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Calculating Adequate Coverage When It Comes to Limits of Liability

Is your law practice adequately protected? 

This topic could cover a range of items, but when it comes to insurance, and the limits you choose when purchasing insurance, this is an important question.

‘I want to save on business expenses.’  ‘I don’t see the need for so much coverage.’  ‘I won’t need to use it anyways.’  ‘My clients love me, they won’t sue.’ ‘I only need coverage to satisfy state requirements.’

These are all understandable thoughts…. However, they are contradictory to the essence of insurance.  Insurance, for anything, is the transfer of risk and an investment in financial security.

While professional liability insurance is unique to other lines of insurance, it still holds true to what insurance is.  Your policy will be there to financially protect your law firm and can help alleviate the frantic stress of dealing with a claim, especially frivolous ones.

Calculating “Adequate Coverage”

It is difficult to accurately say what coverage and limits will be needed.  Just as it’s challenging for an insurance company to quantify risk.  However, when choosing your limits of liability there are a few things to consider to help you decide what is suitable for your law practice:

What is your hourly rate?  What are your average billable hours?

Take your largest case and think “worst-case scenario” … What would it cost to defend and indemnify should a claim arise?

Now weigh the out-of-pocket cost of being underinsured.  Not all claims are rational, but they still come at a cost.  A cost of time, money, and even reputation.

What Limits of Liability are Enough?

Choosing the correct limits for your law firm’s professional liability insurance can be a challenging task.  You want to make sure that you have enough coverage to protect your practice.  But how much is enough?

Here are some factors to consider when choosing your insurance limits:

• Your Areas of Practice: Different areas of law have different risk factors, and you should consider the potential financial impact of a lawsuit in your specific area of practice. For example, if you practice real estate law, you may need higher coverage limits than if you practice family law.
• Your Business Size: The size of your law firm is also important to consider when choosing insurance limits. A larger law firm may require higher limits than a solo practitioner.
• State Requirements: Your state may have minimum insurance requirements for law firms. Make sure you are meeting these requirements.
• Risk Tolerance: You should consider your comfort level and risk tolerance. You may want to purchase higher coverage limits if you are more risk-averse.

Ultimately, the amount of insurance coverage you need will depend on a variety of factors unique to your law practice.  Consider the types of legal services you provide, the size of your firm, and the potential financial impact of a lawsuit or claim against your firm.  This can help you determine the level of risk your firm faces and the amount of coverage you may need. 

Why $100/$300 Limits May Not Be Sufficient                                                                                       

Most insurance providers offer professional liability insurance policies with minimum coverage limits of $100,000 per claim and $300,000 aggregate per policy period.  This amount may not be sufficient for all attorneys or law practices, and higher limits may be necessary depending on the nature of your practice.

Many insurance agents selling auto insurance recommend at least $100,000/$300,000 limits and will caution that this may not be enough. Ask yourself which is more important to carry adequate coverage for…your car or your business?

We have seen cases where law firms with 3-5 attorneys carry the bare minimum coverage of $100K/$300K limits for years.  Then, one day they receive a threat from a client to sue.  The words alone can be eye-opening.

There are many things you may not have considered before the threat of a lawsuit landed on your doorstep.

• Multiple allegations don’t necessarily qualify as multiple claims.  They could very well be considered one claim.  Facing the realization that $100,000 can quickly dissipate as the allegations are being defended can be harrowing; Your firm may be liable for out-of-pocket expenses you did not foresee or budget for that could impact the financial stability of your business.

EX: Your per-claim limit is $100,000. The claim, to defend and indemnify, costs $1,000,000. Are you able to pay $900,000 out-of-pocket?

• The limit of liability applies to the entire firm, not per attorney.  This is a common misconception and another important factor that can impact your insurance coverage.
• The potential exposure of your assets.  If your practice is not incorporated, and the cost of a claim exceeds your policy limits, your assets may be left vulnerable, leaving you to pay out-of-pocket for any dues that are owed.
• A claim scare is not sufficient reasoning to increase limits mid-term.  Your carrier will want to do a risk assessment to make any changes to your policy, and the terms and conditions will most likely include limitations or exclusions that prevent an increase in limits mid-term.

Keep in mind each renewal is an opportunity for you to speak with your agent about adjusting your limits, deductible, and other coverages to satisfy the needs of your law firm and adapt to current events.

The Power of Having a Team on Your Side

It is empowering to know you have a team on your side when managing a claim.  Not having to go at it alone, even for a moment, can be a huge comfort.  If a lawsuit is filed, there are several reasons it would benefit you to have a carrier team on your side:

• Expertise: Carrier legal teams have extensive experience in handling legal malpractice claims and are familiar with the nuances of these types of cases. They can provide advice and guidance while helping to navigate the complexities of the litigation process. They can also provide legal representation that is tailored to your law firm’s unique needs. 
• Cost: Defending a legal malpractice claim can be expensive, and the cost of legal representation can quickly add up. Carrier legal teams are typically paid for by the insurance carrier, which can save your law firm a significant amount of money. By underinsuring your law practice, you allow the possibility of having to defend and pay for the claim yourself. Imagine being responsible for defending a claim and paying the costs to do so whilst attempting to maintain your law practice.
• Protection: Carrier legal teams are dedicated to protecting the interests of your law practice. They will work diligently to defend against the allegations being made and can provide a layer of protection and peace of mind knowing you have a team working to help resolve the matter.  

Be Intentional With Your Insurance Selection

Each law practice is different.  There are various types of attorneys, areas of practice, locations, situations, and needs.  The limits of liability selected are important, but so are the coverages within that policy.  If your firm practices 70% Patent Law but your $2,000,000 policy excludes Intellectual Property, the policy is futile.

It is important to carefully review coverage options and consider your risks.  Understand the terms and conditions of each policy and the exclusions and limitations that may apply to each offer you receive.

Purchase your professional liability insurance with purpose and serious consideration.  Partner up with a knowledgeable agent who can assist you in your search for insurance coverage that will be advantageous to your law practice and business.

Wrapping up

Ask the difficult question: Will my law practice be adequately protected with the insurance coverage and limits I have chosen?

Evaluate your options and consider appropriate coverage and limits of liability based on your risk assessment and the potential financial impact of a claim.  Make sure you feel confident you have the coverage needed to adequately protect your law practice if a claim were to arise.

Your premium is the cost of transferring any potential risk to an insurance company.  Don’t sell yourself short by underinsuring.  Even a frivolous claim costs time, money, and can jeopardize your reputation.  Partnering up with a knowledgeable agent is a great place to start your search for policies that fit your needs and adequately protect your law firm.