Your law firm has made the wise decision to purchase lawyer’s professional liability insurance, or as it’s commonly referred to LPL coverage. Now it’s time to get acquainted with that coverage.
I often hear clients and prospective clients say, “Mr. Hirsch, why do I need to get acquainted with my policy? They’re all the same, or I’m never going to need it.”
After quietly cringing, I usually retort; you wouldn’t purchase a new vehicle without test driving and researching it would you?
The short morale of the story is no two lawyers’ professional liability policies are created the same. They are built by a group of humans usually consisting of lawyers, underwriters, financial gurus and other experienced insurance professionals.
Every insurance carrier has their own experts create their policy form by putting in features they feel will help sell that policy, but make the program profitable.
The important part is knowing some of the important features in the policy so that you can use them when it’s absolutely necessary.
Let’s take a look at my top five features of the typical Lawyer’s Professional Malpractice Insurance policy.
1. Pre-Claims Assistance:
I’ve had numerous clients over the years email me and ask me for advice about a situation, incident or potential claim that has arisen with a lawyer in the firm and whether they should report that as a claim? Here’s my advice to the firm.
First, I’m always going to make sure you refer to your actual policy about what triggers your policy’s claims made coverage. It’s important that you have read the definitions and familiarized yourself with what’s in your policy. You can usually find the Pre-Claims Assistance under the insuring agreement, coverage or supplemental coverage portion of the policy.
The second bit of advice, and something that’s often over looked in professional liability policies, is that almost every reputable carrier selling LPL insurance now offers free risk management hotlines, where the insured law firm can call a 1-800 number and speak with a insurance defense lawyer about your firm’s situation or incident before the actual claims reporting process.
Generally, the insurance carrier hires an outside law firm or will have in-house staff counsel available. These on-call attorneys will give free legal advice about your firm’s situation or potential incident. These defense lawyers are experienced in lawyer’s professional liability attorneys, and more importantly, are familiar with your firm’s LPL policy. Some of these risk management hotlines offer continuing legal education hours for your firm’s lawyers, as well.
There’s a lot of incentive for an insurance carrier to provide this type of pre-claims assistance. The sooner the insurer learns of the client’s problem, the more likely the chance of a better resolution. Even where circumstances later become a claim, early involvement can help mitigate and prevent mistakes that might increase the cost of settling a claim and can create a chain of documentation that assists in the ultimate resolution.
To encourage the use of pre-claims assistance, most insurers do not include expenses related to pre-claims assistance within an insured’s loss history. This eliminates the risk of a premium surcharge for using the service.
Often the expenses the insurer incurs in providing legal or other assistance to resolve a problem get paid out of the policy limits and not subject to a deductible. Please make sure you refer to your policies risk management hotline features to get a full understanding of the features available to your firm.
2. Disciplinary Coverage:
In 2011, the State Bar of California reported 16,156 new complaints against California lawyers. Use this blog as your friendly reminder of the great risk a grievances present to your law firm. They can often be messy and the severity can sometimes resemble a legal malpractice claim in total defense costs.
While it seems fairly straight forward, different LPL policies have different coverage limits and different types of coverage for which they will provide defense costs. Make sure you understand how the limits of the disciplinary hearings coverage work in your policy.
Limits for disciplinary hearings coverage are most often a sub-limit, which does not affect or erode your actual limits of liability of your LPL Policy. However, there is most often a per proceeding limit within that sub-limit and an aggregate limit for total proceedings.
The amount of disciplinary coverage can range from $10,000 – $100,000 depending on the policy and generally not subject to a deductible.
Since it’s likely a reimbursement by the insurance carrier, the law firm sometimes can pick their defense counsel. The reimbursement usually provides for attorney’s fees and reasonable costs, expenses, or fees paid to third parties, resulting from any one disciplinary proceeding.
Pay special attention to the definition of a “disciplinary hearing” in your LPL policy. Definitions often include, but are not limited, to state or federal licensing boards, peer review committees, courts, bar associations, or a regulatory body. You can always find any definition you need clarification on in the definitions portion of the policy. This will lay out exactly who or what is covered.
The very definition might determine whether this coverage would apply to your specific proceeding. One caveat – make sure you follow your policy’s procedure to disclose the grievance proceeding in writing to the carrier. Remember your firm’s LPL policy is the controlling document, so make sure to follow its reporting procedures accordingly. Never deviate or you run the risk of voiding coverage altogether.
3. Punitive & Exemplary Damages:
Punitive or exemplary damages seem to be a very hot button topic in the legal field. Punitive damages are intended to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit.
The purpose behind punitive damages is to punish the defendant for outrageous misconduct and to deter the defendant and others from similar misbehavior in the future. While some states refuse to award punitive damages in any action and some have limited those damages, they certainly exist.
There has been a significant increase in Fair Debt Collection Practices Act (“FDCPA”) actions against lawyers in recent years. This has become a leading cause of claims in LPL the last few years. It’s important to determine whether your LPL policy covers awards arising under the FDCPA. Make sure to check your state’s laws on punitive damages, as well.
Most older LPL policies exclude punitive and exemplary damages in the definition of damages. Some polices do not specifically exclude coverage for punitive and exemplary damages, however there is no direct language as to whether they are covered in the policy.
You should consult with your broker, if no such language exists in the policy. However, I’m seeing a trend of newer LPL polices including punitive and exemplary damages, where insurable by law, in the definition in order to differentiate that policy form from the others.
It’s an excellent selling point, and these policies do exist because I sell them. You should consult with an expert broker in LPL about finding those particular policies that do include punitive and exemplary damages.
Depending on the types of cases your firm handles this could be a huge difference in covering the type of liability the firm might be exposed to.
4. Mediation Incentive Deductible Clause:
Mediation Incentive Deductible Clauses are a relatively new supplemental coverage or incentive that I’m seeing in LPL policy forms, and it’s certainly a great selling point, if the firm carries a larger deductible.
The mediation incentive clause usually states that if mediation of the claim takes place either without institution of an arbitration proceeding or service of suit, or within a set period of time (ie., 60, 90 or 180 days) of the institution of such proceedings or service of suit, and such claim is ultimately resolved for an amount acceptable to the insured and the insurer by the process of mediation, the insured’s deductible is reduced by (50%) or some other amount.
Generally you can find this clause in the settlement portion of the LPL policy or possibly in the supplemental coverage. The rationale behind offering this clause is that both indemnity and defense costs will be typically lower when claims are settled by mediation, which can save the carrier significant amounts of money in quickly dealing with a variety of LPL claims.
Make sure to carefully review the LPL policy forms under consideration for the broadest provisions that give you the best opportunity to take advantage of this incentive.
5. Extending Reporting Options:
What are extended reporting periods (“ERP’s”) better known as tail coverage? I strongly recommend you get intimately familiar with this provision in your policy.
I often get the following question. “What does the law firm or individual lawyer do when the firm dissolves or the lawyer leaves the firm?” This is where tail coverage comes into play and will ultimately help the firm decide on their next move.
Tail coverage extends the period of time during, which an insured lawyer can report a claim based upon an act or commission that occurred after their retroactive date, if any, and prior to the effective date of the tail coverage. There will always be an extended reporting period option portion of the policy detailing the different options available to the firm.
Remember the firm can only purchase tail coverage through its current insurance carrier, it is not sold, as a stand-alone product.
If the firm dissolves, generally LPL polices offer a 30-60 day period to purchase tail coverage after that policy cancels or expires. Once that window expires you can no longer purchase the tail coverage and the firm can go unprotected from claims that arise later.
In addition, some LPL policies offer individual lawyers the option to purchase tail coverage upon leaving the firm, but I would suggest you review the LPL policy to see, if such a provision exist.
Most, if not all, LPL insurance carriers offer tail coverage for lawyers that retire or cease the private practice of law. Some carriers offer these (retirement or cessation of practice) lifetime tails for free after you have had three years of continuous coverage with that carrier.
Tail coverage pricing is almost always listed in your LPL form under extended reporting coverage. The premium for the tail coverage will depend on the length of the extended reporting period purchased.
Generally, ERP’s are calculated as a multiple of the regular policy premium for that period, (e.g., 100 percent of the annual premium for a 1-year ERP; 175 percent of the annual premium for a 3-year period; or all the way to an unlimited option, although not every carrier has an unlimited ERP option.
When determining the right length of an ERP for your firm, here are my suggestions tp consider.
- The most critical factor is the area of law your firm practices. This will determine the types of statute of limitations that may arise in cases the firm handles, which can lead to longer periods for a claim to arise and become known.
- How many claims the firm has had in the past might also service as a good measure of the likelihood of a future claim.
- Also, consider the firm’s caseload. How many files the firm has handled in past? How many closed files are there in that last 2 or 3 years? This might be a good opportunity for the firm to review its file closing procedures and other firm risk management practices in the wind down.
Zachary A. Hirsh, J.D. is the President & CEO of the Hirsch Insurance Brokerage, LLC. Follow Zach on Twitter at @Hirschinsurance. For more information, visit www.hirschinsuranceagency.com, or contact Mr. Hirsch at firstname.lastname@example.org.