For lawyers considering opening up their own shop, malpractice insurance is one of those areas where you’re probably clueless. So you’ll rely on your friend’s recommendation for a carrier, or you’ll just call a few companies who advertise in the Bar publications and see if you can “get the best deal.”
As usual, I’m here to make your life easier with truthful information that you can actually use. No no, don’t thank me. I feel your appreciation.
For purposes of this post, I interviewed Sam Cohen of Attorneys First. Sam is a Florida-based broker. He is licensed in Georgia and has access to other brokers throughout the United States. Now before you gutter dwellers down there in the comment section start hypothesizing (I think that’s the biggest word I’ve used here) about my relationship with Sam, let me burst your conspiracy bubble.
Sam and I are long-time friends and have never done business together.
Some years ago, I was referred to Sam when my policy was up for renewal. He went out and got quotes from a half dozen companies, compared them to my policy, and determined that what I had was the best. So he made zero dollars, and based on his against-his-financial-interest honesty, I refer everyone to him. (There’s a lesson in there somewhere).
Here’s the interview….
1. Which types of attorneys do not need malpractice insurance?
Any attorney in the private practice of law is at risk of being sued for malpractice (our current economic condition only increases this likelihood). An allegation of malpractice can cost thousands of dollars in defense costs that could put significant financial strain on a lawyer or law firm. If a claim does arise, malpractice insurance can serve as an important financial buffer for the lawyer and law firm.
2. What does malpractice insurance cover? (Just law suits, bar matters, what?)
Insurance policies vary, but many will provide additional or sub-limited coverage for pre- and post-judgment interest, disciplinary proceedings (bar matters), loss of earnings, expenses associated with a subpoena, privacy/cyber protection, and outside director coverage.
Coverage is subject to the limit of liability, and is for amounts in excess of the deductible that an insured becomes legally obligated to pay as damages and claim expenses as a result of a claim (lawsuit) that is first made during the policy period or any extended reporting period (tail).
3. Tail? When I was a kid that meant a part of a dog, but then as I got older it meant something else.
Extended Reporting Period (ERP) also known as “tail” coverage covers claims resulting from errors which occur on or after the insured’s retroactive date and before the policy termination date, and are reported to the carrier during the ERP coverage period. ERP options vary by insurance carrier, therefore it is important to review the options available when deciding which insurance policy to purchase. ERP options are expressed in years and those options may include up to five years, or an unlimited period to choose from.
4. What should lawyers consider as far as options for coverage?
Some coverage options are more important than others, and each firm must decide what options are the most critical to protect their firm.
Some coverage features to consider:
Prior Acts – This is the date after which losses may occur and be covered under the policy. A very important consideration is to maintain continuity of coverage as well as prior acts coverage. Ideally, the prior acts date should be the initial date the law firm was formed.
Limit of Liability – The maximum amount the insurance company will pay for the coverage. Typically, limits are expressed as “per claim” and “aggregate” (the most the insurance carrier will pay for all claims during the policy period). Each firm will need to decide what an appropriate limit of liability should be and weigh that requirement against the cost of the insurance. The higher limit of liability will translate into a higher cost for the insurance.
Deductible – The deductible is how much the firm will pay “out-of-pocket” in the event of a loss. Insurance carriers will vary in terms of the deductible allowed and the type of deductible options available. In addition to the deductible amount, there is a deductible option where the deductible only applies to the indemnity payment (the deductible does not apply to defense costs). There is an “aggregate deductible option” whereby regardless of the number of claims during the policy period, the most “out-of-pocket” expense the firm will pay is the “aggregate deductible”. In some cases insurance carriers will offer a zero deductible option.
Extended Reporting Period (ERP) Options – This option is described in greater detail below, but it should be an important consideration for the firm to evaluate what ERP options are available within the coverage form. ERP options will be expressed in years as well as an “unlimited” option. The cost for the endorsement will be a percentage of the expiring premium and will vary depending on the year selected.
Claim Expenses – Usually claim expenses (e.g., reasonable fees, costs, and expenses charged by attorneys retained or approved by the insured for a claim brought against an insured) are included within the limit of liability. Some carriers will offer an option to provide claim expense payments in addition to the limit of liability with a maximum that is usually equal to the per claim limit of liability.
Other coverage options to consider are:
- Worldwide coverage – coverage applies wherever the lawsuit is filed.
- Disciplinary coverage – coverage for bar matters.
- Subpoena coverage – coverage for expenses associated with a subpoena.
- Reimbursement for lost earnings – lost wage coverage for attending hearings/trial associated with the lawsuit.
- Definition of predecessor firm – coverage forms vary relative to the definition of a “predecessor firm.” This could be important for prior acts coverage of prior firms.
5. What about exclusions?
There are standard exclusions in all the policy forms such as insured versus insured or intentional acts. However, some policy forms exclude coverage for any “Securities” practice or “Intellectual Property” matters. Title agent coverage can vary by insurance carrier as well. It is important to review all of the exclusions to ensure that your law practice is adequately protected.
6. Attorneys are always nervous about making a claim. Should they be?
As a condition of the insurance policy, an insured is required to give notice to the insurance carrier as soon as practicable of any claim or any matter that may give rise to a claim. Failure to do so can forfeit the insurance coverage. Many insurance carriers offer a free of charge hot line to discuss potential matters and whether it is prudent to report a claim. These hot line services are normally conducted anonymously.
7. What’s your best advice on deductibles?
Deductible selection will vary by what the insurance carrier is willing to offer and what the firm decides is a reasonable risk tolerance should a claim occur. A higher deductible amount will generate some premium savings, therefore cost is an important consideration.
8. What about the lawyer that says they are not going to get malpractice insurance because without it they stand a better chance of not getting sued?
The bottom line is every law firm has the potential of being sued, and malpractice insurance can provide a financial cushion should that event occur.