When seeking to purchase lawyers professional liability (LPL) insurance, it pays to first gain insight into the risks your firm brings to the table and also understand the many insurance coverage options available in the LPL marketplace today. Far too often lawyers don’t understand the nuances of the coverage they have purchased until they have to file a claim, which is, unfortunately, too little too late. To help ensure this doesn’t happen to you, today’s post is providing a sampling of some information, resources, and coverage options to help demystify the insurance application and selection process.
IS YOUR FIRM “RISKY BUSINESS”
First and foremost, know your risks. Many law firms are unaware of the specific risks inherent in their practice. However, thanks to the American Bar Association Standing Committee on Lawyers’ Professional Liability, and contributing insurance carriers, this need not be the case! Every four years, the Committee compiles the Profile of Legal Malpractice Claims, relying on claims information from self-reporting legal malpractice insurance carriers. The purpose of the study is to develop information that may be used for claims-prevention programs.
The study provides a wealth of information, using colorful, easy-to-read statistical claims charts. Here is a snapshot of some of its content:
- Number of Claims by Area of Law
- Number of Claims by Number of Attorneys in Firm
- Number of Claims by Type of Activity
- Number of Claims by Disposition of Claim
- Number of Claims by Type of alleged Error
- Number and claims by Expense Pad
- Number of Claims by Indemnity Dollars Paid to Claimant, and so on.
CARRIER FINANCIAL STABILITY
It’s important for a prospective insured to assess a carrier’s financial strength and ability to meet its ongoing insurance policy and contractual obligations. An agency resource that can help with this is A.M. Best, through its insurance company rating service called Best’s Financial Strength Rating. While accessing the results through Best’s Insurance Reports and its website requires a subscription, the ratings can also be found, free of charge, on an insurer’s website. Those working with an insurance broker can also ask them to provide the rating of individual carriers. Here is a guide and key to Best’s rating table.
When shopping for insurance pick a knowledgeable insurance broker who regularly works with LPL carriers. Just as you wouldn’t go to an estate lawyer to pursue a medical malpractice claim, you shouldn’t randomly choose an insurance broker solely based upon them having an insurance license.
Pricing is always a factor when choosing coverage. However, trying to compare quotes from various carriers can be like comparing apples and oranges. Here is where an experienced insurance broker can help.
There are numerous factors that go into the insurance underwriting process, and while policies may be similar, they may also have some coverage differences that can impact pricing. Factors influencing pricing can include (but not be limited to) policy limits, retentions/deductibles, applicant claims history, applicant geographic location, and others a carrier may view as either elevating or lower your perceived risk as an insured.
CLAIMS EXPENSES OUTSIDE OF LIMITS (CEOL)
A policy limit can either include or exclude claims expenses. When it includes, it means that the policy has only that claim limit available for payment of both indemnity payments and claims expenses. This is often referred to as a declining limits or cannibalizing policy limit.
Some carriers provide for the option of payment of defense costs in addition to the policy limit, commonly referred to as CEOL. If available, this is generally available by policy endorsement for an additional premium.
Legal malpractice actions can be costly to defend, adding this endorsement is well worth the additional premium.
Tempting, as it may be to save a few premium dollars by opting for a high deductible, don’t do it. I’ve heard many soon-to-be insured lawyers say the deductible amount really isn’t that important because they will, most likely, never need to report a claim. Weathering a legal malpractice claim is stressful enough without having to worry about how to pay a high deductible.
FIRST DOLLAR DEFENSE
Even better than paying a low deductible is paying no deductible at all! Consider a policy endorsement that provides First Dollar Defense coverage. With this, if a claim is filed against you, your deductible does not apply to loss adjustment expenses (costs incurred for your defense). Even if a claim has no merit, your carrier-assigned defense counsel will still have to engage in discovery to posture the matter for (hopefully) a dismissal. If you have opted for First Dollar Defense, your deductible only applies to settlements or jury verdicts.
THE BOLD NEW WORLD OF DEDUCTIBLES
Even better news about deductibles is that current trends find carriers offering a variety of enticing, creative deductibles. Here are just a few:
- A deductible that applies to the total amount of all claims, applying to the payment of damages only.
- A deductible that is waived if a ruling of no liability is obtained.
- A deductible that is applied in the aggregate, meaning that only one deductible is charged during a policy period, regardless of the number of claims.
- A deductible that does not apply to the first $5,000 of claims expenses incurred by the carrier for each claim made during the policy period.
- A deductible that is reduced by 50 percent if a claim is resolved by way of formal mediation within six months from the date it is reported to the carrier.
Getting a handle on deductible options can help a potential-lawyer insured make informed, wise, and money-saving policy choices.
CLAIMS HANDLING PHILOSOPHY
Ask about each carrier’s claims handling philosophy. One carrier may choose to settle claims if it can do so for nuisance value, regardless of merit, while others may take a tough defense posture and prefer to try claims. Which is the best fit for you?
A word of caution, other lawyers may be reluctant to talk to you about their experience with a carrier’s claims handling practices, not wanting to “share the details” or even admit they’ve had a claim filed against them. Your broker should be able to knowledgeably answer your claims handling questions.
CONSENT TO SETTLE
Check out a policy’s Consent to Settle provision. In days far gone (for the most part), LPL policies were true consent policies, meaning that an insured had to provide his or her consent to settle before an indemnity payment could be made. Many consent provisions now contain what is called the hammer clause. While worded differently from policy to policy, this typically indicates that if an insured unreasonably refuses to consent to a settlement when the carrier and claimant wish to settle, the carrier’s payment for the loss, to include defense costs, is limited to the amount for which the carrier could have settled the claim had the insured consented.
A prospective insured should read the consent to settle policy language and talk to his or her broker about any clarification needed, to include a carrier’s history of invoking its hammer or other settlement clauses.
COVERAGE/READ THE POLICY
Simple (and boring) as it may sound, read the actual insurance policy. Your broker (or direct-write carrier) providing you with quotes should be able to provide you with a specimen policy. Understand what is covered and what is not, and don’t be shy about asking for additional coverage features to be endorsed onto a policy if you feel you have special practice needs that might not be covered under the policy(cies) being presented.
While reading (snoozing) through the policies, prospective insureds are often surprised to find many policies are now offering coverage outside the realm expected. Here are just a few add-ons that are now rather common place:
- Disciplinary Proceedings – Many carriers pay up to a specified amount for attorney fees and other reasonable costs, expenses, or fees paid to third parties that result from a disciplinary proceeding.
- Employment Practices Defense – Under this add-on, a carrier pays a set amount for the reasonable fees of an attorney to defend an insured against claims involving employment practices.
- Subpoena Assistance – Yet another add-on, this benefit provides for payment of attorney fees and expenses associated with an insured responding to a subpoena, either for documents or testimony that involve professional services that were rendered by the insured.
- Cyber-Liability Coverage – A more recent influx of enhancements comes in the way of cyber-liability coverage. If offered, this coverage typically varies greatly from company to company.
While the information provided only touches on some of the many insights into the world of LPL insurance, we hope you have gained some helpful knowledge to aid you in making the right policy choices for you and your law firm.