Lawyers Professional Liability Insurance for the Distressed Risk
Insurance against professional negligence is a requirement for practicing law. Due to the fact that attorneys are regarded as high-risk clients, the regular insurance market does not always allow them to get the coverage they need. The issue that has to be answered is, what precisely does it mean to be distressed?
A risk that is considered to be distressed is one for whom it is difficult to get professional liability insurance because to the number of claims filed, the severity of claims filed, or disciplinary complaints or measures taken.
Although the terms hard to place and distressed are frequently used interchangeably, they are not the same thing. Hard to place indicates that the lawyer or law firm practices in a more risky practice category, such as personal injury plaintiff or patent, while distressed indicates that the lawyer or law firm has not been subject to any claims or disciplinary actions in the recent past.
If a law firm has a history of losses or disciplinary actions that qualify it as distressed, the law firm will have a much more difficult time procuring professional liability insurance and will typically be forced to make do with a lower level of coverage while paying a significantly higher premium. The good news is that there are a few markets available that function on a surplus lines basis, which will allow the struggling law practice to satisfy its requirements for professional liability insurance.
Because the insurance product is not protected by any state insurance guaranty association and the policy form and rates charged are not subject to regulation and approval by the State Insurance Commissioner, the term “surplus lines” is frequently used with a pejorative connotation. This is due to the fact that the State Insurance Commissioner does not have authority to regulate or approve these aspects of the policy.
However, not every insurer that specializes in excess lines is made equal. It is common practice for state insurance authorities to publish a list of approved surplus lines companies. Surplus lines insurers are subject to evaluation by insurance company rating organizations such as A.M. Best.
Before committing to making an insurance purchase from a surplus lines company, legal service providers should check with the insurance department of their state to determine whether or not the company is recognized as a surplus lines insurer and whether or not it has attained a minimum rating of A VII from A.M. Best.
Many admitted professional liability companies will have a surplus lines facility to accommodate those applicants or insureds who do not qualify under their standard program guidelines but who would be acceptable on a surplus lines basis if a more acceptable premium could be charged for the exposure that was presented. This facility is designed to help these applicants or insureds obtain coverage even though they are not eligible for it under their standard program guidelines. Within this sphere, there are a number of A and even A+ markets that may be approached.
Finding a broker who specializes in professional liability and regularly deals with distressed placements is typically required in order to satisfy the requirements for locating an adequately rated surplus lines insurer who can be relied upon to provide the required coverage in the event that a claim is presented.
As a general rule, the majority of brokers who offer lawyers professional liability as a full-time product line will have an insurance company or distressed facility that they have collaborated with fruitfully in the past. This is because lawyers professional liability insurance is a specialized field. It is in your best interest to look for a broker that is conversant with the policy form and the capacity to process claims of the firm that they are recommending.
The following is a list of legitimate questions that a broker should be asked regarding the insurance company that is providing coverage:
Does the insurance firm concentrate on providing coverage for professional liability?
Is it a surplus lines insurer that is recognized by the state and has a rating of A VII or higher from Best?
Does the insurance company handle its own claims processing, or does it contract that work out to a separate adjustment business or a third party administrator?
Will the claims adjuster provide you a list of legal companies in your state from which you may pick the attorney who will represent you in court, and will the business cooperate with you to take into consideration the law firm you recommend?
Is the insurance company prepared to fight a fraudulent claim in order to maintain your image in the community, or do they have the attitude of “getting out the checkbook” to settle the claim regardless of the circumstances?
Will the insurance company keep you updated on the progress of the claim on a regular basis and ask for your feedback before making any decisions about the settlement or defense strategies?
Examining the policy form and having a conversation with the broker about the advantages and disadvantages of the various coverage elements is a worthwhile investment after a financially sound insurance business has been located. The broker is obligated to present a list of coverage highlights that not only describe essential coverage constraints, but also mention favorable marketing benefits.
When shopping for professional liability insurance, one of the coverage aspects that should be brought to your attention as a top priority is whether or not the policy includes coverage for “previous actions.”
Many times, distressed markets may provide conditions known as “retro inception,” which essentially means that the previous actions retroactive date of the policy will coincide with the date that the policy begins to take effect. In order to file a claim under a policy with a claims-made provision, the event(s) that gave rise to the claim must have taken place after the retroactive date of the policy.
This kind of scenario is sometimes referred to as a limited past actions policy or a no prior acts policy. An Extended Reporting Period (ERP) option will need to be obtained from the insurance provider whose coverage is about to run out if the policy includes limited coverage for earlier activities.
An ERP may be a highly cost-effective choice since, in most cases, the terms will be based on prices that were offered by the normal marketplace, and there will be no surcharges for claims or disciplinary issues. A broker ought to be able to provide advice on the benefits and drawbacks of acquiring this option; nevertheless, there are two items that should be taken into consideration:
If your license to practice is revoked, does that mean you lose access to the option automatically?
Will the limit of liability provided by the insurance become exhausted if open claims continue to be paid?
Other policy features that, on a distressed policy form, may be subject to restrictions include the following:
The consent-to-settle clause of the policy
Exclusions that are exclusive to particular fields of activity, such as the SEC
Certain sorts of legal malpractice lawsuits, such as filing a counterclaim as a consequence of a fee collection litigation, are specifically excluded from this coverage.
The cost of defense is often included into the limit of responsibility, which causes it to decrease with time.
Coverage is often restricted to actions carried out on behalf of the named insured identified in the policy declarations. This restriction might limit
coverage for predecessor firms, individual earlier acts, and activities carried out beyond the scope of the named insured’s employment.
Options for extended reporting periods are only available for a duration of 12 or 36 months, and their prices are much higher in comparison to those of the ordinary market.
When filling out an application for professional liability insurance, it is important to keep in mind that you are the greatest potential representation of the risk that your practice may face in the future.
This will help ensure that you obtain the most advantageous terms available. If a company offers a distressed facility, the underwriters are not as concerned with the number and amount of past claims, or even with the fact that the firm has been censored by the state bar, as they are with whether or not the underlying problems that led up to the claims or disciplinary ruling have been identified and addressed.
An approach that is real, honest, and includes full information on any claims or other problems that may have contributed to the company’s current predicament is always the best strategy. Include a narrative that describes the methods and procedures that have been put in place to lessen the risk that similar claims will be filed in the future.
Include your thoughts on the validity of the claim made by the applicant. Give the underwriter a rundown of everything that went well during the representation. Include loss data from past insurers that reflect the actual paid and reserved amounts, if doing so is even somewhat feasible.
If the underwriter is required to interpret the value of the claim, then it is quite probable that the underwriter will determine that the value of the claim is more than the real reserve that the insurance company has established. Participate actively in the payments and reserves that have been established for the open claim, and ensure that you are kept up to date on the claim’s progress on a regular basis.
If you are a small or mid-sized legal office that has had trouble finding attorneys professional liability insurance as a result of paid claims or disciplinary measures, DefenseProSM Lawyers Professional Liability may be able to assist you in obtaining coverage.
DefenseProSM is a product that is offered by Lockton Risk Services, which is a subsidiary of Lockton Companies, which is the largest privately-owned commercial insurance broker in the United States. DefenseProSM was developed specifically to meet the professional liability needs of troubled law firms and is administered by Lockton Risk Services.