High Risk Areas of Practice (AOPs) with respect to Professional Liability Insurance
Malpractice insurance is critical to your practice. You want an insurance carrier on your side if, or rather when, someone files a Professional Liability claim against your firm. But understanding how carriers think about risk isn’t necessarily intuitive.
Stephen Dimiceli is an agent who is well-versed in attorney malpractice insurance. He sat down for an interview and helped explain how insurance carriers categorize different AOPs, and how these factors can contribute to the calculation of your overall premium.
Stephen tackles the following questions in this blog:
- Are High Claim Frequency AOPs Considered High or Low Risk?
- What Makes High-Severity AOPs Higher Risk for the carrier?
- How Should Attorneys Think About Their AOP?
Are High Claim Frequency AOPs Considered High or Low Risk?
Historical data of Professional Liability claims shows that some AOPs have a higher frequency of claims. However, they have a lower monetary pay-out by the carrier. This is known in the insurance world as claims frequency. On the other hand, there is also historical data that shows AOPs with fewer claims typically have a higher monetary pay-out. This is referred to as claims severity.
Claims data from several participating carriers shows that the most common claims result from work in personal injury, real estate, family and estate/trust/probate areas of practice. It just takes one simple mistake, such as missing a statute of limitations, for a claim to occur. But these are also AOPs where the losses are not as severe. For example, the average personal injury case often costs under $100,000. Because there are so many personal injury or family attorneys, this area of practice represents the higher frequency type of claim. That means while these claims do happen quite often, the cost to cover each claim is fairly minimal because of the number of them, and because they often settle quickly and for lower pay-outs.
What Makes High-Severity AOPs Higher Risk for the Carrier?
High-severity AOPs are typically categorized as high-risk. These areas have historically fewer claims and often result in larger settlement amounts. Areas such as medical malpractice, intellectual property, oil and gas, class action, mass tort, securities, and even mergers and acquisitions are all becoming areas that carriers are more hesitant to underwrite. They’re considered more severe AOPs because of larger value transactions where a single mistake can easily cost hundreds of thousands of dollars in losses to the firm’s client. Therefore, the resulting malpractice claim against the firm tends to be higher. These high-risk areas are where underwriters get a lot more particular and may offer lower limits of liability and a higher premium if they’re willing to write them at all.
Medical malpractice claims, patent mistakes, and patent infringement are all good examples of places where large dollar values can come into play. In the case of patents, it’s not just the dollar ramifications of the mistake itself, but the damages that it could cause for the client who loses money as a result of the mistake. With more specialized areas the carrier typically requires a defense specialist. The process of resolving the claim can result in an elongated court case. The attorney fees alone can cost hundreds of thousands of dollars. It's not just the loss from settling a claim but also the cost to defend it.
How Should Attorneys Think About Their AOP?
If you choose to practice in a more hazardous area, then become a specialist in that area. Don’t just dabble in high-severity AOPs – make it your focus so that it’s something you’re doing day in and day out. That way you’ll have a lot of experience, expertise, a knowledgeable team, and your firm will be at a much lower overall risk of having a claim made against you. Specializing in a specific high-risk AOP will help make the insurance carrier more comfortable in insuring your firm.
Everyone makes mistakes. Attorneys know what they’re doing and generally don’t get things wrong. The unfortunate fact is, we're all human and we make mistakes without knowing. When carriers evaluate current premiums for future losses on a claims-made policy, they know you could have done something yesterday without having any idea that a mistake occurred. It could be two or three years, or even 15 or 20 years if working in estate/probate work, before that error or omission is revealed.
There are also instances where claims are filed against a firm where the attorney didn’t actually do anything wrong. When there are multiple parties involved (such as with business and commercial real estate transactions), and when the client feels he or she has been wronged, their plaintiff attorney will sue all parties to the transaction.
Another example is estate planning. Issues with this legal work often are not revealed until the descendent passes. In many of these claims, the attorney and the client are unaware of any flaws in the legal work until the beneficiaries or other third parties come into play. Then they file a suit against the attorney because they don’t like how the will was written. It’s the long “tail” that makes estate/trust/probate or estate planning a hazardous area of practice.
That’s the point of Professional Liability Insurance. It protects the attorney against lingering liability and provides a legal defense. And this gives you and our firm the peace of mind that if a lawsuit is brought against you, someone will have your back.
So, The Bottom Line Is?
If you’re in a high claim frequency AOP you need insurance because you’ll probably need to file a claim at some point. The good news is, you can expect a lower premium than those attorneys practicing in a high-severity AOP.
If you practice in a high-severity AOP a lawsuit can be expensive. The volume of cases is small, but the potential liability is high. Get insurance to protect your firm. Just realize it can be harder to underwrite for your AOP.
Whether your AOP is high claim frequency or high-severity there are always things that can come back and hurt you. Even if you’ve never made a mistake, you can get pulled into a malpractice suit for just being connected to a case. So, the bottom line is you want to be protected for the kind of work you're doing right now as well as the tail of work you’ve done in the past.