The Basics of Lawyers’ Professional Liability Insurance

Who Needs Coverage & What Questions Should I Expect

Over the past two weeks, I have had conversations about lawyer’s professional liability insurance and the need for it with several new clients. One client doesn’t have coverage but certainly now wishes that he did. And the other client leaves all the malpractice insurance claim and grievance handling and reporting to a non-lawyer employee in the office. I cringed when I read the explanation of the non-lawyer for why he “didn’t need to report” the grievance because there was no coverage for it. Wow, how wrong he was!

In any event, lawyer’s professional liability (LPL) insurance is a must. Despite the fact that many lawyers try to rationalize away the need for insurance, the bottom line is that LPL insurance is well worth the expense and provides you with the ability to sleep at night knowing that your assets are not at risk. The last thing you want to do is to find yourself on the wrong end of a lawsuit or grievance with your personal and business assets at risk.

Now that you have made the prudent decision to shop for LPL coverage, let’s outline a few things you will want to consider. There are two primary ways to buy a policy. First, you can go directly to a company, complete an application, review a specimen policy, and get a price quote. Or, you can find a broker, complete one or more applications, get a recommendation for a company/policy based on the application, review the specimen policies, and obtain one or more quotes.

Furthermore, you can use both methods simultaneously because some brokers do not bind coverage for all companies and some companies do not sell through brokers. Outside of time involvement in searching the marketplace, we do not believe any method is better than the other. However, one must ask whether the incentive to receive a higher commission on the sale of a policy could alter the recommendations made by a broker. That potential pecuniary incentive aside, you, the lawyer-consumer, are responsible for the policy you choose to purchase.

Being a wise and cautious lawyer, you decide that you want to use a broker and that you also want to go directly to a couple of companies that do not sell policies through brokers. As I have mentioned, with both methods, the next step will be to complete an application(s) that the insurance company will use to assess the risk you pose and to price the policy accordingly.

Here are some of the topics asked about on the malpractice policy application:

• Limits of coverage desired
• Deductible amount desired
• If a sole practitioner, the name and contact information for a successor backup lawyer in case you are unable to tend to clients
• The type of calendaring and docket control procedures used
• Lawyers or nonlawyers responsible for date controls
• Whether you employ procedures to identify potential or actual conflicts of interest
• Whether you use engagement letters, limited engagement letters, nonengagement letters, and disengagement letters
• The names of the lawyers in the applicant firm, their years in practice, and whether any work is done out of the applicant’s home state
• The number of law clerks, paralegals, and clerical staff em¬ployed at the applicant firm
• The percentage of time, gross billable receipts, or billable dollars devoted to listed practice areas on the application
• The applicant’s revenue for the past three years
• Whether you have filed suit to collect fees in the past five years
• Whether you are in good standing with the State Bar
• Whether you have ever received a Bar grievance
• Whether you have ever been admonished or reprimanded by any court, State Bar, or administrative agency
• Whether you have ever been sued for malpractice
• Whether you or any named attorney engage in business with any clients
• Whether you or any named attorney has entered into any contract or agreement or writing guaranteeing the result of any professional service
• Whether you share office space with other lawyers
• Whether any named lawyer has ever purchased an extended reporting endorsement (tail coverage); and probably the most important question of all:
• Whether you or any named lawyer know of any fact, circumstance, act, error, or omission that could reasonably be expected to be the basis of a professional liability claim against the lawyer or the lawyer’s predecessors in business

Through the years, we have received many phone calls from lawyers who are completing their application for coverage. Repeatedly, they ask whether they have to disclose certain situations that have arisen in their practice within the policy period but that have not yet resulted in a grievance or lawsuit. The motivating reason for asking that question is that the lawyer is fearful that full disclosure will cause a denial of the application or a much higher premium quote.

Sometimes, the circumstance need not be disclosed, but sometimes, the question is too close. So, for those close situations, err on the side of disclosure on the application and report it to your current carrier too. The failure to disclose could come back to bite you and result in your not having coverage when you most need it—after you have received a claim or grievance. Why? Because the insurance company did not have the disclosure up front before quoting and issuing the policy. I cannot stress this enough—if the insured is aware of a fact, circumstance, act, error, or omission that could reasonably be expected to be the basis of a claim, it NEEDS to be reported to the current carrier and disclosed on the application. Failure to do so will most likely result in no coverage from either the old carrier or the new. Lawyers are often shocked when the new carrier does not cover the claim or grievance because you had knowledge of it before their policy incepted.

In such a situation, the company will take the position that a material misrepresentation has occurred, and the company could take several courses of action including cancellation of your policy. Your failure to disclose even a questionable fact, circumstance, act, error, or omission that could reasonably be expected to be the basis of a professional liability claim on the application could therefore have disastrous results. If you disclose it on the application, then again you should also report it to your current carrier before that policy period expires just to ensure that no claim or grievance falls between the proverbial coverage cracks of two different policies. Remember, you must report it to the current carrier before the policy period ends for coverage to be effective. The new carrier will exclude it from coverage under their policy. As longtime lawyer insurance expert Aubrey Smith remarked to me once, “Insurance companies aren’t in the business of buying claims.”

A final recommendation—DO NOT leave the finding of, application for, or securing of malpractice insurance to a non-lawyer in your firm. Invariably, non-lawyers do not understand the importance of the questions or the answers to them. Non-lawyers will wrongly focus on one factor-price.

With the understanding of the general policy terminology and the questions asked on the application for insurance, you now need to understand how a policy is underwritten and priced. Based on the information you supply in your application, the insurance company’s underwriter will review the information and, based on the company’s risk profiles, will determine the price of the policy and offer a quote. A number of factors dictate how an insurance company will underwrite and ultimately price a policy. Underwriting considerations, guidelines, and variables impacting the availability and cost of a policy include:

• Attorney experience—the longer an attorney is in practice, the higher the cost of the insurance, ordinarily
• Area of practice—some practice areas see more claims than others
• The frequency and severity of claims experience in the aggregate
• The claims made history
• The Bar grievance/disciplinary history
• Whether there are extra coverage features, including defense costs outside of limits and aggregate versus per-claim deductibles

The insurance marketplace also affects the pricing. The greater the competition between carriers ordinarily drives down the cost of coverage. A tight insurance market with fewer companies offer¬ing coverage gives lawyers fewer choices and allows insurance companies to charge higher premiums.

Finally, there are a number of important malpractice insurance policy provisions to consider. This begs the question: What policy provisions can you, as an insured lawyer, expect to see in your malpractice insurance policy? Along the same line, what policy provisions do you really want in your malpractice insurance policy? To learn more, checkout Chapter 2 of my book Minnows and Sharks – Lawyers’ Quick Reference for Reducing Risk and Avoiding Trouble at this link: https://chandler-law.net/minnows-sharks/