Lawyers need to have professional liability insurance. Because they are considered to be a "distressed" risk, not all lawyers can get the coverage they need on the standard market. What exactly does it mean to be "distressed"?
A "distressed" risk is one that is hard to insure because of the number of claims, the severity of the claims, or disciplinary complaints or actions. "Hard to place" and "distressed" are often used interchangeably, but they are not the same thing. "Hard to place" usually means that the lawyer or law firm works in a more risky area of law, such as Personal Injury Plaintiff or Patent, but that they have never been sued or disciplined. If a law firm's losses or disciplinary history make it "distressed," it will have a much harder time getting professional liability insurance and will usually have to settle for less coverage at a much higher price. The good news is that there are a few markets with surplus lines that can help the "distressed" law firm get the professional liability insurance it needs.
Surplus lines are often used in a negative way because the insurance product is not protected by any state insurance guaranty association, and the policy form and rates charged are not regulated or approved by the State Insurance Commissioner. But not every excess lines insurance company is the same. Surplus lines insurers are reviewed by insurance company rating agencies like A.M. Best, and state insurance departments usually list them as an "Approved Surplus Lines Company." Before buying insurance from a surplus lines company, law firms should check with their state insurance department to make sure the company is an approved surplus lines insurer and has an A.M. Best rating of at least A VII. Many admitted professional liability insurance companies will have a surplus lines facility for applicants or insureds who don't meet their standard program requirements but would be okay if they could charge a more reasonable premium for the risk. In this area, there are a number of A and even A+ markets to go after.
To find a surplus lines insurer with a high enough rating that you can trust to cover you if you make a claim, you usually need to find a broker who specializes in professional liability and works often with distressed placements. As a general rule, most brokers who offer lawyers professional liability as a full-time product line will have an insurance company or "distressed facility" that they have worked with successfully in the past. It is best to find a broker who knows the company they are recommending and how they handle claims and policy forms.
Here are some good questions to ask an insurance broker about the company that will provide coverage:
- Will the claims adjuster give you a list of law firms in your state from which to choose a defense attorney, and will the company work with you to consider a firm you suggest?
- Is the insurance company willing to defend a false claim to protect your reputation in the community, or do they just want to "get out the checkbook" and close the claim no matter what?
- Will the insurance company keep you up to date on the status of the claim and ask for your advice on how to settle or defend it?
- Is professional liability what the insurance company specializes in?
- Is it a state-approved surplus lines insurer with at least an A VII rating from Best?
- Does the insurance company handle its own claims or does it hire an independent adjusting firm or a third-party administrator to do it?
Once a good insurance company has been found, it pays to look at the policy form and talk to the broker about the pros and cons of the coverage. The broker should give a list of "coverage highlights" that talk about both the good things about marketing the policy and important things about what it doesn't cover.
When you buy professional liability insurance, one of the most important things to look out for is whether or not the policy covers "prior acts." "Retro inception" is a term that is often used in distressed markets. It means that the policy's prior acts retroactive date will be the same as the policy's start date. On a Claims-Made policy, the act or acts that led to the claim must have happened after the retroactive date of the policy. This kind of policy is also called "no prior acts" or "restricted prior acts." If the policy has limited coverage for prior acts, you will need to buy an Extended Reporting Period (ERP) option from the insurance company whose policy is about to end. An ERP can be a very cost-effective choice because the terms are often based on rates from the standard market and do not include extra fees for claims or disciplinary issues. A broker should be able to tell you the pros and cons of buying this option. However, there are two things you should think about:
If your license to practice is taken away, does the option go away automatically?
- Will open claims use up the maximum amount of money the policy will pay out?
Other parts of a policy that can be limited on a form for a distressed policy are:
The consent-to-settle clause in the policy
- Exclusions for certain fields of practice, such as SEC There are exceptions for certain types of legal malpractice cases, such as a counterclaim after a fee collection suit.
- Defense costs are usually included in the limit of liability and eat away at it.
Coverage is usually limited to acts done on behalf of the named insured listed in the policy declarations. This can limit coverage for predecessor firms, individual prior acts, and activities done on the side.
3. Options for longer reporting periods are only available for one year or three years, and they are much more expensive than the market average.
When you fill out an application for professional liability insurance, a good thing to keep in mind is that you are the best representation of your practice's risks going forward. Underwriters who offer a distressed facility aren't too worried about how many claims have been made in the past or even if the firm has been disciplined by the state bar. Instead, they want to know that the problems that led to the claims or disciplinary action have been found and fixed. The best way to deal with claims or any other problem that has put the company in this situation is to be sincere and tell the whole truth. Include a description of the systems and steps that have been set up to make it less likely that similar claims will be made in the future. Include your thoughts on how strong the claimant's case is. Tell the underwriter what the representation did well. If you can, include loss reports from previous insurers that show how much was paid out and how much was set aside. If the underwriter has to figure out how much the claim is worth, it is likely to be more than what the insurance company has set as a reserve. Take an active interest in the payments and reserves that are set for the open claim and get regular updates on how the claim is going.
DefenseProSM Lawyers Professional Liability may be able to help a small or mid-sized law firm that has had trouble getting lawyers professional liability insurance because of paid claims or disciplinary actions. DefenseProSM is run by Lockton Risk Services, which is a division of Lockton Companies in Kansas City. Lockton Companies is the largest independently-owned commercial insurance broker in the U.S. DefenseProSM is designed to meet the professional liability needs of law firms that are in trouble.
