How to Better Understand Insurance Coverage
What is a Claim?
Because insured lawyers are generally required to report malpractice claims to their carrier as soon as they become aware of them (in order to not jeopardize coverage), it is important to know what constitutes a claim according to the definition that can be found in the policy. Not understanding how the insurer defines a claim can create a significant problem if a matter that should have been reported to the carrier was not reported in a timely manner.
Professional liability insurance policies may define a claim more broadly than a simple lawsuit naming the policyholder as a defendant. For example, a claim may be defined as “a demand or communication to the insured for damages or professional services,” or “an act, error, or omission by any insured which has not resulted in a demand for damages but which an insured knows, or reasonably should know, would support such a demand.”
Claims-Made And Reported vs. Occurrence Policies
One of the most significant differences between a professional liability policy and a general liability policy is that professional liability policies are almost always written on a claims-made and reported basis, as opposed to an occurrence basis, and it is the policy that is in force at the time when the claim is presented that pays the loss. An example of this would be if an error was made by a policyholder in 2010, but discovered by the policyholder in 2014. The error should be reported to the carrier providing coverage for the policyholder in 2014, at the time the claim was discovered.
An attorney’s error may present itself in several different ways, including being notified of the error by a lawyer who has been newly appointed by the client, or after receiving notification of the error directly from the client.
In order to establish coverage on a claims-made and reported policy, important conditions must be met by the policyholder. First, a policy must be in place at the time the claim is made. Additionally, the policyholder’s “retroactive date” or “prior acts date” must be dated at least as far back as when the services giving rise to the claim were provided. Finally, notice to the insurer of the claim must be given in a timely way, according to the claim-reporting requirements defined in the professional liability policy.
The insured attorney’s “prior acts” or “retroactive” date is established at the time the policy is created and is defined in the declarations page of the policy (or by an endorsement attached to the policy). For an attorney who sought insurance coverage at the time he or she first became licensed to practice law and has had successive, continuous years of uninterrupted professional liability coverage, the prior acts date may go back to the first day of the lawyer’s first insurance policy.
Claim Reporting and Policy Renewal
It’s important that policyholders report claim matters to their insurance carriers in a timely way. Reporting claims quickly ensures that the carrier will have ample opportunity to respond to the matter with all the resources at its disposal, and the policyholder will lock in the insurance coverage.
Lawyers sometimes worry that reporting a claim will automatically trigger an increase in annual policy premiums. However, professional liability insurers generally do not debit a policy premium simply because the policyholder reports a claim. To do so would discourage the early reporting of claim matters. Reporting multiple claims of a similar type over a period of time, however, indicates that there may be a systemic problem in the way the firm organizes its client matters, thus triggering an increase in the policy premium at the time of renewal.
Policyholders will be asked at the time they are renewing their professional liability insurance whether they are aware of acts or circumstances that might lead to a malpractice claim. This question helps identify the correct claims-made and reported policy for providing insurance coverage.
Lawyers who are aware of a claim matter but choose not to report it to the carrier risk losing coverage if they report it later under a subsequent insurance policy. This sometimes happens when the lawyer ignores the frequent pleas from an angry or frustrated client, assuming the matter will “go away,” only to realize later that the matter has spiraled out of control and the policyholder desperately needs some after-the-fact help from the insurance carrier.
Pricing
Lawyers, especially new ones, often have a misunderstanding about the cost of professional liability insurance. You would think the more inexperienced lawyers have the most risk, and therefore they should be subject to higher premiums; this is not the case.
Risk exposure to malpractice claims increases dramatically for lawyers during the period from five to ten years after they begin practicing law. To put this in perspective, lawyers in private practice for five years or less generally report around 3.5% of malpractice claims, whereas the attorneys practicing law 11 to 20 years report about 37% of the claims. Why is this happening? Simply put, the new lawyers don’t have a “tail”—meaning they simply haven’t been in practice long enough for some of the mistakes they made to be discovered and reported. Additionally, the more experienced group of lawyers who have been in practice a decade or more tend to handle more matters, the matters they handle tend to be more complicated, and they are likely responsible for overseeing matters that are handled by other lawyers in their firm.
Also, lawyers who devote a significant amount of their practice to areas that experience a frequent number of claims, such as plaintiffs’ personal injury or real estate, are more likely to pay higher annual premiums. Higher premiums can also be expected for lawyers in practice areas where the severity of their legal matters can cause them to be quite expensive to resolve—such as patent/trademark, entertainment, and securities law.
New lawyers who are establishing a firm and do not yet have any clients may sometimes choose to wait for their doors to open before binding coverage on their first policy. However, any opportunity to provide legal advice is also an opportunity for individuals to rely on defective information to their detriment. Therefore, it is vital that new lawyers seek coverage for professional liability as soon as possible after they first receive their license to practice law.
