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For the past 17 years Jack Witherspoon has spent a good deal of his workdays talking to lawyers on the phone. Lately, the voices on the other end of his line have not exactly been congenial. “The reaction I’m getting from most firms is they’re angry,” says Witherspoon, an Oakland, Calif.-based insurance broker who deals exclusively with attorneys. “A lot of them say, ‘I didn’t get any claims this year, why are my rates going up?’” When it comes to errors and omissions policies — the professional liability insurance that covers lawyers if they get sued for malpractice — just about everyone’s rates are going up. Over the past year, a confluence of factors have catapulted E&O insurance premiums to dizzying heights. The phenomenon is taking a lot of lawyers by surprise and leaving some firms facing the unpleasant prospect of being uninsured. “I think [law firms are] having a hard time understanding it,” says legal malpractice attorney James Murphy of San Francisco’s Murphy, Pearson, Bradley & Feeney. “For years and years the rates have been probably unrealistically low.” Big firms that have joined forces to form their own insurance-buying cooperatives are somewhat better protected than most firms. McCutchen, Doyle, Brown & Enersen, Allen Matkins Leck Gamble & Mallory and Morrison & Foerster are among the 11 major San Francisco firms that form MPC Insurance. Founded in the late 1980s, the company uses the group’s combined buying power to obtain favorable rates for each firm. “We know [insurance is] going to be more expensive,” this year says Allen Matkins managing partner Brian Leck. “We do not think it’s going to be catastrophic, for us at least.” AT RISK Smaller firms and solo practitioners, however, are less protected from the swings of the market. For each of the past two years, San Diego-based solo Kindra Willey has received a similarly phrased letter from her E&O insurance carrier. Both times, the letters were 90-day notices that her policy was being discontinued. “The first time it happened I didn’t know what was going on,” says Willey. “I have an absolutely and totally clear record.” It turns out the nonrenewals had nothing to do with anything she had done; the insurance carriers had simply decided to pull up their stakes and get out of the market. When Willey found a new insurance carrier the first time, her policy was some 38 percent more expensive. This year, the quotes she’s getting are about 30 percent higher than what she’s been paying. “It’s rising more rapidly than any other cost,” says Willey. “It’s not going to be long before it puts me out of the capability of paying for it.” Some insurance brokers report rate hikes well above 100 percent. A few years ago $3,800 for a plaintiffs’ attorney with $1 million in coverage was a typical rate, says Gary Egloff, president of the insurance brokerage, Egloff Insurance Group. These days Egloff says he’s seen rates of $9,000 to $12,000 per attorney for certain types of plaintiffs’ lawyers. “We’ve never seen so many people screaming,” says Egloff. The change comes at a time when many expect the sluggish economy to result in an increase in legal malpractice suits. But many attorneys and insurance brokers say the rising cost of E&O insurance to date is not the result of a surge in malpractice claims. Rather, it’s due to the peculiarities of the insurance market. During the 1990s, many carriers looking to break into the California E&O insurance market found a toehold by undercutting the competition. This created a self-perpetuating downward spiral by which rates were kept artificially low. Many insurance carriers made up for money they were losing on premiums by investing in the then-booming stock market. But as the Nasdaq started to crumble, this business model lost its viability. “They had to go back to basics on making an underwriting profit without the luxury of investment strategies,” says Egloff. The current tough business environment has led many insurance carriers to exit the market altogether. While there were more than 20 carriers writing E&O insurance in California a year ago, there are fewer than 10 today, says malpractice attorney James Murphy. Less competition, of course, means higher prices. Other factors contributing to the rising rates are the massive losses that hit the insurance and re-insurance industry from the Sept. 11 terrorist attacks, as well as fallout anxieties from the Enron/Arthur Andersen debacle. Perhaps more discomfiting to lawyers than higher premiums is the threat of not getting insurance at all. There’s no law or State Bar mandate requiring lawyers to carry E&O insurance in California. But given the risk and potential damages of a malpractice suit, most firms consider the insurance an unquestioned cost of business, no different than paying rent. BETWEEN A ROCK AND A HARD PLACE But now insurance carriers are getting a lot choosier about whom they underwrite. Declinations, in which a carrier refuses to cover a firm or one of its practices, are up 20 percent this year, says Carol Bauman, a VP at insurance broker Daniels-Head. A year ago, a law firm with two or three claims in its history could find coverage without any problem, explains Bauman. Today, insurance carriers are turning down firms with prior claims, since there’s such a large supply of clean, claim-free firms to choose from. Practices like intellectual property and personal injury, with a perceived high-risk factor, are also facing increased scrutiny from insurance carriers. For law firms that are declined, the only option is often to go with a so-called non-admitted insurer — a carrier that’s not regulated by the state’s Department of Insurance. These carriers usually charge huge premiums for their services. Someone accustomed to paying a $6,000 premium might be looking at $20,000 to $30,000 with a non-admitted carrier, says Bauman. For some lawyers, these kinds of rates are simply not possible. Bauman says she’s had a half-dozen clients this month alone that have chosen to do without E&O coverage because of the exorbitant cost. “If you’re strapped,” says Bauman, “insurance is one of the things you let go and you pray a lot.” These prayers are not likely to abate until the insurance market starts to get soft again. Given the cyclical nature of the insurance industry, say lawyers like Murphy, liability insurance will eventually become cheap and plentiful once more. “Once carriers think they can start making money in the state of California they’ll come back in,” Murphy said.

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