On Risk Management: Questions and Answers on Professional Liability Insurance
By Kay G. Kenny
The Daily Record, April 9, 2001

What is lawyers professional liability insurance? What does it cover? Do I really need it?

Whether it’s legal liability, malpractice or errors and omissions insurance, professional liability coverage is designed to address negligence, mistakes or the failure to take appropriate action and is typically customized for the needs of specific industries — law, accounting, medicine, architecture, engineering, etc. — to address exposures that are excluded by general liability policies.

This insurance is usually mandatory for doctors, accountants, architects, engineers, but it is optional for lawyers in Maryland. And, yes, it is essential! Going without malpractice insurance until you have a claim is akin to “closing the barn door after the horse is out!”

Here are some basic questions and answers to help your law firm clarify its insurance needs:

How much protection?

Keeping in mind that there really are no limits to the liability of a professional, the best starting place is to consider the nature of your practice and the value of the matters that you handle regularly. For example, if the firm is involved in commercial real estate and has a number of transactions ongoing at the same time, the protection needs may be greater than those of the personal injury firm or family law firm which handles a volume of smaller cases.

Give some thought, too, to how the office operates, and what single mistake might produce the biggest loss that can be imagined. For example, if a calendar failure could make responses late on several high-value matters, consider the resulting loss as a starting point in examining appropriate limits.

Unlike general liability policies, most standard professional liability policies include defense and other claim costs within the limit of liability. Thus, when you consider ultimate loss potential, defense costs must be included.

Most lawyers professional liability policies have aggregate limits that will apply to all losses in a policy year. Though there may be additional allowances for some circumstances, the total number of claims that could arise from failures in rendering professional services should be considered when selecting your limits.

It is statistically improbable for one mistake to cause a catastrophic loss, or to have a series of catastrophic losses occur in one policy year. So, a coverage limit of less than the absolute maximum is appropriate. In the vast majority of cases, a limit that would cover 80 percent or more of the ultimate foreseen loss or combination of losses will be sufficient — and will fit closer to the budget for professional liability insurance.

Key policy provisions

All professional liability policies are written on a “claims made” basis, not an “occurrence” basis. Previous columns in this series have addressed this difference; basically, it means that coverage is determined by the date the claim was made against you (and reported to your insurer), not the date of the incident that triggered the claim against you. This should be considered when reviewing other provisions. If it is ignored, there is a distinct possibility that a gap in coverage will result.

The most crucial provision to consider is the Prior Acts Limitation Endorsement or Retro Date. While the policy coverage is triggered when a claim is reported between the inception and expiration dates, policies also provide that the event or action that led to the claim must have occurred after this date. The insurance company often places a Prior Acts Limitation Endorsement at the date the firm was started, unless the firm has been insured continuously with another company. When associates are hired this endorsement may also be added to the policy to prevent attorneys from bringing liability exposure from their previous firm.

Another area to review is the definition of “Professional Services” within the policy. This will define what activities the company considers the practice of law, and thus how broad the coverage will be. Professional services of lawyers, arbitrators, mediators, fiduciaries, title insurance agents and notaries public are among those that should be included in the standard professional liability policy.

It is also necessary to review the policy exclusions to be sure that the activities important to your firm are covered. Though policies among insurers differ, these are some of the more common endeavors that are customarily excluded:

Enhancing or limiting coverage

Attorneys with office sharing arrangements, or those who are not members of one firm, may have an endorsement that excludes coverage for vicarious liability.

Attorneys who also are title insurance agents need to be sure that their exposure resulting from activities for the title company are covered, either by the definition of “insured” or by an endorsement added to the policy.

Law firms that own their own title agencies may want endorsements for title insurance agency’s professional liability, rather than purchasing separate errors & omissions policies. The insuring agreement would be amended to include the title agency as an additional insured.

Insurance companies are especially concerned about firms that engage in securities work. It is not unusual for an exclusion to be added to the policy. In many instances, however, coverage for this exposure can be added back by endorsement.

As mentioned above, defense costs typically are included within policy limits. Concerns over this provision have been handled in a number of different ways. Some insurers have liberalized their policies, while others have endorsements that put costs of defense back outside limits (claims expenses in addition to the limits of liability.)

And, particularly in this soft insurance market, another popular addition to the policy is an endorsement for first dollar defense, an endorsement that responds to pay defense costs from the outset, without having the policyholder first incur a deductible.

Most of these policy enhancements are available with varying additional premiums.

Conclusion

Although professional liability premiums have fluctuated greatly over the past years, it is essential that your firm operate with the appropriate coverage for their liability exposure. Assess both the financial strengths of your company and the services it provides to help make the best decision.

Professional liability insurance: don’t practice without it!

Resources

Legal Mutual Liability Insurance Society of Maryland - Professional Liability Insurance Policy MLPL-160 (01-2000);
“ALPS On the Docket - Risk Management Report: 1994 Issue - Analyzing Your Professional Liability Insurance Protection” by Robert D. Reis, Risk Manager;
Legal Mutual Policy Endorsements MLPL-162 Prior Acts Limitation Endorsement;
MLPL-164 Lifting SEC Exclusion;
MLPL-190 Title Insurance Agency’s Endorsement;
MLPL-194 (01-99) Claims Expenses in Addition to the Limits of Liability;
MLPL-196 First Dollar Defense/Aggregate Deductible Endorsement.

Kay G. Kenny is Assistant General Manager of the Legal Mutual Liability Insurance Society of Maryland. This is the ninth in a series of articles that includes claim prevention techniques, designed to minimize the likelihood of being sued for legal malpractice. The material presented does not establish, report or create the standard of care for attorneys, is not legal advice and does not represent a complete analysis of the topics. Readers should conduct their own appropriate research.

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