Legal Malpractice Insurance Explained
Legal malpractice insurance is a professional liability insurance purchased by professional lawyers as a form of risk management that protects the insured from claims resulting from negligent actions or omissions that occur while providing professional services. Legal malpractice insurance differs depending on the jurisdiction as regulations requiring specific minimum limits, the manner in which coverage is triggered , pre-conditions prior to bringing a cause of action, and allowable defenses against a claim. In every case, the general idea behind an insurance policy is an agreement between two entities, the insurer and the insured. The insurer guarantees services as agreed to the insured in exchange for a premium. When a risk occurs, the insured is entitled to be indemnified by the insurer subject to the terms of the insurance policy and the law.
Legal Malpractice Insurance Main Coverages
One of the hallmarks of a legal malpractice insurance policy is the comprehensive coverage it affords to attorneys facing allegations of error or wrongdoing. While the precise coverages available may vary, the core coverage provisions found in the typical policy include protection against errors or omissions, liability for negligence, and insurer’s duty to defend.
Errors or Omissions. Legal malpractice policies provide for liability for attorney errors and omissions, which is often defined as any negligent act, error, omission, or breach of trust committed, attempted or allegedly committed during the policy period arising out of the rendering of legal services. This broad language encompasses a wide range of potential claims against attorneys, including wrongful litigation, failure to prosecute/dispose of matters, breach of fiduciary duty, and other claims that may fall out of the scope of an attorney-client relationship. Complete protection for these claims is necessary because even if an attorney is not at fault, defending against a legal malpractice lawsuit can be a prohibitively expensive process.
Liability for Negligence. Legal malpractice policies also afford coverage for attorney liability for causes of action alleging professional and/or legal malpractice. The policy affords coverage for the insured with respect to any claim made against him/her during the policy period for damages arising out of the insured’s alleged acts, errors or omissions in the rendering of or failure to render Professional Services. Covered claims include negligence, negligence per se, malpractice, errors and omissions, and breaches of fiduciary duty.
Insurer’s Duty to Defend. Legal malpractice insurance policies provide that the insurer has the right and duty to defend and investigate any claims or suits against the insured even if the allegations are groundless. It is the policy language that dictates the parties’ responsibilities in this regard. The policy’s duty to defend is broader than the duty to indemnify, and even if the allegations fall outside of the policy’s coverage, the insurer’s duty to defend runs to the allegations that are arguably covered.
Legal Malpractice Policy Exclusions
Just as it is essential to know what legal malpractice insurance will cover, it is equally important to understand what it won’t. Insurance policies are contracts and are strictly construed, so if one of the exclusions contained in the policy applies to the facts of the case, the insurer will win and be released from its duty to defend or indemnify the attorney. It is not unusual that an insurer will refuse to cover the claim and the insured attorney can be left to fend for himself. Common exclusions include criminal acts, intentional fraud, punitive damages, loss or damage arising in the performance of non-legal services, and acts of collusion.
The criminal acts exclusion is broad and simply stated, an exclusion stating that the insurer will not pay on the claim if the claim "arises out of criminal acts you commit, conspire to commit or knowingly allow to be committed." In the New Jersey case of Northfield Ins. Co. v. Star Tile & Construction Co., the court held that a rape did not arise out of the insured’s legal work even though the insured raped the plaintiff (a former client) in his office. There was no duty to defend or indemnify because the act of rape was excluded from coverage.
The intentional fraud exclusion bar coverage for claims arising out of knowingly fraudulent, dishonest, or criminal acts of the insured if "they are committed in the course of professional services" (as opposed to acts relating to the practice of law, but connected to business and personal matters). The policy language may include an exception for innocent insureds whereby an insured’s vicarious liability for the acts of another insured is covered by the policy if the guilty insured was a different partner in the firm at the time of the wrongdoing. More likely, however, the policy would exclude vicarious liability in this context unless the act committed was also in the course of rendering professional services.
One of the more common exclusions in malpractice insurance policies is the punitive damages exclusion clause. It is also a clause that makes sense, because civil liability has generally been thought of as a scheme by which to make the injured party whole. Punitive damages, on the other hand, are a category of damages that are intended solely as punishment for wrongdoing.
The law does not impose a duty on attorneys to represent every client. Thus, the exclusionary language in a typical policy concerning services outside the scope of practicing law is often drafted broadly, to include "professional services you are legally qualified to perform or are reasonably believed by you and your client to be within the scope of the profession" and relates only to services rendered "in your capacity as a lawyer." Without careful parsing of the policy language, the insured attorney could be without coverage for "non-legal" services or for a claim brought by a former client who has defaulted on a loan guaranteed by the attorney under a loan agreement.
The Importance of Tail Coverage
Tail coverage is a provision in a legal malpractice insurance policy that extends coverage for claims that are made after a policy has expired, but that relate to work performed while that policy was in force. In other words, it covers the policyholder for any legal malpractice that may come to light after a law firm has closed its doors or its partners have dispersed elsewhere. Purchasers of tail coverage pay an additional premium to their insurer, either for a fixed period of time likely corresponding to the statute of limitations for malpractice claims, or indefinitely, usually for a percentage of the annual premium.
Lawyers retiring and switching careers may be particularly interested in tail coverage, or at least conversing with their insurance agent about the possibility. If a lawyer decides to get out of private practice , they will almost certainly have thousands of hours worked for clients between the time the relationship with the client began and the time the relationship ended. If there were to be any mistakes made in that time frame, and the claim were not made until long after the lawyer left practice, there could be a problem.
Lawyers who are switching careers do not have the option of simply extending their policies, however. Since the cost of the tail coverage has to be paid by the lawyer in one lump sum, the changing lawyer may prefer to simply leverage the present policy up to its maximum limits, and take whatever losses are incurred as a result.
Once the person has decided to retire, however, they are probably better off in the long run by purchasing a tail, which will carry an extended period of coverage once the bar date has passed.
Influences on Premiums and Policy Limits
One of the primary considerations in purchasing a legal malpractice insurance policy is its cost. Premiums are usually based on a number of factors such as the types of law practiced, number of attorneys in the firm, gross annual income etc. to determine risk and the cost of coverage.
Areas of practice that are more likely to invite a claim such as Family Law, Bankruptcy and Estate planning usually have higher premiums than other areas of practice and may see higher increases every year or in the case of a claim. Firm size is also a risk factor used by insurers. Large firms, (more than 11 attorneys) in general pay a smaller premium. Increase in premium also occurs after the arrival of a new partner as this generates a new re-evaluation of the firm by the insurance company. Another consideration is a firm’s claims history. Just like other forms of insurance policies such as homeowners, or auto insurance, insurers consider whether previous claims have been made. Claims also generated against an attorney while employed at another firm or firm partnerships are also considered. An attorney who has moved between firms and partnerships and carries his claims history with him or herself is likely to pay a much higher premium.
Selecting Legal Malpractice Insurance
As you sit down with your broker/purchaser, it’s time to make decisions about carrier and policy. There are many factors to consider in selecting the appropriate legal malpractice insurance. First of all, you should be sure that you are purchasing from an "A-rated" insurance company. Many lawyers may not consider this important, but perhaps it is of paramount importance. There are many carriers out there which are "A-" or even less rated, but when your world comes crashing down and you need to make a claim, changing carriers might be hard or impossible (or perhaps cost prohibitive). As a result, it would be wise to buy from a highly rated insurance carrier which is well established and has a good reputation. The last thing you need is a carrier who is about to go under, or whose claims department is the source of constant criticism.
Another factor to consider is the claims handling department of the carrier. Some companies are known to be "tough" when it comes to defense efforts. Although there is no goal to spend money unnecessarily, the company’s intention when defending a matter should be to identify and assert all available defenses. This does not mean that some creative, but admittedly weak claims should be defended on a long term basis, but at least to the extent that coverage applies the company should aggressively defend the class action.
The third consideration is whether you can afford to cover your claims-made deductible. Most policies have a $25,000 claims made deductible . If you can afford to pay this, your costs for insurance will be lower than if your deductible is $5,000. Of course, the best situation is a carrier who has a "no deductible" option. With a $50,000 no deductible option, the premiums are typically in the $10,000 range. If the deductible is $100,000, the premiums could be as high as $30,000 per year. Weigh the economic benefit of a lower premium against the risk that your deductible might be that high when a claim is asserted against you.
The next consideration is whether there are any exclusions applicable to your particular practice. For instance, some companies are not covering lawyers practicing with new law partners. If you have served one year with a law partner, you might be eligible for coverage, but if your practice consists of four lawyers who have been together for 4 years, there may be no way to buy insurance for the one new lawyer without paying substantially higher premiums. Also, many companies do not write policies for securities lawyers. This is of particular interest because the primary business or industry give rise to legal malpractice claims arise from the securities arena. Unfortunately, these companies are in the market, but only for securities lawyers who have not represented hedge funds. The exposure is intensive when the client suffers a loss, whether or not the lawyer contributed to it. The simple fact is that many law firms find that they cannot buy legal malpractice insurance in certain situations.