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Malpractice Insurance Information
Consumer's Guide to Legal Malpractice Insurance
THE KEY PLAYERS Program administrators, brokers/agents, insurance companies and underwriters, managing general agents and insureds: Who are they and what role do they play? The insured is you, the consumer who is purchasing legal malpractice coverage (the policy holder). The broker is the insurance advisor who represents you to get coverage, tells you what types of coverage you need, answers coverage questions, and details the limits of liability you may need. The broker will discuss current claim trends and assist with legal malpractice prevention programs. You should consider broker/program administrators with expertise and experience in lawyers professional liability. You may be purchasing insurance from a managing general agent (MGA), which is an intermediary operating between the insurance company and the broker. Sometimes the broker is not associated with the insurance carrier, and therefore, must access the insurance company through the MGA. The insurance company is the primary company that provides the policy form, terms and conditions, and limits, and handles your claim in conjunction with the local defense panel. It is the source of your insurance product and provides coverage for claims against you. You should consider insurance companies with an A.M. Best Rating of A- or better. CLAIMS MADE COVERAGE One of the primary differences between lawyers professional liability insurance and other types of insurance you have is the use of "claims made" coverage rather than "occurrence" coverage. Auto and property insurance, for example, are occurrence types of coverage designed to respond to claims if the incident occurs during the policy period. "Claims made coverage" means that coverage applies to claims made against the insured, within the time period covered by the policy, regardless of when the incident giving rise to the claim actually occurred. Presently, all lawyers professional liability insurance is "claims made." However, many policies exclude coverage for prior acts unless prior acts coverage is specifically stated in the policy. Unless your policy contains full prior acts coverage, don't assume you have coverage for claims made for the errors which occurred prior to the inception of the policy. Claims made insurance has an added advantage over occurrence coverage. Problems can still arise, particularly in gaps when a lawyer changes insurance companies, moves to another firm, becomes permanently disabled, or ceases to practice. There is value in "continuity"--having the same insurance company for an extended time period. Changing insurance companies every year increases the risk that claims can fall through the cracks and will not be covered. PRIOR ACTS OR RETROACTIVE DATES In the event a policy doesn't offer full prior acts coverage, a policy may specify a retroactive or prior acts date which signals the earliest date for which a claim can be covered. Most prior acts provisions limit coverage to past errors. It is difficult to coordinate coverage when changing from one policy to another. Pay close attention to this coverage when changing policies. TAIL COVERAGE This is an important feature with all the lateral movement happening within the legal profession today. Tail coverage provides an extended period of coverage after the firm dissolves and cancels its policy, a lawyers retires, or an attorney leaves private practice for a position on the bench or assumes a teaching position. The "tail" is for a specific number of years based on the premium charged. There are, also per-attorney tail options. It is common for an insurer to offer a disabled or free tail to a disabled attorney. Each policy has different options, varying terms, and restrictions. You should consider each policy's tail features to make sure you have the widest range of options. COST OF INSURANCE AND SPECIFIC COVERAGE The cost of your insurance premium is not the primary consideration. Does the policy cover the work you actually perform? Check the companies premium history, rating, stability. and relationship with the bar association. When selecting a specific coverage, it is important to think about the type of practice you have. If you practice in high-risk areas of law, such as securities, banking, real estate, family law, personal injury, and financial institution representation, you may have limitations in your options for coverage and coverage may be extremely expensive. It is important to take an objective look at the potential damage to your practice or firm from the biggest case. Ask yourself how much it would cost to cover a claim, and assess this realistically. There should be enough coverage to protect yourself against the worst-case scenario. It is important to consider the differences between self-exhausting policies and policies with defense costs outside the limits of liability. When defense costs are inside the limits of liability, every dollar spent defending the claim reduces or erodes the remaining limits of liability. For example, if a firm had limits of $500,000, which included the defense costs, and the claim was settled for $350,000 and defense cost associated with the claim were $175,000, the firm would be responsible for the $25,000 in excess of the $500,000 limits. Whereas, if the firm had the defense costs outside the limits of liability, it would still have $150,000 of remaining limits for future claims during that policy year and would not have paid the $25,000. Given the current litigious climate, you should probably obtain a minimum of $1 million in coverage. If you are involved in a professional company of any kind, you must study the limit requirements of C.R.C.P. Rule 265. DEDUCTIBLE, DEFENSE, COSTS, AND POLICY LIMITS Like regular liability policies, malpractice policies contain deductible clauses. This may apply to each and every claim or may be aggregated on an annual basis. The deductible may apply both to loss and defense costs, and defense costs may be deducted from the limit of liability, or they may be paid in addition to the limit. It is most favorable for the insured to have defense costs paid in addition to the limit, since more coverage will be available for actual losses paid. The insurer may require a higher deductible when they are insuring a higher-risk insured. The insured may prefer a higher deductible if they are looking for a way to reduce the premium and assume more of the risk themselves. Generally, liability coverage is written with two policy limits: one specifies a per claim per attorney amount; the other specifies an aggregate limit for all claims per year. (See C.R.C.P. Rule 265 (A) (4) (iii) for professional corporation insuring requirements.) Although it is typical to require the consent in settlement, some policies specify certain penalties which may be invoked when consent is withheld. such as limiting liability to the amount for which the claim could have been settled. Any such penalties should be reviewed with care. Be sure to be clear about whether the insured has a say in the selection of defense counsel. ENDORSEMENTS, EXCLUSIONS, COVERAGE, AND CONDITIONS After reviewing the declarations page (the first page setting forth the parties and the date the policy takes effect) and the insuring agreement, which describes the type of coverage, carefully read the coverage agreement, exclusions, conditions, and endorsements. The coverage agreement describes what the coverage is for and whether anyone besides the lawyer in an office is covered. Exclusions may remove coverage for uninsurable acts or acts covered by other kinds of insurance. Lawyers should read each policy's exclusions carefully. Once you have determined that the coverage of a policy meets your needs, you should become familiar with the condition section. This section states conditions which must be complied with before coverage will attach. Also, be aware of any endorsement attached to a policy to see how it may broaden, limit, or clarify the policy itself. MALPRACTICE ITEMS TO CONSIDER
Malpractice items to consider when making the following changes in your practice situation: Leaving a Firm to Go Solo: Lateral Hire Situation (Firm or Attorney Perspective): Firm Dissolution: New Firm Creation: AREAS OF LAW PRACTICE WHERE LAWYERS ARE MOST FREQUENTLY BEING SUED Personal Injury - Plaintiff COMMON ERRORS OR OMISSIONS IN ALL AREAS OF PRACTICE Failure to timely file or respond
WITH YOUR CLIENT AND AVOID MALPRACTICE
This page, published by the Colorado Bar Association Lawyers Professional Liability Committee, is designed to bring awareness of how to analyze and understand policies now available in the insurance marketplace. Your sophistication as a consumer in this area will help ensure that the policy you purchase will meet your needs and make use of the features in your policy should the need arise.
Portions of the information contained on this page were submitted by Seabury and Smith, Inc. and Westport Professional Liability Division. |
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