Considerations in Purchasing and Using Malpractice Insurance
by Michael Skolnick
A couple of months ago, members of the Utah State Bar received a letter from Salt Lake attorney Grant Clayton. When he's not out driving his vintage TR-6 or writing patents, Grant serves as chairperson of the Bar's Lawyers Benefits Committee. His recent letter urged members of the Utah Bar to support our Bar-endorsed malpractice insurance program. That program is administered by Marsh Affinity and underwritten by Liberty Mutual. This article is intended for those who take the next step; either in obtaining malpractice insurance for the first time, or carefully reviewing their existing policy to ensure it meets their needs. The article will briefly address key considerations in obtaining and using malpractice insurance, with the goal of helping the reader become a wiser consumer of this professionally-invaluable commodity.
Selecting an Agent or Broker
Your first step in purchasing professional malpractice insurance is to select an agent or broker. Select an insurance agent or broker who thoroughly understands professional malpractice insurance. Lawyers' malpractice insurance is very different from most forms of insurance. Special policy considerations include the Òclaims-madeÓ nature of a lawyer's malpractice policy, obtaining appropriate tail coverage and prior acts coverage. These unique characteristics may be unfamiliar to non-specialist insurance agents or brokers. They'll be discussed later in this article.
Look for an insurance agent or broker who tends to show up year after year at Bar- sponsored events, such as the summer Bar meeting at Sun Valley. This indicates a commitment to the market and a degree of specialization. An agent or broker experienced in lawyers' professional insurance is going to be in an excellent position to tell you exactly what is available in terms of service and what the various insurance companies' reputations are for claims handling.
Selecting an Insurer and Policy
Be a smart consumer in shopping for everything relating to your attorney malpractice policy, such as price, service (including risk management services), and financial size of the insurer. Your insurer should have at least an ÒAÓ rating from A.M. Best. You want to be sure the company you select will be able to pay its claims, particularly if an unexpectedly large number of claims occur in a relatively short period of time.
Ask the agent or broker you select to give you a quote for different types of coverage, for instance, limits of $1,000,000, $2,000,000 or $3,000,000. Bear in mind that lawyers' professional insurance is written on a per occurrence and aggregate basis. There are separate limits for each incident and an aggregate limit. If you buy insurance with a million dollar limit and one claim uses up that entire limit, you'll be in trouble if another claim hits. Try to anticipate the risk of multiple claims within any one year. A high volume litigation practice, for example, may bear a higher risk of multiple claims during the same policy period.
You should also compare quotes at different deductible levels. Generally speaking, the higher the deductible, the lower the premium. You may also want to consider a Òloss-onlyÓ deductible. With a regular deductible you'll usually need to pay defense costs of a claim until your deductible is satisfied. A loss-only deductible only becomes payable in the event the insurer has to pay something to settle the claim or satisfy a judgment. One advantage to a loss-only deductible is that in the event of a frivolous claim which gets dismissed by motion practice or otherwise, you're not stuck paying any deductible amount. The downside of a loss-only deductible: it's usually more expensive in terms of premium.
Study the policy language of the policy your agent or broker recommends. Make sure you understand what's covered and what's not covered. For instance, is coverage provided for defense of disciplinary actions? If so, how much? Do defense costs diminish the limits of the policy? If so, you may need higher limits. Lawyers' professional insurance policies vary. It makes sense to shop aggressively for everything.
Find out whether the claims representatives who will be handling your case are attorneys as opposed to non-lawyers. Non-lawyer insurance adjusters (as opposed to claims counsel) may have a more difficult time understanding the defense of a complex malpractice case. A non-lawyer is more likely to make claims handling decisions based upon purely economic considerations, as opposed to encompassing the lawyer defendant's professional concerns.
Find out how long your prospective insurer has been in the lawyers' professional insurance market. Part of what you're buying is the ability of an insurance company through their claims handling procedures to keep you in practice and keep your business working. That makes it particularly relevant to find out how long a carrier has been involved in insuring this type of claim.
Benefit of Building a Relationship with a Carrier
Insurance carriers come and go in the lawyers' professional insurance business. Continuity and the benefit of building a long-term relationship with a carrier become especially important if a larger claim hits. This can be a simple matter of mathematics Ð the longer a firm has been with a particular carrier, the more premiums they have paid over the years. Additionally, there will be a greater familiarity between the broker or agent and underwriter, and sometimes even the law firm and the underwriter. The better and stronger these relationships, the better chance that an insurer will continue to insure your law firm even if a difficult claim hits. In other words, if claims experience has been stable, acceptable and enduring, a carrier will be more likely to keep a particular insured on the books, notwithstanding one very difficult loss.
The Application Process
After you have selected an insurance agent or broker and an insurer, you will begin the process of applying for insurance. This entails in the first instance a fairly detailed written application. The application is a critical part of establishing your contract of insurance. Once signed, the application will become part of any insurance contract that eventually issues. Accordingly, it is imperative to be absolutely forthcoming and truthful on the application. Material omissions in the application can result in non-coverage of a particular claim or even recision of an entire policy. There may be some inclination to shade answers in the application in a favorable way in order to portray the attorney or law firm in a better light. There may also be a tendency to take a ÒshortcutÓ approach because preparation of the application doesn't generate income. Both approaches are ultimately short-sighted. It's best to carefully prepare an application so that it discloses all possible underwriting concerns.
Pay particular attention to the application questions pertaining to law office management. Lawyer malpractice insurers have found that a significant number of claims arise because of failure to use appropriate retainer or engagement letters, as well as from poor docketing and conflict of interest controls. The underwriter reviewing your application will want to know what safeguards your firm takes in those regards. In this sense, the application process is an excellent opportunity for an attorney or law firm to Òclean houseÓ and make sure that appropriate policies are in place regarding retainer/engagement letters, docketing controls (the insurer will almost certainly prefer a dual diary system) and set procedures for checking conflicts of interest.
The most important question on the application relates to knowledge of any circumstance, act, error, or omission that could result in a professional liability claim. If the prospective insured represents that he or she is unaware of any circumstance, act, error, or omission, but a claim later arises which the insured arguably should have disclosed, the insurer may seek to exclude coverage for that claim or even rescind the policy based on non-disclosure. It's best to err on the side of over-disclosure with respect to claims or potential claims, and avoid the risk of non-coverage when you need it most. Carefully poll every lawyer in your firm about the existence of a claim or a potential claim prior to signing and submitting your application.
Underwriting 'Red Flags' in the Application
Underwriters may be particularly concerned by applications which reveal the following:
¥ Significant equity interests in a client. This can lead to conflict of interest claims.
¥ Excessive suits to collect unpaid fees from clients. Statistically, these often result in malpractice counterclaims.
¥ Inadequate client intake procedures, with respect to client retention agreements and conflict checking protocols.
¥ Existence of practice areas considered by the insurer to pose a higher degree of risk. These include, without limitation, securities work, intellectual property law, and plaintiff personal injury work. Lawyers or firms practicing in these areas will likely be subject to heightened scrutiny.
¥ Extensive claims history or history of bar complaints. Again, these lawyers or firms will be subject to a higher degree of scrutiny. They will need to satisfy the underwriter that the prior claims/complaints don't pose an inordinate ongoing risk.
Reporting a Claim
After a policy is issued, reporting a claim or potential claim continues to be the most important duty you have as an insured under a claims-made policy. If you fail to timely report a claim or potential claim you place your coverage for that claim in jeopardy. Unlike the form of most other insurance, which provides coverage on an occurrence basis, professional malpractice insurance is provided on a claims-made basis. With occurrence type insurance, your policy responds to any claim arising from a covered occurrence during the effective period of the policy. Claims-made insurance differs in that in order to provide coverage, a policy of insurance must be in effect at the time the claim is made. The act of making the claim triggers the insurer's duties under the policy, rather than the occurrence itself.
Typical claim reporting language (taken from Liberty Mutual's policy) states Òyou must give us written notice of any claim(s) or potential claim(s) made against you as soon as practicable, but not later than sixty (60) days after expiration of the policy period or an extended reporting period, if applicable.Ó The same policy defines ÒclaimÓ as Òa demand received by you for money or services, including the service of suit or institution of arbitration proceedings against you, or a disciplinary proceeding.Ó Note that under this definition a disgruntled client's demand for free work halfway through a nasty case will likely be considered a claim.
Attorney malpractice policies typically exclude known claims or circumstances which predate the policy. A known claim or circumstance may be defined as a situation in which the lawyer has a 'reasonable basis' to believe that he or she breached a professional duty, committed a wrongful act as defined under the policy, violated a disciplinary rule, engaged in professional misconduct or foresaw that a legal malpractice claim would be made. Reporting claims and potential claims is critical not only during the policy period, but also when reapplying for insurance. If you are unsure about whether you have a claim or a potential claim, contact your agent or broker, who can put you in touch with coverage counsel. You can then discuss what to do about the potential claim and whether it needs to be reported. In summary, you should report claims and potential claims as soon as you have knowledge of facts which indicate a claim is possible, not just when a claim is imminent.
Sometimes attorneys avoid reporting a claim or potential claim out of fear that it will cause an increase in their premium. This head-in-the-sand approach can prove costly. Failing to report a claim or potential claim could have a far greater impact on future insurability than an increased premium due to reporting that claim or potential claim. A coverage denial or policy recision based on failure to timely report a claim will not look impressive to a future underwriter.
Obtaining Appropriate Tail and Prior Acts Coverage
Attorneys who retire or otherwise become inactive in the practice of law should investigate whether they need to obtain tail coverage. As discussed, claims made policies do not provide coverage after the policy expires. To avoid coverage gaps an attorney must maintain coverage year after year, or purchase tail coverage for claims which may be brought after the attorney becomes inactive. Tail coverage (also called an extended reporting endorsement) can be purchased for various time frames. The longer the time frame, the more expensive the coverage. Keep in mind that a four year limitation period pertains in negligence-based malpractice claims.
In addition to liability tail coverage, a standard form lawyers' professional policy will likely restrict coverage Ð at least to some extent Ð for acts which occurred prior to policy inception. For instance, Liberty Mutual's policy does not apply to any claim for which an insured gave notice to a prior insurer or one which the insured had reasonable basis to believe existed prior to policy inception. Additional prior act coverage may be available through supplemental endorsement, usually for an increased premium. Determine your firm's need for such additional prior acts coverage by consulting an experienced agent or broker.
Adding New Employees or Practice Areas
Once your insurance is in place, don't forget to contact your insurer and add new attorneys who join your practice. Coverage for newly added attorney employees may be conditioned upon written notice. You may also need to obtain specific underwriting approval for the new attorney. In some cases an additional premium may be charged. In any event, you need to make sure that new attorneys who pose the greatest ÒunknownÓ in terms of malpractice risk are covered under your existing policy. The same reporting requirement may pertain to new practice areas. If you're in an insurance defense firm which suddenly decides to start advertising on television for plaintiff's personal injury work, your insurer will probably want to know.
Why Subject Yourself to All This?
If you've made it this far in the article and are still wondering why you need insurance, or why you need to spend some time reading your policy, the answer is simple: peace of mind. I've defended malpractice actions against insured attorneys and uninsured attorneys. The ones who are insured and who understand what their policies cover seem to sleep better.