IMPORTANT DECISIONS YOU NEED TO MAKE WHEN
PURCHASING A LEGAL MALPRACTICE POLICY
by David A. Grossbaum, Esq.
David is a partner in the Boston and Providence offices of Hinshaw & Culbertson LLP. He represents lawyers in legal malpractice cases, represents insurers in coverage disputes, and lectures on risk management for lawyers. He can be reached at 617-213-7003 and at dgrossbaum@hinshawlaw.com.
When you buy a legal malpractice policy, many of the terms are not negotiable. But you do have a number of important options to choose from that affect the price and the coverage. These include the limits of liability, the amount of the deductible, whether the deductible will be applied to payments of judgments and settlement only, or will include the attorneys fees, whether the defense costs will reduce the limits of liability, and whether to buy coverage for acts committed all the way back to the beginning of your legal career or more limited coverage.
The Limits of Liability
The limits of liability are the amounts available to pay any judgment and settlement, and to pay the defense costs, for claims made against you in a legal malpractice case. Under the standard policy, these limits are reduced by the amount of money the insurer pays for these costs. When the carrier pays out an amount equal to the limits, it has the right to cease providing any further defense and will not be obligated to pay any more towards judgments or settlements.
Policies have two liability limits: a “single” limit and an “aggregate” limit. The single limit is the amount available for each claim. The aggregate amount is the maximum that the carrier will pay for all claims that are made against you and reported during a single policy period. For example, if you buy a policy with a $1MM single limit and a $2MM aggregate limit, the company will pay up to $1MM to deal with each single claim brought against you, but will not pay more than $2MM with respect to all of the claims brought against you. If the carrier incurs $500,000 for a single claim, you have $1.5MM left to deal with other claims under your policy, but not more than $1MM for any single claim.
In most policies, all “related” claims are treated as a single claim and subject to a single liability limit. Whether claims are “related,” or instead are separate claims subject to separate single liability limits, may be determined by policy language, but is more often decided by court cases interpreting that language.
When considering the limits you wish to purchase, think about the types of cases you handle and the worst case scenario that could occur if you made a mistake in one of them. If you work on small cases, where the risk of harm to a client is less than $250,000, you will be able to buy a smaller policy than someone who typically handles cases where malpractice will cause the client a loss of $1MM or more. Make sure that the single limit is enough to cover this worse case scenario. Most lawyers cannot afford an uninsured judgment in excess of their liability limits.
But you will also need to consider that these limits will usually be reduced by the amount of defense costs that the insurance company pays to defend you. Defense costs can mount quickly if a case is hotly contested, is complex, or where experts are heavily involved in the defense. Thus, when determining the single limit you need, it is important to add in the likely amount of defense costs for the claim.
If you serve institutional clients, they may demand that you purchase certain minimum limits. If you refer cases to other law firms, keep in mind that you could be found liable for mistakes made by those other firms, if they do not have adequate insurance. If those other firms do not have adequate insurance to cover liability arising from your referral cases, you better carry such limits.
Deductibles
As with any other type of insurance, there is a deductible that you will have to pay before the carrier pays a judgment, settlement or defense expenses. You will have a couple of choices with respect to deductibles: the amount of the deductible, whether to have an aggregate deductible, and whether the deductible will apply only to judgments or settlements, or will apply to the payment of attorneys fees as well.
The smaller the deductible, the higher the premium. In deciding on the size of the deductible, think about the frequency with which you are likely to be sued for malpractice. If you expect a large number of small claims that will be quickly resolved, and you do not want to pay the bulk of the costs associated with these, you will want to have a smaller deductible, say $2500. If you are not likely to be sued often, and your firm can handle the risk of paying a larger deductible in the rare event of a claim, then a higher deductible will save you money. Depending on your claims history, the carrier may offer you limited deductible choices.
Most deductibles apply to both defense costs and to judgments and settlements. Many carriers offer the option of a deductible that applies only to judgments and settlements, but not defense costs (referred to as a “loss only” deductible). The price for a loss only deductible is higher because the insurance company is forced to absorb all the defense costs itself. Regardless of the merits of the malpractice case against you, it will undoubtedly be necessary for the carrier to hire an attorney and that will likely use up your deductible. If you expect many claims that will be resolved in your favor, and your biggest worry is paying the lawyers every time such a claim is brought, you should get a loss only deductible.
Related claims that are treated as a single claim for deductible purposes, and are subject to only one deductible. On the other hand, if the claims are not related to one another, but there are a large number of them (say, for example, in a class action matter involving numerous unrelated claims), the firm may be subject to a large number of deductibles resulting in a very significant payment of the firm’s own money towards resolution of these claims. An aggregate deductible places a cap on the amount of deductibles the firm must pay. An aggregate deductible in such a circumstance will likely benefit the firm.
Defense Costs Outside The Limits Of The Policy
As discussed above, defenses costs reduce the limits of liability in the typical policy. Most carriers will, however, offer the option of paying a higher premium for a policy where the defense costs do not reduce liability limits. Under these policies, the entire policy limit is available to pay any judgment or settlement and the costs of the defense are borne entirely by the insurance company (perhaps subject to your payment of the deductible). These policies are particularly appropriate where the size of the likely judgment or settlement is ascertainable, but the likely cost of defense is not. A policy with defense costs outside the limits may be more cost effective than purchasing a larger liability limit to include a cushion for defense costs.
In some states you will be offered a policy where some, but not all, of the defense costs are outside the limits of coverage. This means that some of the defense costs will reduce the limits, and the remaining defense costs will not. Some states require that defense costs not reduce the limits for policies with smaller liability limits.
Tail Policies And Prior Acts Endorsement Dates
A carrier may give you a choice between “full prior acts” coverage and coverage only for acts occurring after a certain date (called a retroactive date). Full prior acts coverage means that you are covered for any acts of malpractice committed by you at any point in your legal carrier, if the claim is first made against you and reported to the carrier during the policy period. If, on the other hand, you purchase coverage with a retroactive date, then you are only covered if the claim was first made and reported to the carrier during the policy period and the act on your part occurred after the retroactive date. Coverage with a retroactive date is less expensive because the carrier has less exposure.
When a lawyer changes firms, the new firm’s carrier may decide that it does not wish to provide coverage for any acts of malpractice that may have occurred at the prior firm. Thus, it may offer a policy that has a retroactive date that is the same date you sign on with the new firm. As long as the prior firm continues in existence, you will be usually be covered under the prior firm’s policy for acts committed while at that firm. But how can you be sure that your prior firm will remain in existence and that it will maintain malpractice coverage? If it goes out of business, goes through a transformation, or changes its coverage, you may no longer have coverage. Similarly, sometimes when a lawyer switches carriers, the new carrier may not want to pick up coverage for acts committed while another insurer was on the risk.
The very important question is whether you should spend the extra money for full prior acts coverage. The answer is almost always “yes.” It is advisable to have coverage for your entire career as statutes of limitation can be tolled for very long periods of time.
If the new carrier is not offering full prior acts coverage, it is sometimes possible to purchase “tail” coverage under your prior policy. Tail coverage extends the period for you to report claims that are first made against you after you leave the firm, but the tail only covers acts you committed before you left the firm.
But not all carriers offer tail coverage to departing lawyers if the prior firm continues in existence and continues to buy a policy. Some carriers only offer tail coverage when the firm disbands or when a partner retires from the practice of law. While you may be dissuaded from purchasing tail coverage, even if it is available, due to its cost, keep in mind that you will completely uninsured for a claim arising from acts occurring prior to your retroactive date.
Conclusion
Although many of the terms of your insurance policy will not be negotiable, you do have options that allow you to dictate the scope of the coverage and the price of the coverage. When deciding which options to purchase, do not be shortsighted and look simply for the lowest present premium. Insurance is all about mitigating risk and that sometimes costs more.