Most law practices today know that it’s worth having a professional liability insurance, even if they operate in states which don’t require them to. A much harder analysis, though, can be to determine what type of coverage to purchase and for what amounts. Brokers and insurers can help with answering those questions, but let’s look at some factors a practice might want to consider.
Choosing the Right Insurer
When you can’t make up your mind, a good idea might be to consult a good broker. Brokers, especially those who specialize in law firms, practice groups or areas of law, can prove to be great assets in these situations. They may also be quite knowledgeable when it comes to the insurance market and the scope and size of claims that are usually brought against similar firms.
Firms would also do good to verify insurers’ reputations before purchasing any insurance policy. As with any other company, an insurance company’s ability to satisfy its clients depends on their strength in the marketplace and the likelihood of them still being part of the market in the future. Many lawyers also find it helpful to ask other firms about recommendations, as they may have relevant experiences that could be of use.
Law practices that have had a long relationship with an insurer may find it worthwhile to maintain that relationship for the long term. Although it’s always a good idea to periodically review the marketplace, few firms ever consider switching insurers unless they can get savings of at least 10% on premiums.
Choosing the Right Limits
Sometimes choosing the amount of coverage can be a real challenge. Most of the time, the most relevant analysis is the type of legal work actually performed by the practice, instead of the amount of fees collected in a year. It is helpful for firms to consider what a claim against them would actually look like.
Brokers and insurers may also have more information regarding what practice groups are typically considered higher risk than others. For example, data suggests that plaintiffs personal injury work and real estate representations are among the highest in claim severity and receive more claims than other practice areas. As such, firms with significant practices in high-risk areas may choose higher aggregate limits that reflect the likelihood of repeat litigation or multiple claims.
Law practices may also choose additional layers of excess insurance to obtain the right limits and insurance portfolio, layers which are often referred to collectively as a “tower.” It’s fairly common for midsize or large firms to be insured through multiple insurers, each of them owning a different part of the “tower.”
Choosing Policies with Other Benefits
In addition to indemnity coverage, different policies can provide other benefits for those insured as well. Some firms choose to negotiate for the right to select a counsel if the firm is sued for malpractice. That way, if a firm is ever sued, they can use counsel with whom they have an ongoing relationship instead of having to work with assigned defense counsel.
However, should a firm choose its own counsel, it may result in them paying a higher self-insured retention before the coverage kicks in. That means that the insurer may require the firm to pay more defense fees to their counsel of choice out of the firm’s pocket before the insurer starts paying fees.
Firms can provide some thought on how defense fees for legal malpractice claims should be addressed within the policy’s terms. For example, it is generally accepted that malpractice claims are among the most expensive types of litigation, largely because of the need to review the “case within a case.” That’s why some law firms will negotiate to make sure that defense costs are outside the limits, meaning that the defense costs incurred do not reduce the limits available for settlement or indemnity. There’s a possibility that this may result in higher premiums. If the incurred defense costs also erode the limits available for settlement or indemnity, though, the firm may need to think about higher limits that will account for legal spend, as well as remaining limits for resolution of claims.
Premiums and Self-Insured Retentions
A higher self-insured retention typically means that a policy has lower premiums associated with it and vice versa. Generally, the amount of a self-insured retention relates to which party has direct control over the defense, either the firm or the insurer, and when exactly that right arises.
If a firm has a higher self-insured retention or deductible to pay before the insurance company’s obligation to defend is triggered, then that firm may end up allocating money for that specific purpose. In the event of a claim, the firm will then have enough funds to satisfy its self-insured retention.
Law firms can take other steps as well to try and reduce their premiums. For example, there are many insurance companies which reduce premiums or issue credits to law firms that employ risk management prevention within the firm. Then there are insurers that charge a higher premium and provide targeted, concierge-style service to firms, even providing risk management advice.
Every firm’s needs are unique but ensuring sufficient coverage can go a long way to helping attorneys sleep better at night knowing they are protected.