Causes and Effects of Claims

Summary: Attorneys, by the very nature of the profession, are in need of professional liability insurance. This article is a general discussion of the reasons for professional liability insurance for lawyers, along with a guide for attorneys to use in the analysis and evaluation of insurance coverage provisions.

Topics covered:

Introduction
Markets
Seven points

Introduction

That the legal profession is vulnerable to attack on many grounds is common knowledge to almost everyone, certainly to the professionals themselves. The reasons for the vulnerability of lawyers are varied.

Attorneys are being affected by a multitude of complex and quick-changing statutes, regulations, and procedural rules which, if not followed by the attorneys, can lead to claims of malpractice. Moreover, still other legal developments have effected a certain erosion of once stalwart protective barriers to the liability of attorneys—such as gross negligence and privity—and this undoubtedly increases their vulnerability to loss. And, in spite of the good faith efforts of competent attorneys, some clients inevitably will be unsuccessful or dissatisfied with their lawsuits or demands.

On the other hand, many claims made against attorneys are legitimate outgrowths of professional errors and omissions that are rooted in countless causes, including incompetence. By dint of sheer numbers, it is impractical to list the pitfalls here: no better proof of the numbers and diversity of these legitimate errors and omissions claims is required than that available from court digests and other legal texts.

In order for attorneys to protect themselves from professional liability claims—be they legitimate or not—professional liability insurance coverage is a must. The question is not “do I need professional liability insurance?”, but rather, “where can I purchase such coverage and what protection will I get for my money?” This article will help give some answers.

Markets

The market for attorneys professional liability insurance tends to follow the cycles of the general commercial insurance market, with its movements being perhaps more precipitous on the downturn and gradual on the upturn. Like all insurance cycles, lawyers professional liability insurance cycles from multiple insurers competing with price limitations and coverage expansion to situations where there are a limited number of insurers willing to take the risk whose prices are more than double the premium cost when there were multiple insurers competing for the business.

Alternative risk financing plans, many sponsored by state bar associations, have moved in where traditional insurers show reluctance to participate. Often the motivation for attorneys to participate in alternative markets is not price but stability in the availability of insurance and the ability of alternative carriers to meet their unique needs. These alternative markets have held up even when the market is soft, because lawyers, like other insurance consumers, have become more sophisticated in their understanding of insurance cycles. On the other hand, there are many traditional insurance markets in which attorneys can buy professional liability policies.

Seven Points

The following seven points are suggested as an aid in the analysis and evaluation of provisions in the liability coverage forms that are available to lawyers.

1.Must insureds who are not sole proprietors be specifically scheduled by name or does coverage apply on a blanket basis? The blanket approach is preferable. It not only reduces the chances of oversight, but it also eliminates the expenditure of time and effort involved in reporting changes—a particularly significant consideration if they are frequent.

a.Modern lawyers professional liability policies require an application before inception or before renewal providing a detailed description of each lawyer practicing with the firm.

b.The professional experience of each lawyer is required.

c.Most will allow new lawyers to be added to the policy.

d.Blanket coverages are rare and usually deal with large firms.

2.What protection is available to an insured that leaves the employment of a covered firm if a claim arises after termination of employment, though the claim is based on an error or omission committed during the employment period? If coverage is not specified for this type of situation, the former insured is without protection even though he or she were to be covered under the policy of a new employer. If this gap cannot be covered by insurance, it is even more essential that the insured be aware of the exposure.

a.When leaving one firm for another firm or sole practice, it is prudent for the lawyer to acquire coverage for himself or herself including coverage for prior acts.

b.Special coverages are available for lawyers upon retirement that cover prior acts.

3.Are payments for defense and related costs covered within the applicable limit of liability? Though it might be expected that those costs are treated as part of the liability limit, there are some exceptions. Those forms that pay defense costs in addition to the liability limits are obviously more advantageous to the insured.

a.Current lawyers professional insurance contains burning limits clauses that reduce the available policy limit to pay claims by money spent by the insurer for investigation and defense of claims and suits.

b.If available the lawyer should attempt to find an insurer that will not burn away limits recognizing that such coverages will be more expensive than a burning limits policy.

4.Do policies extend coverage to attorneys who serve as officers or directors of other firms, associations, or government entities? This is an extremely important point to consider, because attorneys frequently are asked to serve in those capacities. While it is possible to obtain this extension, coverage seldom, if ever, encompasses the exposure related to government entities. Because courts have tended to say that any directors and officers action against an attorney serving on a board of directors is in his or her capacity as a lawyer giving legal advice, more and more lawyers professional liability policies exclude completely claims from companies for which an insured is a director.

a.If a lawyer in the firm seeking insurance is so engaged, he or she should require that the firm, association or entity provide him with directors and officers liability insurance (D&O) coverage.

5.If a policy applies to otherwise covered claims presented during the policy period, what protection is available to a firm whose policy is nonrenewed or canceled as regards claims that are made following termination and resulting from errors and omissions during the time the policy was in force? This limitation presents the same disadvantages to insureds as pointed out in (2) above. But in these situations (cancellation or nonrenewal), insurers will provide certain extensions—referred to sometimes as “discovery clauses” or “extended reporting period endorsements”— if insureds make the prerequisite request for coverage and pay an additional premium. The usual requirement for insureds that elect the extension of coverage is to notify the insurer of their intent within a specified number of days following termination. Insureds therefore must keep that time period firmly in mind and act as promptly as possible if the extension is desired.

a.Almost every lawyers professional insurance policy is a “claims made” or a “claims made and reported” policy.

b.There can be no coverage unless the claim is made during the policy period or made and reported during the policy period.

c.A new policy must be obtained after cancellation or non-renewal that covers prior acts so that if a claim is made after the termination date of the cancelled or non-renewed policy it can be successfully reported to the new insurer. Some insurers are willing to continue coverage for a period of time beyond the termination date. With one insurer the extension may be for one year, whereas another insurer may provide additional extensions. The latter is clearly the better of the two choices because of the expected time lag between an error or omission and a resulting claim.

d.The cost of additional extensions must also be taken into consideration and the insured will have to decide on whether further coverage is really worth the cost.

6.What is the territorial scope of coverage? If attorneys are required to handle affairs from time to time outside the United States, worldwide coverage, which is available, obviously will be required. Otherwise, the usual limitation to within the United States, its territories, possessions, or in Canada will suffice.

a.If the attorneys do work outside the United States they should be certain that the policy issued contains an endorsement that provides coverage for errors or omissions made outside the U.S.

7.How much advance notice is given insureds if the insurance company wishes to cancel coverage? The time period varies but usually it is no less than 10 days. Considering the difficulty of obtaining professional liability insurance for attorneys, a 10-day period is likely to be grossly inadequate. While it may be difficult for an individual insured to obtain a longer period, the advantages of an extended period are such as to make it surely worth the effort to try.

a.Some states limit, by statute, the cancellation of insurance policies that have been in effect for more than 60 days.

b.Lawyers professional liability insurance is a contract and the insurer will negotiate terms and conditions with its customer.

c.If there is no statutory protection over short notice cancellations it would be prudent to negotiate better terms.

d.Statutes often require the insurer to give 30 to 60 days notice or an offer to renew no later than 30 or 60 days notice.

Coverage provisions that contain all or most of the broader aspects mentioned above represent the ideal more closely than the actual. Yet, large, reputable groups of professionals may be able to obtain certain concessions along some of the suggested lines. In the meantime, simple awareness of the possible pitfalls should help attorney-insureds to become more conscious of loss prevention, particularly so in areas where claims may have to be wholly or partially retained.

To obtain the best available lawyers professional insurance policy, it is prudent and efficient to use the services of an insurance broker who will represent the lawyer and not the insurer in acquiring the insurance. The broker will have access to multiple markets from admitted insurers and surplus line insurers who are not admitted to do business in the state but are authorized to sell insurance as a non-admitted insurer. Since there are multiple insurers in the market, obtaining the best available coverage can be found by use of a professional broker who will transact insurance with the insurer, but on the behalf of the lawyer.