Most law practices understand that they should have professional liability insurance, even in those states in which having such insurance is not required by law. However, it can be a harder analysis to determine what type of coverage a practice should purchase and for what amounts. Brokers and insurers can help answer questions, but here are some factors to consider.
Choose the Right Insurer
When in doubt, consider using a good broker to help find the right insurer (and policy). Brokers, particularly those who specialize in law firms in certain geographical locations, practice groups or areas of law, can be a great asset. Brokers may also be well attuned to the insurance market and to the scope and size of claims routinely brought against similarly situated firms.
Firms also may review the reputation of the actual insurer from whom they purchase insurance through rating services like Moody’s or AM Best. Like any other company, an insurance company’s ability to satisfy its customers depends in some part on that company’s strength in the marketplace and the likelihood that the insurer will still be part of the market in the future. Many also find it helpful to ask around to other law firms, as colleagues in other firms may have relevant experiences to share.
For law practices with a relationship with an insurer over several years, it may be worth maintaining that relationship for the long term. Although it can be helpful to review the marketplace to determine what other options and benefits are available, few firms will consider switching insurers unless they can get a savings of at least 10 percent on premiums. For some, this is because consistent renewals with a single carrier can reduce the risk of a gap in coverage that can come upon a switch. But the right course of action will depend on the firm.
Choose the Right Limits
Choosing the amount of coverage—or the limits of the policy—can be a challenge. Indeed, in many instances, the most relevant analysis is the type of legal work performed by the practice, rather than the amount of fees collected in a year. It is helpful for law firms to think about what a claim against the firm would actually look like.
For example, a law firm may receive a certain amount of fees for a corporate transaction or an intellectual property representation, but a claim from a client could be expected to seek damages reflecting the value of a lost corporate deal or forfeited patent. Thus, a policy with limits that track the amount of fees earned, rather than the overall risk, could leave the law firm dramatically underinsured.
Insurers and brokers may also have detailed information and statistics regarding what practice groups are considered higher risk than others. For example, there is data that suggests that plaintiffs personal injury work and real estate representations receive a higher number of claims than other areas of practice and are among the highest in claim severity. Thus, firms that have significant practices in high-risk areas may elect to choose higher aggregate limits to reflect the likelihood of repeat litigation or multiple claims, even if the per claim limit is expected to be lower.
Law practices can also choose to purchase additional layers of excess insurance to obtain the right limits and insurance portfolio, which layers of insurance are often referred to collectively as a “tower.” It is not uncommon for a midsize or large law firm to be insured through multiple insurers, each owning a different part of the “tower.”
Choose Policies With Other Benefits
In addition to indemnity coverage, different policies can provide other benefits for insureds as well. Some firms will negotiate for the right to select the counsel of their choice if the firm is sued for malpractice. In that way, if the firm is sued, they can use counsel with whom they have an ongoing relationship instead of working with assigned defense counsel.
However, if the firm is going to bargain for its own choice of counsel, that negotiation may result in the firm paying a higher self-insured retention before the coverage kicks in. That is, the insurer may require the firm to pay a higher amount in defense fees to the counsel of choice out of the firm’s pocket before the insurer starts paying fees.
Relatedly, firms can give some thought to how defense fees for a malpractice claim should be addressed within the terms of the policy. For example, it is well accepted that defense costs for malpractice claims are among the most expensive type of litigation, largely due to the necessity of reviewing the “case within a case.” For that reason, some law firms will negotiate to ensure that any defense costs are outside the limits, that is, that the amounts of defense costs incurred do not reduce the limits available for settlement or indemnity. This approach may result in higher premiums. On the other hand, if defense costs incurred will also erode the limits available for settlement or indemnity, the insured firm may need to consider higher limits to account for legal spend and remaining limits for resolution of a claim.
Understand Premiums and Self-Insured Retentions
A higher self-insured retention may mean that a policy has lower premiums associated with it and vice versa. The amount of a self-insured retention in many circumstances relates to which party—the law firm or the insurer—has direct control over the defense and when that right arises.
If a firm has a higher self-insured retention or deductible to pay before the insurer’s duty to defend is triggered, that firm may end up allocating money in its budget specifically for that purpose. Then, in the event of a claim, the firm has sufficient funds to satisfy its self-insured retention.
There are other steps that law firms can take, however, to potentially reduce their premiums. For example, many insurers will reduce premiums or issue credits for law firms that employ risk management prevention within the firm. On the other hand, sometimes an insurer that charges a higher premium provides targeted, concierge-style service to a law firm, including by providing risk management advice or tips.
Each firm’s needs and expectations are unique, but ensuring sufficient and appropriate coverage will help attorneys sleep better at night.
Shari L. Klevens is a partner at Dentons US in Atlanta and Washington, D.C., and serves on the firm’s U.S. board of directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons’ global insurance sector team.
Alanna Clair, also a partner at Dentons US in Washington, focuses on professional liability and insurance defense. Klevens and Clair are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” and the upcoming 2019 edition of “Georgia Legal Malpractice Law.”