How Much Professional Liability Insurance Coverage Do I Really Need? Part I – Looking At Your Firm From A Claims Perspective

//How Much Professional Liability Insurance Coverage Do I Really Need? Part I – Looking At Your Firm From A Claims Perspective

How Much Professional Liability Insurance Coverage Do I Really Need? Part I – Looking At Your Firm From A Claims Perspective

The practice of law has evolved dramatically over the last 25 years with the explosion of technology.  Technological advances have made the practice of law easier and increased its complexity. Society, firms, and attorneys are behaving radically differently. Associates rarely stay at a firm longer than a few years, requiring firms to install and manage sophisticated conflict of interest systems.

The prior stigma associated with an attorney suing another member of the bar has vanished. Attorneys used to purchase professional liability insurance, believing they would never have a claim or, that any claim made would be meritless. Those days are gone.

Today, most firms purchase professional liability insurance to insure against the claim that will inevitably come and potentially put their firms out of business. Such a claim can ruin everything you have built for yourself and your family. Unfortunately, it is rare in our litigious society for an attorney to make it through their entire career without receiving a claim or a bar complaint. This is the new reality.

When the claim comes, you want to be absolutely certain you have more than enough professional liability insurance coverage to protect your firm and your assets. You don’t want to be underinsured.  So how do you figure this out?

You must first determine your firm’s risk of potential exposure. Your firm should take a critical look at its practice and examine the following:

1) Areas of Practice Associated with More Severe Losses = Increased Limits

Some areas of practice are associated with more severe or larger loss claims when they occur.  Current data continues to place Real Estate, Corporate Business Organization & Securities, Trusts & Estates, Commercial Business Transactions, Taxation, Civil Litigation-Plaintiff and Intellectual Property as areas of higher risk of incurring a severe loss. This just makes sense. If a large commercial real estate transaction in Seattle fails due to an error by an attorney, the losses alleged will be millions of dollars. If you or your firm are handling any of these areas of practice and receive a claim, it will almost certainly be large. If your firm fails to purchase the appropriate amount of professional liability coverage and indemnity limits to protect your firm, you are putting your personal assets and your firm’s assets at risk. You also severely limit the opportunities available to your insurance carrier for the defense of any claim – particularly claims with good defenses, significant defense costs and risk of exposure above your policy limits.

Keeping with the same example as above, let us assume the commercial real estate transaction in Seattle fails due to the alleged failure of the law firm to provide the client with a time-sensitive deadline, and this error is alleged to have caused $5,000,000 in damages. Assume the firm has only purchased $1,000,000 limits on their professional liability policy, and the defense costs begin to erode the indemnity limit from day one. In other words, it is an inside limit or cannibalizing policy. Also assume that the defense is anticipated to be fact-intensive and complicated, requiring multiple experts and costing between $250,000 and $350,000 through trial.  The Plaintiff’s counsel makes a policy limits offer that expires within one week. If not accepted, the insurance carrier is responsible for any verdict above the $1,000,000 eroding policy limit.

Unfortunately, in a fact scenario like this, the insurance company will likely need to tender the policy to protect the insured firm. Alternatively, if the firm had purchased a professional liability policy of $5,000,000 with an outside defense limit of $1,000,000, meaning the defense costs do not begin to erode the indemnity limit unless or until the $1,000,000 defense outside limit is paid on defense, then the firm and the carrier would have options to consider and discuss. If your firm chooses to underinsure its practice you may limit the options available to defend your firm against claims.

Thus, if your firm’s practice is large real estate transactions, mergers or business transactions, securities or tax issues for wealthy corporations, consider purchasing $5,000,000, $10,000,000 or $20,000,000 limits, depending on your firm’s risk of exposure.

2) Approximate Value of Client Matters/Jurisdiction = Relevant Exposure and Limits

If you represent clients in Seattle or New York City with significant net worth in any area of the law, those clients are likely sophisticated and have high expectations for service. Suppose you are handling domestic relations work for such clients and their divorce does not turn out as expected, or you do not get them the result they want. You can likely expect a claim. Domestic relations is an area of increasing claims frequency, likely because it coincides with a low-point in one’s life. When the parties have a lot at stake and something goes wrong, the finger may be pointed at you. Wrongly or otherwise, the value of the claim will be proportionate to the book of clients you represent. So consider the value of the larger cases you handle and the net worth of your clients. Consider the clients’ expectations of service. Now, think about the true cost of underinsuring your firm. It is much more than the difference in premium.

It may seem like the above analysis takes time you don’t have, but you cannot afford not to do it. If you invest time in analyzing your practice areas and your clients’ location, sophistication and net-worth, you should have a pretty good idea of how far you have come and what it has taken you to get there. Don’t risk losing it all to save a few dollars in premium.

I am happy to answer any additional questions and I hope you found this article helpful. Stay tuned for Part II – Deciding What Policy is Right for Your Firm.

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By | 2017-07-21T14:03:24+00:00 September 20th, 2016|Lawyers' Insurance 101|0 Comments

About the Author:

Ms. Gibbs received her Bachelor of Science in Economics with Honors from Montana State University in Bozeman, Montana prior to receiving her Juris Doctorate and Certificate in Alternative Dispute Resolution from Willamette University College of Law in Salem, Oregon. While in private practice, Ms. Gibbs focused on tax and estate planning and business transactional work before joining the Yellowstone County Public Defender’s Office in Billings, Montana to defend felony criminal cases while gaining valuable trial experience. In 2004, she joined ALPS and is now a Senior Claims Attorney. In addition to resolving and managing claims for ALPS, Ms. Gibbs has conducted extensive risk management visits around the country assisting firms with practical solutions to help minimize their risk for incurring future malpractice claims.