THE ANATOMY OF A
PROFESSION LIABILITY INSURANCE POLICY:
How To Evaluate A Malpractice Policy
Notwithstanding
the fact that you are infallible, you still need profession liability
insurance. Just - in the most unlikely of cases- you are wrong.
Professional liability insurance will protect your
assets, retirement nest egg, and the kids’ college fund. You need it even if
you formed a Limited Liability Partnership or Corporation– that does not protect
your personal assets from your personal negligence.
You need insurance even if you practice only criminal law
or immigration law. You may reason that if you make a mistake your client will
end up in jail or out of the country – both hard places to commence a
malpractice action. But it only takes one persistent client to convince one
attorney that there is a viable claim against you.
You need malpractice insurance because other people are
entrusting important aspects of their lives to you. You are offering to act as
their fiduciary. There is no ethical cannon that requires you to carry
insurance to protect your client in case you make a mistake, but it is the right
and moral thing to do, it’s a mitzvah and it brings good karma. Not only will
you sleep better because you are protected, you can look your client in the eye,
because she is protected too.
You need insurance even if you can’t afford it. A simple
rule: if you can’t afford malpractice insurance, you can’t afford to open your
own practice.
That’s easy. Now the hard part: how to evaluate an offer
of coverage.
Most legal malpractice policies are “claims made”
policies Under a claims made policy, not only must the incident have occurred
during the coverage period, but the claim for damages also must be made during
the coverage period[1].
As long as your current policy is renewed there is no issue, as the renewal will
include coverage for “prior acts”. As a result of the defining downside of this
type of policy, however, when your current policy ends without renewal (because
of retirement, non-renewal by the carrier, or a voluntary change of carriers), a
claims made policy can result in uncomfortable gaps in coverage. Protection
will be found if you obtain a new policy with prior acts coverage or buy a
“tail” (extended coverage policy) from your old insurance carrier. Under the
tail, you can choose to purchase one, two, three years or unlimited coverage for
claims based on incidents that occurred while the actual policy period was in
effect. Tails are expensive, though, and the insurance carrier generally does
not offer financing to spread out the cost of the tail, so you must pay for the
entire policy up front.
If you’ve been good, then the new carrier will probably
offer you prior acts coverage, which is a considerable savings over the cost of
a tail. The prior acts coverage is just that: coverage for future claims based
on past malpractice. Either way, if your current policy ends, be sure to secure
coverage for incidents that have occurred but have not been claimed.
The policy will provide coverage for each occurrence,
capped at a total aggregate amount annually. If your policy covers $500,000 per
occurrence with an annual aggregate of $1,000,000, then two judgments of
$300,000 each are fully covered, but one judgment of $600,000 will leave you to
cover personally $100,000. So carefully consider your exposure by reviewing the
size and quantity of the matters you handle to determine the proper amount of
coverage. Do not underinsure yourself, though even a small policy with a high
deductible will provide you with a defense for a frivolous claim.
Many policies offer a “selection of counsel” option
whereby the insured attorney has the opportunity to select defense counsel if a
claim is made, or to choose from a list of several defense firms. Some offer
the insured attorney control over settlement of claims. Consider whether these
options are necessities, or more like racing stripes on cars: they look good
but don’t change the outcome one wit.
All applicants should start shopping at least six to
eight weeks before the expiration of the current policy, advises Shelly Kozel.
Mr. Kozel is a third-generation insurance agent and past president of
Professional Insurance Agents of New York. He explains that having time allows
you to compare offers and policy details. Carriers may offer widely varying
quotes for the same coverage, or similar prices for significantly different
coverage. It pays to do your prep work.
The cost of a policy is dependent upon your years in
practice, areas of practice, and claims history. You might not expect it, but a
policy is least costly when you first start, and will probably double by the
time you are practicing five years. Risky areas like plaintiff’s negligence,
intellectual property and securities work is even more expensive. If you have
claims, or numerous reported prior incidents that could result in a claim, then
coverage is more expensive, if you can get it at all.
Whether a carrier will offer you a policy, decline to
renew, raise your rates a lot or a little is hard to predict on an individual
basis. Carriers embrace or avoid certain areas of practice based on each
carrier’s own loss record in those areas. The insurance industry cycles through
soft markets when it writes a lot of policies at low prices because the carriers
are making good money in the stock market. Other times, the market is down and
the carriers raise their rates and stiffen their criteria.
Not surprisingly, insurance carriers prefer to receive
premium dollars and prefer not to pay claims. Carriers manage risk, and want as
little of it as possible. So, carriers raise rates or drop attorneys who cause
large payouts. Some carriers drop attorneys with lots of reported incidents,
even if none of the incidents resulted in a claim or a payout. (Imagine if you
had to call your car insurance carrier every time you changed lanes without
signaling.) The attorney who realizes that a reportable incident has occurred
is left in a difficult position: report it and risk an increase in rates, or
decline to report it and risk a claim that is not covered by the insurance
policy for failure to timely notify the carrier. As Yogi Berra said, when you
come to the fork in the road, take it.
The first money spent on the claim is yours, and the
amount is based on your “deductible”. The higher the deductible, the lower the
premium, so if your aim is to insure against catastrophe, select a high
deductible. Some policies only deduct for money paid out in settling a claim or
paying a judgment, other policies deduct for the cost of defending the claim as
well. Know what you are buying.
The high anxiety swirling about these issues can be
intimidating. Shelly Kozel’s soothing voice and knowledgeable discussion is
calming. Mr. Kozel instructs that a broker can be very helpful in dealing with
the search for insurance coverage. A good broker brings you closer to even
footing in dealing with the insurance industry and will help you figure out what
you need, and do not need to insure, based on your particular circumstances.
Take the Terrorism Insurance? Buy part-time practice coverage? Is there a
better rate out there?
Get recommendations about brokers from the bar
association or other attorneys. Professional liability insurance requires a
broker with special knowledge of the nuances of the insurance industry, as well
as the complexities of practicing law.
Meticulous care in filing out an application will result
in the proper coverage at the right price. Inadvertent mistakes could be costly
and could even result in disclaimer.
Omissions or misstatements on your application may seem
to save you money on a premium, but if the carrier later rescinds the policy or
disclaims on a claim, you have been penny-wise but pound-foolish. Shortcuts
result in a false sense of security, because you wind up without any insurance
coverage at all. Having recognized that you need insurance, do not undermine
your own wisdom for a few dollars.
When you complete an application for insurance, you are
required to estimate the percentage of your work in various areas: negligence
defense, negligence plaintiff, intellectual property, securities, etc. While a
carrier is not likely to try to audit your current docket, it will ask for your
website address and will check it. Carriers are known to decline coverage if a
website lists risky areas of practice not itemized on the application. If you
tout yourself as practicing in every area of the law, even if it is “mere
puffery,” it may cost you some premium dollars to get coverage.
Buy a good insurance policy and you will never need to
use it. Be warned, to act otherwise will anger Hubris and Arrogance, the twin
gods of all attorneys without malpractice insurance.
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