internal systems, or procedures, which help to avoid a claim. These questions are very important to an underwriter’s evaluation of the firm’s risk. They determine how the firm is organized and how much attention to detail is present. They want to make sure nothing falls through the cracks. These procedures include:
- Dual calendars
- More than one person checking the systems regularly
- How you check for conflicts before taking on a matter
- The use of formal agreements, such as engagement and disengagement letters.
The more information you provide the underwriter, the better the risk. Often the underwriter has the ability to add credit, which help reduce the premium, if the firm has certain controls in place that qualify the firm for these credits.
All malpractice insurance applications will ask, in some fashion, “Does the firm file suit for fees against their own clients?” This is a very important evaluation for the underwriter. Suing clients for fees should be avoided, if at all possible. This is often an automatic decline by the underwriter if the firm answers yes, or has a history of suing for fees. In some cases, the underwriter might accept the risk, but increase the premium or the insurance carrier might endorse the policy to exclude any malpractice claim that arises out of a fee suit.
Most, if not all, applications for new LPL coverage will request a five year claims history. This generally means a claim reported more than five years before does not have to be included. The measuring point is the date of reporting not the date the matter was closed or settled.
If you have had a claim in the last five years, you will have to answer “YES” and complete a claim supplement. But, this represents a great opportunity to advocate on behalf of the firm. This is also why having a specialty insurance broker, one who deals specifically with LPL and professional liability insurance, can make a huge difference.
The underwriter will want to know about the facts of the underlying claim and what remedial steps the firm has taken to make sure a similar claim does not arise. Make sure you take the time to fully explain the matter and include any facts that might mitigate the firm’s liability or make it unlikely the claimant will succeed. If the claim has already closed and money was paid out to settle or even to just defend the matter, be certain to explain what the firm has done to avoid similar disputes in the future.
Remember: these are just helpful tips for completing a malpractice insurance application. You should always consult with your broker for any additional questions you might have. A specialized LPL broker can make a difference in helping you achieve right product and premium for your firm.