According to the ABA, 5% to 6% of all private attorneys face legal malpractice charges each year. Because the cost of fighting a malpractice claim is generally higher than the cost of malpractice insurance premiums, many law firms buy coverage.
Unfortunately, firms tend to set their policies aside to gather dust. This can spell financial disaster when a claim arises and coverage is inadequate. It is critical not only to buy the right policy but also to maintain it to keep pace with changes at your firm.
Why Insure?
Lawyers generally are not required to buy malpractice insurance, although several states have adopted mandatory malpractice disclosure rules, requiring lawyers to disclose to their clients whether they have malpractice coverage. If you are concerned about protecting your lawyers' personal and business assets, as well as their reputations, you need adequate coverage. For most lawyers, adequate coverage roughly equals the value or amount of their clients' cases.
As you add clients and cases, your insurance needs change and may require additional coverage. Also note that attorneys who join or leave your firm should be added to or deleted from your policy on their effective hire or termination date. Lawyers who leave the firm to go solo, create a new firm or even retire should investigate buying an extended reporting endorsement known as a "tail." A tail can protect these attorneys from incidents that occurred during the coverage period but were not reported until after they left the firm.
Two Types of Policies
There are generally two types of malpractice insurance policies:
Claims-Made — To receive benefits under this type of policy, an incident must occur and be reported to the insurer while the policy is in force. Once the policy term is over, coverage no longer exists. If you require coverage for claims reported after the policy has been terminated, you must purchase a tail.
Occurrence — This kind of policy covers incidents — up to a specific dollar amount for each year — that happen during the policy period, regardless of when the claims are reported. Unlike claims-made policies, occurrence policies do not require a tail. Occurrence policies give you the option of buying additional "prior acts" coverage for acts committed before the policy's effective date.
Claims-made policies usually cost significantly less than occurrence policies. This is true even when you account for the cost of unlimited tail coverage that many lawyers purchase with their claims-made insurance.
Best Buys
To find the right policy for your firm, research several insurance providers. Solicit quotes from each so you can compare features, such as defense within limits coverage, the amount of indemnity and disciplinary coverage, and tail and prior acts coverage.
Do not just evaluate insurers on price. Also consider each company's financial strength, stability and services. You can contact your state's insurance regulating authority about specific insurance companies. Another source for information on carriers is the Standing Committee on Lawyers' Professional Liability section of the ABA's website.
Remember that coverage and pricing will vary depending on factors such as your firm's size, operating characteristics, practice type, loss experience, turnover and financial results. There is no one-size-fits-all malpractice insurance policy for law firms.
Act Quickly but Carefully
Whether you are buying your first malpractice insurance policy or updating one that no longer meets your firm's needs, know that it is important to act quickly so you are not caught uninsured. But you also need to carefully weigh your options. Sometimes purchasing a more expensive policy is the wisest decision you can make.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
