What is professional liability insurance?

Professional Liability Insurance is one of the most important insurance coverages a law firm can carry. As an attorney, you and your firm likely uphold the highest standards of professionalism and service to your clients. However, in spite of your best efforts, sometimes clients can be disappointed with your work. In addition, in a busy law firm, mistakes and errors in professional judgment can sometimes occur.

Professional liability insurance can also be called malpractice insurance or errors and omissions insurance. This insurance coverage can help to protect your firm from financial repercussions if your firm is sued by a client for errors or perceived mistakes arising from the practice of law. Professional liability insurance can pay for the cost to defend lawsuits against you or your firm, as well as any settlements or judgments that arise out of your firm’s mistakes.

Common causes of malpractice lawsuits include misfiled or delayed paperwork, and failures of professional judgment such as failure to know the law, errors in planning or inadequate discussion or investigation, and failure to follow instructions. Additional claims come from allegations of conflicts of interest, fraud or failure to obtain client consent. Any mistake that your firm makes that causes significant expense or losses to a client is a possible cause of a malpractice claim.

Professional liability insurance is not required by law in most states. However, at least 26 states require attorneys that do not carry malpractice insurance to provide notice to their clients that they are not covered. Some of these states require attorneys to have their clients sign a written disclosure that states the attorney does not have malpractice insurance coverage.

What does professional liability insurance cover?

Every insurance company’s policy is different, so it is important to read your policy carefully or discuss coverage with your insurance agent or broker. Most policies will cover errors and omissions claims that arise out of your primary area of law practice. For a law firm, professional liability insurance will cover both the firm itself as well as the individual attorneys in the firm.

Additionally, many policies will also cover activities incidental to acting as an attorney. These activities can include acting as a notary public, serving as a title agent, acting as a trustee or executor, and acting as an officer, director, or member of a professional organization.

For the majority of law firms, such as general practitioners without any history of claims, insurance companies can offer standard policies which are generally less expensive.

However, practitioners practicing in certain areas of law that are riskier, or firms with substantial claims history or a history of disciplinary action may be denied standard coverage and only qualify for nonstandard policies with higher premiums. Areas of practice that may have higher premiums include:

• Patents, trademarks, and intellectual property
• Plaintiff’s personal injury
• Class action and mass torts
• Securities law
• Trusts and estates
• Residential real estate and loan modifications
• Entertainment law

What doesn’t professional liability insurance cover?

The following actions are generally excluded from professional liability insurance claims:

• Fraudulent, criminal, dishonest, or malicious acts.
• Legal or other services furnished to businesses controlled or owned by the insured firm or attorney.
• Fiduciary duties to retirement plans covered under ERISA.
• Bodily injury or property damage, as these claims are covered under general liability insurance.
• Claims or lawsuits between lawyers who are both part of the insured law firm.
• Any claims where an attorney or firm was aware of the possibility of a claim but did not disclose it before the policy took effect.

Limit of Liability

An important choice for your professional liability insurance is the limit of liability. The limit of liability is the maximum that the insurance company will pay in the event of a claim. The higher the limit of liability, the higher your insurance premiums will be.

The limit of liability is usually denoted as per claim/aggregate. For example, you may select a limit of liability of $5 million per claim / $5 million aggregate. This means any given claim will have a maximum coverage of $5 million, and the most the insurance company will pay in a policy year is $5 million total.

In most policies, any fees for legal defense are included in the limits of coverage. This means that any attorney’s fees expended to defend against claims will reduce your limit of liability available to pay settlements or judgments against your firm.

The reason that legal defense is often included within the limit of liability is that many claims are dismissed or result in small judgments or settlements. Oftentimes, the cost to defend against a claim is higher than the actual settlement or judgment itself, so legal defense costs make up a large proportion of professional liability claims.

Deductibles

When purchasing a professional liability policy, you also have the option to choose your deductible. The deductible is the amount of a claim your firm is responsible for paying before the insurance company’s coverage takes effect. Deductibles are a form of risk sharing, and provide a financial incentive for your firm to take actions to reduce the risk of malpractice claims.

Different insurance companies will offer different deductible options. A common range for deductible choices might be from $0 up to $100,000. A higher deductible will lower your insurance premiums.

For example, if you have a deductible of $10,000, and there is a claim against your firm that settles for $100,000, your firm will be responsible for $10,000 of the claim, while the insurance company will pay the remaining $90,000.

Is professional liability a cliams-made or occurrence-based coverage?

Professional liability insurance policies are claims-made policies. With a claims-made policy, the event that triggers insurance coverage is the filing of the claim. The insurance that is active at the time the claim is filed covers the claim, rather than the insurance that was active while the incident causing the claim happened. This differs from occurrence policies, where the trigger of coverage is an accident or specified event, rather than the reporting of the claim.

Consider this example: you have a claims-made policy for the calendar year 2017. Your firm represented a client in a legal matter from 2014-2015, and your work on the case has been finished since 2015. In 2017, the client discovers errors you made on the case and sues your firm. The insurance policy that would cover this claim is the one that you have in 2017, rather than your insurance in 2014 or 2015.

The reason for claims-made policies is that claims in professional liability usually arise from a series of incidents, errors, or omissions over a period of time, rather than from a single event.

Importantly, with claims-made policies, any claims that are submitted after a policy expires are not covered even if the event that caused the claim happened while coverage was active. When you cancel your claims-made policy, you lose all coverage for any work you’ve performed in the past.

Retroactive Date

Claims-made policies have a retroactive date. Any legal work you’ve performed from the retroactive date up till the present will be covered by a claims-made policy. However, any work performed before the retroactive date will not be covered even if the claim is made while the current policy is active.

For example, if you have an active policy with a retroactive date of January 1, 2015, any legal work you performed before then will not be covered by your claims-made policy, even if you are sued for that work while your policy is currently active.

For attorneys who have had continuous professional liability coverage since they started practicing law, the retroactive date on your policy should go back to the first day of your first professional liability policy, protecting all of the legal work you’ve done.

If you drop your professional liability coverage for a period of time, you may lose coverage for all legal work you’ve done in the past.

Extended Reporting Period

Many claims-made policies have an extended reporting period of 3-6 months that is included in the policy at no cost. This gives you additional time after the policy has ended to report claims that occurred while the policy was active.

For example, if you have a policy that ends on December 31, 2017, with a 6 month extended reporting, if you are sued before June 30, 2018 for legal work that you performed before December 31, 2017, that work will be covered by your claims-made policy.

Some policies guarantee the right to purchase a longer extended reporting period of several years for a stated additional premium which is usually priced as a percentage of the premium of the expiring policy. It is also possible but not guaranteed to be able to purchase an unlimited reporting period on the open market from another insurance company. These options are called buying out the tail.

Changing Insurance Carriers

With claims-made policies, it’s important to ensure your coverage is continuous when you change insurance carriers. When starting a new policy, the best option is to have your new carrier provide coverage for your prior acts by setting your retroactive date to be the same as the retroactive date that you have on your expiring policy.

If the new carrier is unwilling to cover your prior acts, you may need to purchase an unlimited reporting period from your existing carrier, or on the open market. If you don’t take these steps, you’ll lose coverage for any legal services you performed prior to starting your new professional liability policy.

Retirement

If you are closing your firm and retiring from the practice of law, it is important to purchase an unlimited reporting period from your insurance carrier or on the open market. If you cancel your policy when you retire without buying out the tail, you will not have any coverage for any of the legal services you provided prior to retirement.

If you are retiring, but your firm continues to maintain its professional liability coverage, you will personally continue to be covered by your firm’s professional liability insurance as long as the firm keeps its coverage and doesn’t dissolve.

How much does professional liability insurance cost?

Pricing for attorney’s malpractice insurance is somewhat counterintuitive. Insurance premiums are lowest for new attorneys, rises substantially in years 5-10, and levels off for experienced attorneys.

According to the American Bar Association, lawyers in private practice for less than 5 years report only 3.5% of malpractice claims, while lawyers who have been practicing for 11-20 years report 37% of claims. The explanation for this statistic is that new lawyers haven’t been in practice long enough for claims to be discovered and reported. Additionally, experienced lawyers handle more complicated cases, and also oversee other lawyers’ work.

The American Bar Association reports that premiums for new attorneys can start around $500, but can rise to $1,500-$3,000 for more experienced attorneys.

Additionally, areas of law practice with frequent claims such as plaintiff’s personal injury, and real estate law have higher premiums. Practices with claims of high severity such as patent/trademark law, entertainment law, and securities law also face higher prices.

Reducing Risk

In addition to carrying professional liability insurance, law firms can also take steps to reduce the risk of a malpractice lawsuit or claim.

Choosing your clients carefully can help to reduce your firm’s liability. When interviewing new clients, it’s important to get a sense of their expectations. Don’t hesitate to turn away clients who you think may have unreasonable expectations for you as an attorney or for the outcome of their case. By avoiding clients that won’t be happy regardless of the work that you do, you’ll have an opportunity to reduce your risk of malpractice claims.

Additionally, many malpractice claims arise from a lack of communication between attorneys and their clients. It’s important to communicate regularly with your clients to prevent any misunderstandings from developing. Many firms follow the best practice of updating or communicating with clients at least every 30 days, even if nothing is happening on their case. It’s also important to document the content of client communications and store this documentation in the client’s file, because memories can be faulty.

Another common cause of malpractice claims comes from missing deadlines or failing to fire paperwork in a timely manner. Many law firms use software called docket control to help them keep track of required deadlines and paperwork. If your firm doesn’t have docket control software, it well worth the investment to install this software to help your practice run smoothly and reduce the risk of calendar-related malpractice.

Reporting Claims

When you apply for or renew your professional liability insurance, the insurance company will ask you if you’re aware of any potential matters that could become a claim. It’s important to fully disclose any potential future claims even if you haven’t been served with a lawsuit by a disgruntled client. If you don’t report any potential claims you’re aware of at the time of application or renewal, you may not receive coverage for them at the time the claim is filed.

In order for a claim to be valid under a professional liability policy, you must have a policy in place, the error must have occurred after the retroactive date, and notice must be given to the insurer in a timely manner.

If you are aware of a matter or situation that could potentially become a claim, it’s important that you notify the insurance company as soon as possible. Insurers encourage early reporting of claims because they can hire experts who can help to resolve a situation before significant damages occur.

Some attorneys are sometimes reluctant to report claims early because they are afraid it will increase their premiums. However, reporting a claim does not automatically trigger a premium increase. Sometimes lawyers ignore an angry or frustrated client, assuming that the matter will go away on its own, but the best course of action is to report these circumstances to your carrier so they can provide assistance to resolve the situation.