Sometimes, legal malpractice happens, but not nearly as often as it is alleged. Whether the case has merit or not, four out of five attorneys can expect to be sued at some point over their career, according to the American Bar Association, which is why lawyers’ professional liability insurance is important. What you may not expect is your malpractice insurance company refusing to cover your claim. This is infuriating to practitioners who have paid substantial premiums for this coverage, only to learn that what they paid for is now not protecting them. Here are things to consider when purchasing legal malpractice insurance.
What Policies Cover
Lawyers’ professional liability policies generally cover defense costs as well as any settlements and judgments for claims arising out of negligent acts, errors or omissions allegedly committed by the law firm and its licensed professionals in the course of providing professional services. They also often cover defense costs related to grievances or ethics complaints, but for lower limits. Different policies have different conditions and exclusions, and we counsel our attorney clients to refer to and review these parts of their policy at any time they face the possibility of professional liability exposure. Premiums for certain practice areas, such as securities and intellectual property law, are typically higher.
Common Exclusions
These policies typically exclude claims arising out of wrongful/intentional acts or fraud, or from circumstances that the insured knew about or should have known about prior to the coverage period. Policies also exclude property damage and bodily injury claims as well as “insured vs. insured” claims, such as when one of the firm’s partners sues the firm or another partner.
Conditions
Professional liability policies are claims made policies, meaning that any potentially covered claims must be made against you and reported to the insurance company during the policy period. Most policies will extend the reporting period for a short period of time – typically 60 days – to report a claim past the end of the policy coverage period. The importance of notifying the insurance company of a claim cannot be overstated. Failure to notify the insurance company during the reporting period is often the death knell of many professional liability claims. Further, it is critical for you to understand how a “claim” is defined under your policy, because the definition almost always requires you to notify the company of potential claims or circumstances that can lead to a claim.
Coverage Period
A lawyers’ liability policy can often be customized to provide retroactive coverage from a date chosen in the past. A claim will only be covered if the incident that was not already known about occurred on or after the retroactive coverage date, and the claim is filed within the policy period or any extended reporting period provided for by the policy.
Coverage Limits/Deductibles
Another area that you need to pay particular attention to is the policy’s coverage limits. It’s advisable that you select a policy limit that would cover your most expensive cases. For some practices, you may need to obtain a separate excess limits policy. Otherwise, you could end up being liable for a settlement or verdict above your coverage limit.
With lawyers’ professional liability policies, you generally have two deductible payment options. You can either pay a deductible per claim, which is uniformly applied to each claim made, or purchase a first dollar defense endorsement, in which defense costs are covered from “the first dollar.” In addition, most policies have eroding limits, where money paid by the insurance company to defend you is deducted dollar for dollar from your indemnity limit.
Keep in mind that every insurer will almost always increase your insurance rate annually, as you accumulate more cases that are covered under the policy during the coverage period; this is called step rating. Moreover, claims history and monies paid by insurers on your behalf will affect premiums.
Reasons for Denials
Claims are routinely denied for falling outside the period for coverage. Insurance companies may also issue a denial if you fail to report a claim or potential claim in a timely manner. Your claim may also be denied for prior knowledge of a potential claim; defending yourself without notifying the insurer; failure to disclose attorneys working at your firm; coverage lapses; policy exclusions; and your adversary’s attorney fees if the court orders you to pay them as a sanction for professional misconduct.
Preventing Malpractice Claims
You can guard against certain errors and omissions that can lead to lawsuits by shoring up your firm’s business practices. You need to have a good calendaring system that prompts you to impending deadlines. You also need to avoid overburdening the firm with too many cases, especially complex ones that will drain your resources, taking both lawyers and administrative staff into consideration. Avoid overpromising and underdelivering to clients. Realistic statements concerning how the case should proceed should be made without ever making any guarantee of success. An optimal way to discern whether your firm is engaging in best practices is to look at the questions contained on your application for professional liability insurance, and how many questions you can answer “yes” to.
Finally, keep in mind that the fastest way to a malpractice suit against you is to file suit against a client to collect your fees. These actions almost always produce a counterclaim of malpractice as a defense tactic, which may cost you more than the amount you were trying to collect in the first place. Be advised that most current policies exclude coverage for malpractice counterclaims arising out of lawsuits for fees.
If you have questions about lawyers’ professional liability insurance or are involved in a coverage dispute with your insurance company, contact us for assistance. We make insurance companies keep the promises they make to you and your business.
Contact us today for a free consultation.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack
800-745-1755
ESS@schlawpc.com