Category: Professional Liability

Having gaps in your liability coverage is like venturing out into a snowstorm without an overcoat. In either case, it’s tough to succeed without protection. Before purchasing any insurance policy, you need to fully understand the basic structure of the contract in terms of what’s covered and not covered.

In general, liability policies are written as “claims-made” policies; that is, the claim for a wrongful act, error or omission must be made and reported to the carrier while the policy is in effect. This means that should your current insurance policy terminate for any reason, such as the insurer refusing to renew or your firm allowing the policy to lapse while shopping for new coverage, any wrongful acts occurring during this gap between the expiration of the old policy and the start date of the new one will not be covered unless you have either “prior acts coverage” or “extended reporting endorsements.”

The first of these, “prior acts coverage” is written into your new policy.  This allows for all incidents leading to claims after your former policy expired to be covered regardless of when they happened provided the coverage is written without a time limitation. There is generally a surcharge for this unlimited coverage based upon how many previous years you want covered. A carrier will not always write this type of “full prior acts” coverage even if you agree to the surcharge. For example, a carrier may refuse because information on your application indicates a high level of risk. Another alternative may be that the carrier provides full coverage, but only within a more restrictive policy. The carrier may also elect to provide prior acts coverage but with the stipulation that coverage would not be in effect under certain circumstances, such as a claim in which the firm knew of the wrongful act, error or omission or should reasonably have know about it prior to the start date of the policy.

Adding “extended reporting endorsements” or “tail” coverage to your current liability policy allows you to make and report claims for prior wrongful acts, errors or omissions after the policy has expired for a specific period of time. There are several instances when this type of coverage is critical. The first is when the insured is changing carriers and “prior acts coverage” is not available or is too restrictive in scope. Secondly, this coverage is even more important when the carrier change is necessitated by the insurer’s refusal to renew coverage and your law firm doesn’t have an alternative yet. There is an additional surcharge for extended reporting coverage.

The other scenario in which this coverage is vital is when a lawyer is no longer actively practicing. When an attorney retires, becomes a judge, or goes from private practice to in-house counsel, the exposures that may arise from the former practice can be covered by “extended reporting endorsements.”

The time to determine what kind of extended reporting your policy provides is before you purchase. Each carrier determines how long an extended period they will provide, under what conditions this coverage can be purchased, and the cost for such an endorsement. In some cases, the coverage is sold in multiples of the policy premium; while in other cases, the cost is the rate that is in effect at the time the endorsement is purchased.

According to a November 2005 article published in the Insurance Journal entitled, “How to Write the Diverse Business of Lawyers Professional Liability,” between $1.5 and $2 billion is spent annually on Professional Liability coverage. With numbers such as these, it is important that any firm in the market for this insurance understand the factors affecting coverage rates.

Determining premium rates is a complex matter based on a combination of factors. However, there are two main factors insurers review when underwriting an insurance application. The first is your geographic location, because each state has a different risk assumption.  The level of risk is measured by the number of suits brought against other lawyers in your area. The second important factor is your practice area(s). You can expect to pay more for coverage if you specialize in high-risk areas such as securities, banking and/or real estate.

Other factors that insurers consider include:

• Liability limits and deductibles selected
• Breadth of coverage desired (prior acts, extended reporting, etc.)
• Number of attorneys covered
• Personal claims history of your firm’s attorneys
• Length of time covered attorneys have been associated with your firm
• Number of malpractice prevention controls utilized by your firm

The length of time covered attorneys have been associated with your firm is important, because insurers typically use step rates to calculate premiums for a new attorney.  Risk exposure increases during the initial years that an attorney practices as the number of potential plaintiffs increases with every new case. After a certain point, this risk flattens out.  So premium rates on a new attorney will automatically increase in set steps until the risk exposure matures.

It is also important to realize the significance reinsurance holds in determining premiums. Insurance is a way of transferring risk. You transfer risks to an insurance carrier, and the carrier will often transfer some of that risk to another company. By reinsuring, a carrier increases its capacity to underwrite more policies.  When reinsurance rates rise, the increased cost can be transferred to you in the form of higher rates.

Controlling expenses is an important consideration in the management of any law firm, so it isn’t unusual that a firm shopping for liability coverage would take premium rates into consideration. However, even though rates are important, they shouldn’t be the overriding factor in your decision to purchase a particular policy. There are a number of other aspects you should consider to ensure you receive the best coverage for your premium dollar.

The first of these considerations is whether your policy has eroding coverage.  In some liability policies, the coverage limits include defense costs. When you file a claim, the amount of coverage for settling the claim or paying a judgment against you decreases as you incur defense costs. This type of policy is referred to as having defense costs “inside” the policy. There are policies in which the defense costs are “outside” the policy, which means they are not subtracted from the amount of coverage. In some cases, policies with outside defense costs have a cap after which the defense costs are subtracted from coverage limits.

The second consideration is whether the policy deductible includes defense costs. If the deductible is only applied to liability, the insured firm doesn’t have to pay it until there is a settlement/judgment. However, if the deductible includes defense costs, the insured pays as soon as defense expenses begin to mount until the deductible is paid in full.

Another condition that you will want to note is whether your carrier can settle a claim without your consent. Some policies have what is known as a “hammer” clause that prevents the insurance company from settling without the consent of the insured. There is an extenuating circumstance to this clause in that, if the insured refuses to consent, the carrier is only liable for the amount for which it would have settled.

You also need to determine if your policy gives you the right to select your own defense counsel. More than likely, if you are a small firm your carrier will retain the right to choose your defense counsel. This doesn’t mean that you won’t have any input at all. Most insurance companies have a panel of defense attorneys and generally allow the insured to select from this panel. Larger firms can typically select their own counsel but the carrier must approve.

All current Lawyer’s Professional Liability policies are issued as “claims-made” policies, which means that a claim must be made and reported to the carrier within the life of the policy. To prevent coverage gaps if your firm is changing policies, you should select a new policy that has a “prior acts coverage” clause. This will extend your coverage so that any claims that existed before the new policy started will be covered. If you don’t have prior acts coverage, your former claims-made policy will not cover claims that developed after it expired and your firm will be without coverage for those claims.

A number of changes in both federal and state court procedures have made sanctioning more commonplace. The cost to defend your firm against a sanction or to pay the monetary penalty associated with it can be extremely expensive. That’s why you will want to ensure your liability policy provides coverage for these occurrences.

The final consideration is whether the policy requires a new deductible if there are multiple claims made in the same policy year. Some policies only require the deductible to be applied to the first claim made in a given policy year. Other policies treat the deductible on an aggregate basis. The policy will stipulate a specific deductible dollar amount per claim, with a cap on the total deductible dollar amount in the aggregate that the insured will have to pay before coverage begins. If neither of these scenarios is spelled out in your policy, your coverage most likely requires applies deductible for each claim.