Buying Attorneys Professional Liability Insurance – What You Need to Know
Summary
This article provides an overview of key considerations when purchasing a professional liability (malpractice) policy for your law firm. While cost is always a concern, compromises in coverage can reduce the value of a policy.
- Selecting a Broker for Attorneys Professional Liability Insurance
- Selecting an Attorneys Professional Liability Insurance Company
- Selecting an Attorneys Professional Liability Insurance Policy
Please note that while we will use the term “malpractice” and “professional liability” interchangeably throughout this article, the term generally accepted in the insurance industry is “professional liability.” This article does not allow for an exhaustive analysis of all the considerations involved in purchasing professional liability insurance. For more detailed analysis, please consult an experienced insurance broker.
Selecting A Broker for Attorneys Professional Liability Insurance
Professional liability is a complex area of commercial insurance, and an insurance advisor selected for obtaining your firm’s coverage should be specifically well-versed in professional liability insurance. Brokers perform the following functions that require specific expertise:
- Selection of insurers
- Negotiating coverage and pricing with insurers
- Structuring coverage to meet your firm’s requirements
- Evaluating coverage and pricing options
- Presenting available options to your firm so you can make a value determination
- Monitoring the insurance marketplace for opportunities to improve upon your current coverage
Application Process for Attorneys Professional Liability
An application is usually required to begin the process of obtaining insurance proposals from one or more insurers. The application will require rating criteria such as number of attorneys, practice areas, prior claims activity, and financial information. Depending upon your specific practice area, additional information may be required. While your insurance advisor will assist in the preparation of the application, your firm should carefully review and verify the application because the application is usually incorporated into the insurance policy as a warranty and an incorrect response on the application could affect coverage in the event of a claim. For example, coverage for practice areas not specifically indicated on the application may be excluded or limited.
Selecting an Insurance Company for Attorneys Professional Liability
Admitted versus Non-Admitted
Insurance companies are “admitted” to a state when licensed and have agreed to regulatory oversight and monitoring in the state in which it is admitted. Their rates are filed and approved by the state’s insurance department. State insurance guaranty funds apply only to admitted insurers and provide an assurance that money will be available to pay claims in the event of that insurance company becomes financially impaired or insolvent.
“Non-admitted” companies are not licensed by a state’s insurance department, but participate under “surplus lines” laws established by the state. Insurance companies may choose to be admitted or non-admitted in a particular state. If a company is non-admitted, it does not mean that it is not reputable or financially questionable. However, that insurer would not be participating in the state’s guaranty fund. A non-admitted insurer may have greater flexibility in rates and coverage because it is not required to have its rates and coverage forms approved by the state when it is operating as non-admitted.
Insurer Financial Ratings
The A.M. Best Company is recognized within the insurance industry as the most reputable organization for insurance company financial and credit ratings. Your broker should indicate the Financial Strength Rating (FSR) and Financial Size Category (FSC) on your professional liability insurance proposal. The FSR represents A.M. Best’s opinion of an insurer’s financial strength and ability to meet its policy and claims obligations. The FSC represents the insurer’s policyholder surplus and is a convenient general indicator of the financial size of an insurer. The FSR is a letter grade ranging from A++ (Superior) to D (Poor). Insurers that do not participate in A.M. Best’s rating process will be assigned an FSR of NR (Not Rated). The FSC is indicated by a Roman numeral ranging from I (less than 1 million policyholder surplus) to XV ($2 billion or greater policyholder surplus).
As a guideline, a law firm should consider only those insurers that carry an A.M. Best FSR of A- (Excellent) or better.
Claims Service and Risk Management Services
Further to financial rating considerations, a firm should consider the claims service provided by the insurance company. Many insurance companies use outside firms for claims adjusting and litigation with results depending upon the quality of the outside firm.
Insurers may also provide risk management resources to your firm to assist in claims prevention and to provide best practices guidance. Resources may include:
- Help line for questions and concerns about risk management topics and claims prevention
- Audit and self-audit for best practices and claims prevention
- Seminars and webinars for claims prevention
- Articles and newsletters on professional liability topics
- Checklists to assist with new client and opening new files
- Ethics rules and opinions
- Relevant case decisions
- Sample law firm best practices for records retention, client funds, disaster planning
- Free or reduced cost CLE credits
Attorneys Professional Liability Policy Selection
“Claims Made” Coverage
Professional liability policies, including lawyers malpractice, are written on a “claims made” basis. Claims made coverage applies to claims against your firm that occur during the policy period, provided the incident that led to the claim occurred after the “retroactive date.” The “retroactive date” signifies the beginning of coverage for a particular policy and will be stated on the policy. It is important to note that the retroactive date must be maintained throughout the law firm’s lifespan, to account for unknown incidents that have previously occurred but have not yet resulted in a claim. Some claims made policies are offered as “full prior acts” and do not have a retroactive date. Other claims reporting requirements may apply depending on the policy conditions
“Claims Made” versus “Claims Made and Reported”
Some insurers use a “claims made and reported” coverage form, which can restrict coverage to claims made and reported during the policy term, or a short time window after policy expiration, usually within 30 to 60 days. This is a key distinction because incidents that lead to a claim arising are often not known until some time after the incident has occurred. Your firm may work internally to resolve an incident before it file a claim with the professional liability insurer. If a claim is reported to the insurer beyond the reporting period, the policy may possible not respond to the claim.
Prior Acts Coverage
As mentioned above, it is imperative to maintain the same retroactive date so that at each policy renewal there is uninterrupted coverage back to the original inception date of your firm’s professional liability policy. The maintenance of the retroactive date is referred to as “prior acts” coverage. Your firm should always confirm that any new policy that replaces a prior policy has the same retroactive date, or the policy has “full prior acts” which eliminates the retroactive date requirement, as the insurer agrees to provide prior acts coverage for any incident that occurred in the past.
Key questions to address your insurance broker or insurer:
- Does your firm’s policy provide coverage for claims made (and/or reported) during the policy period regardless of when the incident occurred?
- Does your firm’s policy provide coverage for claims made (and/or reported) during the policy period only for incidents that occurred during the policy period?
Also note that the maintenance of the retroactive date increases the policy cost versus a policy where the retroactive date is not maintained. While a policy without prior acts will generally be less expensive, you must be aware that coverage for past incidents that may result in a future claim might not be covered!
Extended Reporting Periods or “Tail” Coverage
Depending upon the structure of your policy, it may be necessary to purchase an Extended Reporting Period (ERP) endorsement or “Tail” coverage for attorneys in your practice that retire or cease practice. The ERP endorsement provides coverage for claims that might occur in the future as a result of incidents that occurred while the attorney was still practicing. The insurer will generally provide a window of time to obtain an ERP endorsement and may offer one, two, three, and five (or more) years reporting periods for a proportionally larger cost. Since it is possible for claims to be made and reported years after an incident occurs, it is worth exploring options for a longer term than one year.
Policy Exclusions
Policy exclusions should be scrutinized as they will limit coverage availability for certain practice areas, among other considerations. Exclusions may include, but are not limited to:
- Practice areas related to extraordinary financial risk, such as securities practice
- Practice areas with higher expected levels of malpractice claims, such as plaintiff personal injury, real estate, and bankruptcy
- Coverage addressed by other types of policies, such as workers compensation, employment practices liability, directors and officers, and general liability
While a comprehensive discussion of all policy exclusions is beyond the scope of this article, it is important to understand the various exclusions on any policy and how they might affect the type of work done by your firm.
Coverage Enhancements
Lawyers Malpractice insurers operate in a competitive environment and may offer coverage enhancements to differentiate their coverage in the marketplace. Certain enhancements include:
- Reimbursement for time spent in depositions and appearances related to a malpractice claim against your firm
- Coverage for disciplinary proceedings
- Privacy and data breach coverage related to hacking or theft of client personal information
- Reduced deductible for mediation/arbitration claims
- Automatic acquisitions coverage
Conclusion
Cost is not the only issue with purchasing professional liability coverage for your firm. Careful consideration should be given to choice of insurance broker, insurer, and policy terms. The goal when purchasing a policy should be maximizing the value of the policy, including coverage and services, and being aware of the compromises that may occur when balancing the cost of a policy against the coverage provided. Because this article does not allow for an exhaustive analysis of all the considerations involved in purchasing malpractice insurance, the reader is urged to work with an insurance broker with expertise in professional liability to obtain coverage.
Please contact us if we assist with acquiring coverage for your firm.