Professional Liability Insurance

By
Thomas L. Browne and
Thomas P. Sukowicz

Until the last decades of the 20th Century, a person who wanted to sue his or her lawyer for malpractice might have had difficulty finding a lawyer who was willing to bring such a suit. This is certainly not the case any longer.

In 1973, malpractice claims were filed against only about 5% of attorneys nationwide. Professional Liability Rep. 185–86 (May 1977). Statistically, by 1986, a new lawyer could expect be the subject of three claims before finishing a legal career, although ABA statistics showed that only about one of those three claims resulted in an indemnity payment. See Mallen, Cutting Through the Malpractice Maze, The Brief, Summer 1986.

Considering the significant increase in legal malpractice claims over the years, it is crucial that attorneys maintain appropriate professional liability insurance policies.

Regulation of Professional Liability Insurance

Some jurisdictions have begun regulating lawyers’ professional liability insurance. For example, Oregon requires lawyers in private practice licensed in that jurisdiction to demonstrate proof of financial responsibility. Since 1978, Oregon has had mandatory malpractice coverage for all lawyers in private practice through the Oregon State Bar Professional Liability Fund.

The trend in recent years is that lawyers are being required to disclose to clients and potential clients whether they have malpractice insurance. Jurisdictions, such as Alaska, Ohio, New Hampshire and South Dakota require that lawyers who have no malpractice insurance disclose that fact to their clients. Others, such as Illinois and Virginia, require that lawyers disclose to the attorney regulatory body in those states whether they have malpractice coverage, and that information is disclosed to the public on the web sites of the attorney regulatory agency.

Read Your Policy and Know Your Coverage

Understanding the need for insurance is only the first step. Knowing what your current policy covers is an important next step.

Many, possibly most, lawyers have not read their professional malpractice insurance policies. Some have no idea of the nature and extent of their coverage or only a generalized understanding of what their policies do and do not cover. If a lawyer has not read his or her firm’s malpractice policy, there is a significant chance the firm might lack coverages it needs.

When evaluating a professional liability policy, the first concern should be whether the firm has coverage for the persons and the risks that need coverage. In particular, you need to know who are the "insureds" as defined by your policy. If there are lawyers who are “of counsel” to your firm, or lawyers with whom you have referral relationships, ascertain whether they are covered under your policy. Since you may face claims arising out of their conduct, these questions are not merely academic. You should have a clear understanding of who is and is not an insured under your policy.

Likewise, know what conduct is covered; or, more accurately, what conduct is excluded from coverage. It is risky to assume your policy covers all the practice areas in which you may dabble from time to time. Some standard policies, for example, exclude claims involving alleged ERISA or securities violations. In fact, policy exclusions with respect to highly regulated industries are common.

Obviously, what is or is not covered is specific to each policy. The point is, if your policy excludes coverage with respect to any practice area or legal services that expose you to the risk of a claim, you should seek an appropriate endorsement providing such coverage.

Take the time to read your policy. It's worth it. And when renewal time comes around, make an educated determination whether there is anything you can and should ask for to secure the best coverage for you at the least expense.

What Coverage Does Your Firm Need?

Your professional liability insurance policy is your number one line of defense. Therefore, it is critical that it does what you want and need it to do.

The professional liability policy that is best suited for any given law firm depends on a variety of factors. The standard claims-made legal malpractice policy forms are quite broad-based and cover a wide spectrum of circumstances, errors and omissions. For most lawyers they are adequate or more than adequate. But one size does not always fit all, at least comfortably, that is. It may sound obvious, but it is best to tailor your malpractice policy to your firm’s particular needs.

All law firms are not the same and the basic risk factors of each firm are different. Consequently, the appropriate coverage for any given firm will vary. The nature and extent of a firm’s professional liability risk is governed in large measure several variables, each of which should be considered before deciding what coverage is appropriate.

The first consideration is the firm’s realistic maximum dollar exposure. Some lawyers deal with matters that involve greater exposure than other lawyers. The potential civil liability exposure on any legal representation is always at least as large as the dollar value of the matter involved. The greater the amounts at stake in the legal matters the firm handles, the greater the need for more coverage.

Although intellectual property lawyers may not draw a large number of claims compared to other practice areas, the claims that are made usually involve very large sums of money. Even for a firm that primarily handles residential real estate closings or personal injury cases, however, it would not take a very large house or particularly severe injury for the client’s matter to involve hundreds of thousands of dollars.

The second consideration is the nature of the firm’s practice. Some areas of law are far riskier than others. For example, plaintiff's litigation, domestic relations and estate planning tend to draw large numbers of claims compared with other areas of practice. On the other hand, securities, banking and corporate practices result in fewer claims: but those claims tend to be severe. If your practice is primarily litigation-based, you may want coverage for Rule 11-type claims. Conversely, if you never step foot in a courthouse, such coverage is superfluous.

If your practice carries with it a substantial risk of bar grievances and disciplinary complaints, such as personal injury and family law practices, you may want to consider coverage offered by some insurers for the cost of defending such proceedings.

Another factor is the firm’s location. The citizens of some geographic locations are far more litigious than others, and thus are more likely to make a claim of professional malpractice. Moreover, juries in different counties will award significantly different damages for the same injury. Lawyers tend to know what counties in their states pose increased risk. If a firm practices in one of those counties, take that into consideration when determining how much coverage is needed.

The fourth consideration is the nature and extent of the risk management policies and procedures that the firm has implemented. Many legal malpractice claims are completely avoidable. If a firm has reliable internal controls covering matters such as docket and conflicts of interest, it is far less likely to be sued than a firm that does not. Law firms that take risk management the least seriously need more coverage.

The final factor is the number of lawyers in the firm. Common sense dictates that more lawyers mean more chances for a claim of legal malpractice. Accordingly, the greater the number of lawyers usually calls for larger aggregate limits.

While there is no one correct answer for how much professional liability insurance a firm should carry, one never hears any lawyer say, "I wish I had less coverage."

Kinds of Policies

Just as no two firms are alike, all lawyers’ professional liability policies are not alike. Besides having different coverages, there are different kinds of policies. Those policies written on an “occurrence” basis may provide insurance for a claim which is made in the future. “Claims-made” policies offer coverage for claims made during the policy period, even though the error or omission occurred prior to the policy period. An attorney should also consider policies which are excess or umbrella to the primary coverages since they form part of the basis insurance protection.

Insuring the Cost of Defense

Law firms need professional liability insurance for two purposes. One is indemnity. The other is to finance the cost of the legal defense of the claim. The coverage of the cost of the defense of a legal malpractice claim is a valuable benefit under a professional liability policy.

An attorney should not attempt to defend his own malpractice claim. For one thing, many attorneys who have been negligent often do not recognize their error until it is explained to them by defense counsel. Secondly, handling legal malpractice litigation requires skills and knowledge which are not normally possessed by the attorney who handles routine tort litigation. Also, there are often key issues of credibility involved in legal malpractice litigation which involve disagreements between the attorney and client as to what actually transpired. One cannot be a party in such litigation and competently represent himself as an advocate for his own credibility. There have been too many incidents where an attorney has materially impaired his defense by prejudicial admissions or other conduct which in some instances have constituted an independent fiduciary breach.

It should be noted that some professional liability policies reduce aggregate limits by the cost of defense, and that cost can be very considerable. Legal malpractice actions involve substantial discovery. Experts are numerous and expensive. In a case of significant legal and factual complexity, even a $500,000 policy may be insufficient to provide a complete defense, particularly if the firm’s desire is vindication at trial. The bottom line is that, if it has a declining limits policy, the firm may have less coverage than it thinks.

Risk Management Program

A firm with a strong risk management program is less likely to be the sued for malpractice. In addition to having the proper systems and procedures in place to address conflicts of interest, docket and calendar, handling files, communications with clients and other issues, a critical component of an effective risk management program should be obtaining, and keeping, the right insurance coverage. The specific policies and procedures should include the following:

• assign one individual in the firm to be responsible for obtaining and maintaining the firm’s professional liability policies;
• take whatever time is needed to fill out the application for insurance completely and accurately;
• start filling out the application about 90 days before your current insurance policy expires, and submit the application at least 60 days before your current policy expires; and
• assign an individual in the firm to be responsible for notifying the firm's professional liability insurer of actual or potential malpractice claims and monitoring those claims.