FAQs About Lawyers’ Professional Liability Insurance

TEXAS LAWYERS' INSURANCE EXCHANGE

FAQs About Lawyers’ Professional Liability Insurance

By Jett Hanna, RPLU
Senior Vice President, Texas Lawyers’ Insurance Exchange

Over the previous five years, Texas Lawyers Insurance Exchange (TLIE) has paid approximately $50,000,000 in gross legal malpractice losses, and over $12,000,000 in claim expenses. The claims paid by TLIE are just the tip of the iceberg. TLIE is one of many insurers who provide professional liability insurance to Texas attorneys. According to a study conducted in 1989 by the State Bar, over 50% of solo practitioners in Texas were not insured, and we believe the percentage is larger today. TLIE does not insure a number of the largest firms in the state that have well publicized malpractice claims. Deductibles paid by insureds and loss of productive time spent addressing claims also affect lawyers. The economic effect of malpractice claims is thus very significant.

Insurance may be available to spread the risk of malpractice claims. Consider the issues below in determining your insurance needs.

Should you have insurance?

Some lawyers argue that having insurance just makes you a target for lawsuits. Not having insurance does not prevent claims, as is demonstrated by one recent case resulting in a multimillion-dollar judgment against an attorney without insurance. Consider the following in determining whether you should go bare:

Personal Asset Protection. You may not have a lot of assets as a starting attorney, but what if you become prosperous? The underwriting practices of most malpractice insurers do not allow you to purchase coverage today for what you did before you first obtained and maintained continuous insurance coverage.

Expenses of litigation. Some attorneys argue that if a judgment is rendered against them, they know how to be judgment proof. Of course, such a strategy is risky and unpleasant if taken to its fullest extent. What is often unappreciated is how expensive it may be to get to the point of getting a determination of liability. Historically, about 35% of insurance payments in professional liability are for litigation expenses. Do you want to risk bankruptcy if you really didn’t do anything wrong but the litigation to prove it is expensive?

Client and reputation protection. Anyone can make a costly mistake. The list of well-known lawyers who have suffered malpractice claims is long. It is professional and responsible to buy insurance to protect your clients against mistakes. If you can pay a claim that is truly your fault, it may be possible to settle the claim privately rather than to have the error become generally known in the legal community.

Referral Services. A number of referral services require insurance. These services often provide significant income to attorneys.

Client required insurance. More and more sophisticated clients are requiring proof of insurance. If you have a business practice, you may find yourself shut out of certain kinds of representation without insurance.

How much insurance do I need?

Policy limits of less than $100,000 are rare in Texas. Some large firms have limits as high as or exceeding $100,000,000, though such coverage would not be needed for most small firms. A malpractice verdict against an El Paso three-person firm a few years ago exceeded $40,000,000, however, and a verdict against a small firm in Oklahoma exceeded $120,000,000. Despite the high verdicts, insurance appears to have covered these losses.

In considering appropriate limits, consider the following factors. Include defense costs as well as possible losses in your evaluation. If you have a high volume of cases, you may wish to consider a lower per claim and a higher aggregate limit. The dollar value of matters in which you are typically involved should also be considered.

What policy provisions differ from insurer to insurer?

In Texas, there is no prescribed form for legal malpractice insurance. Important provisions that can vary from policy to policy include:

DTPA coverage. Some policies will not cover additional damages under the DTPA. DTPA coverage is still important, despite recent changes in the law. Misrepresentation by an attorney is still actionable under the DTPA.

Coverage for punitive and exemplary damages. Policies rarely cover punitive and exemplary damages. No policy covers criminal, malicious or fraudulent acts, but punitive damages can be assessed on grounds short of such allegations.

Innocent partner protection. Clauses in some insurance policies waive exclusions as to partners who did not participate or acquiesce in culpable conduct. The extent of such "innocent partner" protection varies from company to company.

Per claim deductibles vs. aggregate deductibles. Deductibles may be stated to be either per claim or aggregate. With a per claim deductible, if you have two claims in a policy year you could have to pay your deductible twice.

Other exclusions. We have recently seen some companies beginning to exclude certain areas they deem high risk. One carrier has begun excluding coverage for intellectual property matters, even relatively simple ones. Others are excluding or limiting coverage for mass tort and class action litigation.

What is the significance of claims made coverage?

Almost all attorneys' professional liability insurance is now written on a claims made basis. "Claims made" means that, unlike your auto policy, the policy in effect when the claim is made to you and reported to your carrier is the operative policy. If the policy expires before you report the claim, you have no coverage under that policy. In addition, most policies also exclude claims of which you knew or should have known at the time you purchased insurance.

What are restrictions on prior acts?

Prior acts restrictions exclude coverage for acts that occurred before a certain date or on behalf of a certain firm. Look for a "retroactive date" in proposed policy terms. A policy with a retroactive date does not cover acts occurring before the retroactive date.

Insurers may not cover your prior acts due to your claims history or the history of your former firm. In general, if you have left a large firm that is likely to maintain insurance, you do not need prior acts coverage. Most policies cover former members of the firm for their acts on behalf of the firm. If the prior firm has dissolved, however, you may want to try to obtain prior acts coverage. The statute of limitations for legal malpractice is, in many situations, two years from the date of discovery of the error by the client.

We recently saw a situation where an attorney had maintained continuous insurance for many years, but one year his agent allowed a new insurer to offer a retroactive date that was the date that the policy went into effect. Carefully review the retroactive date provisions to assure you do not lose years of prior acts coverage.

How do claim handling practices differ?

You want to know how your carrier will treat you when you have a claim. Some carriers may dictate choice of counsel without asking for your input in the event you are sued. Similarly, some carriers have provisions in their policy that put significant conditions on your decision on whether or not a claim should be settled. Consent to settle provisions, or "hammer clauses," provide that if the carrier wishes to settle a claim but the insured withholds consent, the insured will only receive benefits under the policy equal to the amount for which the carrier could have settled the claim. At first analysis, this may appear to be in your benefit as you can prevent the insurer from settling a frivolous claim. However, your limits of coverage for the claim will be reduced to amount for which your matter could have been settled. If you truly believe a settlement is unjustified, you have almost no ability to seek a just result under such clauses. Other carriers have a peer review process that provides an avenue for determining if a proposed settlement makes sense.

Some carriers have non-attorneys supervising claims, from locations outside of Texas. Ask about whether Texas attorneys will supervise your claim on behalf of the insurance company.

My agent just changed carriers again. Should I worry?

Over the past several years, a number of lawyers’ professional liability insurance carriers have entered and left the market. Frequent changing of carriers entails a number of risks. Two insurers of a significant number of Texas attorneys have been declared insolvent, leaving lawyers holding the bag. When carriers change, there is no guarantee that policy terms will remain the same. In some situations, carriers have left the market, and the new carrier supporting the insurance agent has decided not to take certain kinds of insureds. Recently, we have noted agents having difficulty placing coverage for plaintiff injury attorneys, intellectual property practices, and attorneys with a recent claims, even if relatively small.

Some insurers work on a direct basis, not through agents. While direct writers may decide to get into the business or pull out just as insurers who work through agents, some direct writers write only lawyers’ professional liability. Regardless of whether you are talking to a direct writer or using an agent, make sure to ask how long the insurer has provided insurance in Texas.

How do I know if my insurer is financially sound?

There is no guarantee of financial stability, but you can look for several things. Look for insurers rated highly by financial rating services such as Best. You can check Best ratings online at www.ambest.com. Be wary of insurers offering low rates that have just entered the professional liability market for the first time. If you are offered insurance from a company that is not admitted in Texas, known as surplus and excess lines, understand that in the event of insolvency you will not be eligible to participate in recoveries from the Texas guarantee fund.

My premium just doubled. What’s going on?

The cost of legal malpractice insurance has risen significantly in the past year. The reasons are complex. As you gain experience, your premium actually increases because of prior acts coverage. If you have a claim, your premium is likely to increase. Some types of legal practice have experienced larger increases than others due to their specific overall claims experience. The general insurance market has tightened in part due to the impact of September 11 related claims. Other lines of insurance, such as workers’ compensation, medical malpractice, and corporate officials insurance have had very poor results from insurance written several years ago. Insurers now cannot make as much on investments as they did when equity markets were roaring. All of these factors influence the price of all lines of insurance, as risk is spread between lines of insurance as well as within lines of insurance.

Where can I learn more?

The ABA Standing Committee on Lawyer’s Professional Liability offers a number of useful guides for legal malpractice insurance. Their website is http://www.abanet.org/legalservices/lpl/home.html. West publishes Legal Malpractice: The Law Office Guide to Purchasing Legal Malpractice Insurance.