Lawyers’ Professional Liability Insurance: Do You Need It?
Most businesses, including law firms, need a plan for handling unexpected situations, typically including some type of insurance policy. However, some lawyers might question whether small to medium law firms need malpractice insurance, commonly known as lawyers’ professional liability coverage. If you are one of them, you might be in for an expensive reality check.
According to a recent annual survey conducted by insurance broker Ames & Gough, legal malpractice insurers are reporting huge payouts of tens of millions of dollars for liability lawsuits, even though the number of claims being made has remained relatively flat in recent years. Ten of the 11 insurers surveyed said they had a claim payout exceeding $50 million in the past two years, three insurers reported paying a claim between $150 million and $300 million, and four paid a claim over $300 million.
What is Lawyers' Professional Liability Coverage, and Do I Need It?
Lawyers’ professional liability (LPL) insurance, also known as legal malpractice insurance, can help to protect a lawyer or law firm from expensive consequences should a client sue the firm or attorney for errors or apparent mistakes that may have happened during the representation. Professional liability insurance can pay for the cost of defending lawsuits against lawyers or law firms and any payments or awards that arise. Such policies also help protect against employee theft or internal fraud that might affect a lawyer’s or law firm’s reputation.
LPL insurance is not required in most states, and Oregon is the only state currently mandating it. However, any attorney in private practice should consider carrying it. The reasons: One misstep in a case could lead to liability, defending a malpractice lawsuit can cost tens of thousands of dollars, and an unfavorable result could cost even more. Even attorneys who consider themselves “judgment proof” (although few, if any, actually are), the headaches of a malpractice suit and potential bar disciplinary action they might have avoided make malpractice insurance well worth the expense.
Legal Malpractice Insurance Options
There are two types of professional liability coverage: 1) errors and omissions liability (E&O), which is designed to protect a law practice from claims arising out of alleged errors and omissions related to work performed for clients, as well as claims for bodily injury or property damage, and 2) professional liability, (also known as a general liability), which covers damages that result from professional services rendered. In addition, the policy generally includes such coverages as legal malpractice, libel and slander, personal injury protection, legal defense expenses and cost related to the trials, and any settlements or damages awarded against your firm.
Professional liability insurance policies typically include numerous significant provisions. These include:
The date after which losses may occur and be covered under the policy. Maintaining continuity of coverage and prior acts coverage is a critical consideration, and the prior acts date should be the initial date the law firm was formed.
Limit of Liability
The maximum amount the insurance company will pay for the coverage. Limits are usually expressed as “per claim” and “aggregate” (the most the insurance carrier will pay for all claims during the policy period). In some circumstances, certain types of practices may have clients that require proof of certain levels of liability insurance, such as outside counsel for corporate clients.
How much the firm will pay out-of-pocket in the event of a claim. Fewer and fewer LPL policies offer zero deductible coverage. However, it can still be obtained, usually at a significant premium.
Extended Reporting Period (ERP)
This endorsement protects against claims initiated after coverage ends pertaining to cases handled during the coverage period. The cost for the endorsement is a percentage of the expiring premium and will vary depending on the number of years selected.
Coverage for the cost of defending against claims, such as attorney fees, costs, and investigative expenses.
Coverage for bar disciplinary matters.
Coverage for expenses associated with responding to a subpoena.
Lost Earning Reimbursement
Protects the insured against lost earnings due to attendance at hearings or a trial associated with the lawsuit.
Firms should also be aware of what LPL insurance may not include. For example, many policies deny coverage when one insured files suit against another insured under the same policy or if a lawsuit arises from the insured’s intentional misconduct. Some policies also reject coverage in certain high-risk practice areas, mandating additional premiums to extend coverage in those areas.
Factors to Consider When Choosing an LPL Carrier
A lawyer should never buy LPL insurance on price alone. Here are some reasons why:
Level of Protection
If you can’t afford to pay a potential claim out of your own pocket (how many lawyers can?), you need adequate LPL coverage. The purpose of insurance is to transfer the financial risk you cannot afford to carry yourself, and without formal LPL coverage, you’ll still pay in the event of a claim, and the cost will likely be much more than the premium you pay each month.
Strength of Carrier
Price is important, but you should never buy a policy simply because you think it’s a good deal. Always make sure your carrier is financially sound so that it will be there if and when you make a claim. In addition, not all carriers are strong in all lines, so make sure the company you purchase your LPL coverage from specializes in your desired type of coverage.
Claim Payment History
When you buy insurance, you buy a promise that the company will pay valid claims. So even if you can find a cheaper policy, if that company doesn’t have a history of honoring the claims of their policyholders, are you really saving any money?
If your firm is contemplating whether to change LPL carriers, full prior acts coverage should be negotiated into the new policy if possible. Once a prior acts date is established, it must be maintained on all future policies, whether you stay with the same LPL insurer or switch to a new carrier.
How Much Does LPL Cost, and How Much Covering Do I Need?
Although LPL insurance is not cheap, it can be essential for law firms. The most crucial document that insurers use to determine the insurance premium for the law practice is the application, and the accuracy of your answers will help ensure an acceptable price.
According to the American Bar Association (ABA), the factors that typically determine the rate you will be charged for LPL coverage include:
Limit of Liability Selected
Generally, a higher limit of liability will translate into a higher insurance cost.
Those who practice in high-risk areas such as securities, banking, personal injury, and real estate can expect to pay more for coverage. In addition, some attorneys might have to pay an extra premium to get the specific coverage they need.
The personal claims history of all attorneys in the firm.
The State of the Insurance Market
In “soft” markets, rates are generally lower and coverage more available than in “hard” markets, when even renewing an existing policy may be difficult or expensive to accomplish.
The higher the deductible you are willing to pay, the lower your premiums.
Years of Experience
Contrary to what many believe, malpractice insurance costs for new lawyers are often less than for more experienced lawyers since seasoned attorneys are more likely to take on cases of greater complexity.
The claim experience of the other lawyers who practice in your geographic location and the litigation atmosphere of your jurisdiction will classify you in a particular risk pool.
Some companies offer more competitive rates for firms that employ more attorneys.
If your firm has instituted legal malpractice prevention controls such as automated conflict checks that help eliminate costly errors, you might qualify for insurance premium credits.
How much LPL coverage should you buy? The answer to this question depends upon two things: your practice and your financial circumstances. You should do a risk-benefit analysis to assess the value of your assets and review how much coverage you will need to protect your clients.
Controlling the Cost of Your Lawyers' Professional Liability Insurance
LPL insurance is generally not overly expensive, and most LPL carriers accept monthly premium payments, making it much more affordable than defending a legal malpractice claim.
Here are some ways to reduce the cost of your LPL insurance:
1 Be Careful When Classifying Attorneys
Insurers commonly price a law firm’s premiums based on the number of full-time attorneys employed. Some insurers distinguish between various counsel relationships, including “of counsel,” contract lawyers, and retired or part-time attorneys. The risks associated with these types of lawyers are typically different from those associated with a full-time practicing attorney. A law firm that treats all its attorneys the same, regardless of role or schedule, may be paying a higher-than-appropriate LPL premium.
2 Evaluate Your Law Firm's Practice Areas
LPL insurers typically evaluate the risk of insuring certain practice areas, basing their decisions on two factors: how often claims are made and how serious they are. Specific practice areas, such as personal injury, family law, and real estate, may have higher claim frequency. In contrast, other AOPs, like intellectual property, environmental law, and securities, typically have more serious claims. If your firm dabbles in non-core practice areas, it may be worth considering whether this habit adds unnecessary risk without sufficient return.
3 Reap the Rewards Available
Some LPL carriers offer lower premiums to firms based on their history of a clean claims record or repeat business, while others provide specific premium credits linked to the law firm’s efforts to manage risk. For example, if a law firm can demonstrate dedicated use of risk management tools, such as formalized billing practices, a calendar tickler system, docket control, and a conflict resolution process, it may receive a discount on its malpractice insurance premiums.
How to Avoid Legal Malpractice Claims
Mistakes and oversights happen, but without LPL coverage, these errors can result in the loss of a license, job, or an entire law firm going out of business. Although most lawyers could easily come up with many ways big law firms differ from their small and solo counterparts, all size firms face the same type and proportion of legal malpractice claims.
The most significant number of legal malpractice claims are related to three practice areas: trust and estates, business transactions, and corporate and securities. According to the Ames & Gough survey, many insurers also saw in increase in cases involving insurance defense and tax work/matters. Many of the lawsuits filed against tax attorneys were related to rapid changes in tax law during the COVID-19 pandemic, specifically the Families First Act, The Covid Tax Relief Act, The America Cares Act, and the Child Tax Credit.
But regardless of the area of practice, how can attorneys avoid legal malpractice issues?
Avoid taking on matters outside the scope of your legal expertise. Generally, the more complicated the cases being handled, the higher the payouts made by LPL insurers when something runs amuck. Lawyers who routinely stray outside their usual practice area are treading on a slippery slope – you don’t know what you don’t know.
Rule 1.4 of the ABA’s Model Rules of Professional Conduct requires attorneys to communicate important information with their clients, and the failure to do so can lead to malpractice claims. Practice management software for law firms can help you create, schedule, and send automated client communications that will keep everyone in the know.
Given the increasing complexity of many legal matters, even an otherwise ‘simple mistake’ can lead to a sizeable legal malpractice payout. As a result, firms should automate routine tasks to ensure accuracy and save time.
Put a process in place to identify conflicts of interest. Every year since the Ames & Gough survey began in 2010, participants have said that conflicts of interest – including perceived conflicts of interest – are one of the most alleged legal malpractice errors, likely because courts may view such errors as a breach of an attorney’s duty of loyalty to a client.
While LPL coverage is not required, most lawyers would rather not risk their personal assets for expected risk exposure. Lawyers’ professional liability insurance is essential to protecting a lawyer’s financial well-being and can be critical in preserving a lawyer’s professional reputation and livelihood.
Jan Hill also contributed to this article.