Lawyer Professional Liability
By Laura Impellizzeri. She was California Lawyer’s news and trends editor.
Few consumers of any type of insurance relish the experience of buying it. But buying professional liability coverage brings especially uncomfortable scrutiny to lawyers’ skills and their choice of practice area. Purchasing the right coverage also requires a good deal of money and an understanding of very particular terminology (see “Terms of the Art of Liability Coverage”). But there is significant risk involved in skipping the whole process, no matter how tempting that is. Brokers say the typical lawyer is sued by a former client every seven years, or at least three times in a career.
“Even if you think you’re perfect at what you do, if someone else doesn’t, that can be the end of your business,” says wholesale insurance broker Raffi Kodikian with Cooper & McCloskey in San Francisco.
Nonetheless, a significant minority of California lawyers “go bare,” the favorite term among specialists in the field for doing without professional liability coverage.
“They’re trying to save a dollar,” says wholesale broker Ian Bell with Socius Insurance Services in Los Angeles. “And it is somewhat of an invincibility thing. Attorneys are very confident of their ability to do their job. Which is excellent – everyone should be. But part of [doing good work] is recognizing that people do make mistakes.”
Brokers say a typical new policy for someone of medium risk with no prior claims costs $3,000 to $4,000 per lawyer per year in California, which has the highest rates in the nation. And the cost rises by 10 to 20 percent per year for the first five to seven years, brokers say. After that, price increases ease, absent a record of malpractice claims or a lapse in coverage. But many lawyers revisit their professional liability policies each year at renewal time, looking to cut their costs by switching carriers or programs. This churn puts upward pressure on prices, as has a rise in the frequency and average dollar amount of claims against lawyers during and after the recession.
“Some of the perceived instability in the market is caused, rightly or wrongly, by clients looking for the best deal each year,” says lawyer Bradley Rutt, a retail broker and vice president with Elkins Jones Insurance Agency in Los Angeles. “And there is more instability in the [market for] smaller firms or sole practitioners than bigger firms.”
Rates for a given firm or lawyer can’t reliably be predicted because so many variables are involved: claims history, practice area, deductible, and coverage limits, to name a few. The most common purchasing tip from industry professionals is to start by choosing a broker you trust (consult lawyers you know) and getting lots of quotes. Keep in mind, however, that insurers and programs won’t prepare quotes repeatedly for the same potential client just because different brokers request them.
“Remember, the first broker to market on your behalf will be the one to contact all the top companies; the second broker is going to have slim pickings,” says Rutt. “So make sure that’s the broker you want to do business with.”
Richard O’Regan, a principal and retail broker with Mercer Health & Benefits Insurance Services, says very few professional liability carriers were operating in California when premiums first soared in the 1980s. That rise prompted the State Bar to sponsor a program now provided by Arch Insurance Company, which O’Regan has managed for twelve years. (Find details and an application at www.mybarbenefits.com.) For lawyers who haven’t found a reputable broker, he recommends applying through the bar. His top tip after that? Remember the definition of “claims made.”
“It’s the policy that’s in force when the claim comes in that governs the coverage,” says O’Regan. That is, whether a carrier pays a professional liability claim depends first on when the claim was made, and then on how far back the policy extends (see “Terms,” this page).
It’s important to understand that – unlike, say, car insurance, which has fairly standardized terms – professional liability coverage can vary dramatically. “We see lots of attorneys in smaller practices who, no matter what the coverages are, always pick the cheapest one,” says Bell. “That’s always fascinating to me, because they’re pretty heads-up about a lot of other things. These same attorneys probably buy the medium-to-best car insurance they can.”
“Not that price isn’t important,” agrees wholesale broker Dave Weller with AmWINS Insurance Brokerage of California, in Los Angeles. “But it’s like saying, ‘I can go to any of these [lawyers] out here. They’re all the same if they all have a law degree.’ ”
Dan McKenna, a principal with Mitchell & Mitchell Insurance Agency in Novato, says less expensive carriers may be more likely to drop insureds after they file claims, or to leave a market and be replaced by a company that’s “pickier” about covering certain practice areas, such as entertainment, real estate, or personal injury.
Premiums rise fastest in the early years of a policy because your potential liability increases in proportion to the volume of work you have handled under it, but the rate of increase shrinks as the volume grows. That is, the volume of work you’ve handled can be expected to double in the second year you have a policy, but rise by just 50 percent the third year, 33 percent the fourth, 25 percent the fifth, and so on until each year’s increase is negligible compared with the total volume of work you’ve handled. The change in the premium increase reflects the likelihood your insurer will have to cover a claim for you. That’s because professional liability policies typically cover claims made whenever they were in force.
“I’m working on a policy right now where the insured is considering going with no retroactive date, and his policy will be 60 percent cheaper,” says Bell. “He thinks that’s a great deal, but the reason it seems like a great deal is that the insurance company is recognizing it’s writing off a ton of risk.”
Of course, some practice areas carry more risk than others. The toughest right now, according to brokers, are intellectual property, entertainment, and high-net-worth family law. Many carriers admitted in California won’t cover any lawyers in those fields.
If the two most important steps a firm can take when purchasing professional liability insurance are to work with a reputable broker and understand the concept of claims made, a close third is to proofread your application, says Susan Kilano, a vice president with Ahern Insurance Brokerage in San Diego. Check math regarding, for example, the percentages of your time you devote to various practice areas, and – whatever you do – don’t write it out by hand.
“Make sure you add everything up before you send it to your broker, and complete every question, and explain all your past claims,” cautions Kilano, who serves on a committee of the Professional Liability Underwriting Society’s chapter in Los Angeles. “If you have a good broker, they can figure all this out. If you have a bad broker, they’ll just ship it out with all those problems [and] … you’re not going to get the best look [from underwriters]; you’re not going to get the best rates.”
Lawyers whose insurers leave California or drop them after covering the inevitable claim can almost always find new coverage, brokers say. But lawyers who can’t resist the temptation to jump around to cut costs are more likely to face those frightening prospects. Sure, whichever policy you buy will be in force when a claim is made, says Rutt, but it won’t necessarily be backed up with enthusiasm.
“Although no one would admit to it, there is also a human element,” says Rutt. “If you are asking a carrier to defend you and you move your business, I don’t think the carrier is going to go the extra mile for you. They will merely do what is legally sufficient.”