Do I really need professional liability insurance?

Yes! Professional liability insurance (PLI) can provide your law firm a defense in the event a claim filed against you, whether an error was made or not. Should a claim occur, PLI coverage can provide you with access to a defense attorney seasoned in lawyer’s malpractice claims caused by:

    • administrative errors,
    • unintentional negligence,
    • missed deadlines,
    • alleged misrepresentation,
    • inaccurate advice,
    • alleged baseless charges, and so on.

Access to this type of support when dealing with a malpractice claim can help eliminate the loss of time and money (and not to mention stress) that defending a claim requires. Having someone on your side to offer advice and answer questions is invaluable.

Many states require lawyers to disclose whether or not they carry malpractice insurance. Some states may require clients to sign a written disclosure acknowledging that the attorney is practicing without coverage. Requiring potential clients to sign these disclosures could make them question working with you. Or you may practice in a state that requires PLI. Oregon and Idaho, for example, currently require attorneys to carry professional liability coverage. More reasons why yes, you do need professional liability insurance.

Lawsuits can happen whether frivolous or not. Without adequate coverage protecting your firm, a lawsuit could end up so costly, it could leave your business in ruins.

How does professional liability insurance protect my law firm?

If a client suffers damages, they may sue you to make themselves whole. Professional liability insurance offers you protection from possible severe financial impact, emotional turmoil and/or reputational ruin. It will cover your legal defense and indemnity* in the event an unexpected issue arises, providing you with defense counsel and the financial support required to handle the lawsuit. That way, you can continue to run your law practice without the distraction of handling the claim yourself. Depending on the policy, coverage may extend to court fees, administrative costs, witnesses, mediation, judgments, settlements or other related expenses you could easily incur as a result of a claim.

Professional liability coverage can also protect your work for years to come. Most policies provide a free “tail” (Extended Reporting Period) after years of continuous coverage upon retirement. So even after you retire, there is coverage for your past acts*. In addition, most coverage could also apply to other attorneys in the firm or non-attorney staff, keeping your entire organization protected from legal malpractice claims.

What types of risk does professional liability insurance typically cover? Are there risks typically not covered?

Risks typically covered by a professional liability policy include*:

  • Inadequate work
  • Mistakes or negligence
  • Personal injury
  • Previously performed services
  • Work performed by your employees

Risks typically not covered by a professional liability policy include:

  • Dishonesty
  • Employment matters such as workplace injuries
  • False advertising
  • Fraudulent or criminal acts
  • General liability claims such as bodily injury or property damage
  • Intentional acts or harm
What are the common causes of professional liability claims?
When is the right time to buy professional liability insurance for my law firm?

Due to the fact that professional liability insurance is written on a “claims-made and reported” basis, you will want to obtain coverage for your firm as early as possible in your legal career.

“Claims-made and reported” means the claim must occur and be reported during the policy period. Your retroactive date, or prior acts date, is the date upon which you first obtained coverage. When a lawyer has prior acts coverage, malpractice issues that occur after the retroactive date are covered*, as long as the matter was reported in compliance with the policy. On the other hand, any alleged malpractice that happened prior to the retroactive date would be excluded from coverage, even if reported during a current policy term.

So, because you will need to have a policy in place when the error occurs and the claim is reported (or coverage will not apply) you will want to have coverage in place as soon as possible.

What is the difference between professional liability insurance and general liability insurance?

The difference is the risk that is covered. General liability covers events that could happen to any type of business, such as physical injury or property damage. Professional liability covers risks specific to the professional services a business provides. If a third party makes a claim against you or your business for services you provided, then professional liability insurance will cover the legal costs involved in defending your firm from the claim*.

How much professional liability insurance do I need?

The amount of professional liability insurance coverage you should have depends on many different variables. The number of cases you take on each year as well as the size and monetary value of the cases you are working will factor in to how much coverage your firm will need. Other factors including where you are located, how many employees you have, the areas of practice you work in, and limits of liability and deductibles will all need to be considered as well.

How much insurance coverage you need will also depend on what limits of liability are appropriate. Your limits of liability will be offered in two ways:

    1. Per claim (the maximum amount that will be paid on any given claim); and
    2. Aggregate (the maximum amount that the carrier will pay in the policy period)

It is important to keep in mind how quickly defense costs can erode your limits, possibly leaving you with little to no coverage for indemnification. Choosing the correct limits of liability is a very important decision. If a claim were to arise, even if baseless, increasing your limits after this occurs might not be an option. The best way to look at it is like this: if you were to make an error and be sued by one of your clients, what would it cost you to defend (billable hours to a defense attorney) and indemnify (monetary judgement or settlement)?

What is a retroactive date and why is the application asking about it?

A retroactive date, is the date upon which coverage was first in place on a claims-made policy. It indicates to the underwriter how many years of exposure the carrier will be taking on if terms are offered. To elaborate, when you obtain coverage (when no prior coverage is currently in place) the retroactive date will be the date of the inception of the firm’s first claims-made policy. The exposure to the carrier regarding past acts, at this point, is minimal. The policy will only be providing coverage on a go forward basis. However, at each renewal the exposure borne by the carrier will increase as past exposure increases. In tandem with the increased exposure, the premium will also increase for a set number of years until it reaches the “mature premium” level. All admitted carriers must file these “step rate factors” with the state’s insurance regulators. An insured will see an increase in premium commensurate with the increased exposure for anywhere from 5-8 years depending on the carrier and state.

What is the difference between a retroactive date and a prior acts date?

A retroactive date is the date from which your insurance coverage starts. Think of it like you are drawing a line in the sand. Any events or incidents that happen after this date are covered by your policy. However, events that occurred before this date are generally not covered.

A prior acts date is the date when your insurance policy begins, regardless of when you actually purchased the policy. It allows you to be protected against claims for events that occurred before the policy started but after the retroactive date.

The main difference is the retroactive date determines what events are covered going forward, while the prior acts date determines when your coverage begins for events that happened before your policy started.

What is the difference between claims-made and reported policies and occurrence insurance policies?

A claims-made policy requires coverage to be in place at the time a claim is reported, and the incident must occur after the retroactive date. A claims-made and reported policy requires that you report any claim or potential claim during the policy period in which you received notice of the claim. If a claim is made after the policy expires or is canceled, it will not be covered unless an extended reporting period (tail coverage) is purchased. Professional liability insurance is written on a claims-made and reported policy form.

An occurrence policy provides protection for incidents that occurred during the policy period, regardless of when a claim or incident is reported. Even if the policy is no longer in effect, the incident during the policy period will be covered as long as the claim is made within the statute of limitations.

Why is it important for the carrier to know if there have been any claims/incidents/grievances against me (the applicant) or member/past member of the firm or predecessor firm in the past? How detailed should the explanation of claims made be?

Your explanation of claims made should be “VERY” detailed. If there has been a claim in the past, this is your chance to advocate on behalf of your firm; in short you can give your side of the story.

The reason it is important to provide this information to the carrier to which you are applying for coverage is because lawyers professional liability insurance is written on a claims-made and reported policy. This means a policy must be in place at the time the claim is made, and the claim must be reported to the carrier during the policy period. The underwriter (for the new carrier) may attach a Specific Claim Exclusion for the claim(s) for clarification purposes. Failure to answer truthfully could have consequences such as a denial of a claim/coverage.

In addition, if there is a potential claim, or if the firm is aware of circumstances that may give rise to a claim, then the firm should also report this to their current carrier, if there is one, prior to changing carriers to prevent jeopardizing coverage under the former policy.

Why does the application ask for percentages of my areas of practice?

The areas of practice portion of your application is necessary to allow the underwriter to determine if they will insure the risk that you firm presents to the carrier, and also serves as part of the metric in determining the premium. Essentially, each area of practice is given a ‘risk factor’. The more hazardous areas of practice will have a higher risk factor. The carriers determine ‘hazardous’ areas of practice by analyzing their loss experience for each specific area of practice.

What areas of practice are considered more hazardous by most carriers?

These can change over time depending on past claim experience but currently a few are plaintiff personal Injury, medical malpractice, class action/mass tort, securities, entertainment, environmental, estate/trust/probate/wills, intellectual property, real estate, and corporate tax law, to name a few.

How do underwriters view smaller percentages in several areas of practice? How accurate do I need to be when assigning percentages to my areas of practice?

Answer truthfully and to the best of your knowledge. Underwriters sometimes frown upon applications that have several areas of practice listed with small percentages. This can be considered ‘dabbling’ by an underwriter/carrier. When dabbling occurs, the underwriter may consider this a less than desirable risk – their reasoning could include: The firm is trying to handle too many areas of practice and therefore does not have the knowledge or experience in those areas, which could be the basis of a future claim. They may also question why the firm is practicing in so many areas of practice; and that it may be because they take any case that comes their way, even if they are not familiar with the area of practice (which may end up being the basis for future claims). From an underwriter/carrier standpoint, when areas of practice are focused, there is more expertise in these areas and in turn a reduced chance of a claim even if it is a hazardous area of practice.

Why is the application asking me questions about my calendaring systems and conflict checks?

These are important questions; they help the underwriter evaluate the risk. The more systems in place, the less likely you will miss a filing date, client appointment, deadline, or conflict with or between clients – all of which could lead to a potential claim.

What is so important about engagement, non-engagement, disengagement and billing/fee agreements; does the carrier really look at this information?

An underwriter evaluates the entire risk, not just certain aspects. Each question asked on the application will help the underwriter ascertain the overall risk the applicant poses to the carrier.

A firm that consistently uses engagement, non-engagement and disengagement agreements, with all cases and matters, can prove to the carrier that they will be of less risk to them. Engagement letters outline the agreed upon services to be provided to the client and state that the firm has in fact accepted the case or matter. Non-engagement letters provide written proof when a prospective client is not accepted by the firm, and/or when a new matter for a current client is declined by the firm. Disengagement letters formally advise the client that the attorney-client relationship in a particular matter has been terminated. Without these documents, there is a higher probability a firm could be sued. Having these types of letters in place, reduces the possibility of miscommunication, provides clarity, which in turn, makes this a better underwriting risk for the carrier.

Billing/fee agreements are equally as important as they spell out what fees have been agreed upon and when payment is due, etc. You never want to be in a position of having to consider suing your own client for unpaid legal fees. This often leads to counter-suits for malpractice even if you’ve done nothing wrong. Instituting a solid fee agreement process may prevent any future claims of excessive fees, etc.

Why does the application ask if I have filed a suit on a client to collect my fees?

When an attorney sues a client for unpaid fees, there is the high probability the client will countersue the attorney for malpractice. The unhappy client could also file a complaint with your State Bar Association. When an underwriter reviews an application and sees there are several suits for fees, the underwriter may decline to offer terms or an exclusion may be attached to the policy, excluding any claims which arise from the attorney suing for fees. Some carriers have automatic exclusions for countersuits brought on by suits for fees written into their policy. Again, if you have a fee agreement in place, there is a better probability that you will be paid by your client. An attorney needs to keep in mind, if the client countersues for malpractice, then the attorney will need to report this claim on future applications. In addition, it may be harder for the attorney to obtain coverage in the future if the claim was settled with a defense or indemnity payment.

I’m a sole practitioner, why is the application asking if I have an attorney who will handle my practice and legal matters on my behalf if I am absent for an extended period of time?

In a multi-attorney firm, there are other attorneys who can step in and assist with your case load should you be out for an extended period of time or in the event of incapacitation or death. The other firm attorneys will be able to step in and disseminate your cases, make sure no deadlines are missed, and your clients are taken care of, which lessens the possibility of a malpractice claim.

As a sole practitioner you do not have this luxury, therefore the carrier wants to ensure that should something happen to you, you have a plan in place for another licensed attorney to review your caseload, confirm your clients are taken care of and deadlines are not missed, which reduces the potential of having a client file a malpractice claim against you.

Some states (ex. Iowa) require each sole practitioner to find an attorney willing to serve as the designated attorney and also secure an alternate as well in the event of death or disability. Some carriers will not offer terms if there is no ‘backup’ attorney in place or if they do offer terms, they will do so with the caveat that a backup attorney must be in place upon renewal or the policy will be non-renewed. Remember, the underwriter/carrier is looking at the application to determine if a firm is a good risk; with no backup attorney, the carrier is taking on the possibility of a malpractice claim, or claims being made should something happen to the sole practitioner.

Why does the carrier want to know about my revenues/income?

This question is asked for several reasons. If a high deductible is requested, the underwriter will look at the revenues to see if the firm would likely be able to pay the deductible should a claim arise. In addition, revenues provide insight with regard to the legal services performed. In short, does the amount of revenue correspond with the firm’s area of practice or is there a discrepancy?

For example, if an attorney shows a revenue of $300k yet is only working part time, the underwriter may request additional information on such high revenue/income. Revenues are also a good indicator of the firm’s ability to pay operating costs. In addition, it is also an indicator of stability; is the firm stable and therefore will carefully consider the type of client they take on, or is the firm liable to take any client that walks through the door, even if the client brings a case in an area of practice outside the areas with which the attorney is familiar?

What determines my annual premium?

There are many factors that will determine your annual premium. These include your area of practice, the state and county where you are located, coverage limits and deductibles, claims history, how many years of prior acts coverage are being offered among other variables.

What deductible should I carry?

Choosing your deductible can be a very important decision. If a claim were to arise, you will be responsible for your deductible. As a general rule, there is usually not a great premium difference in having a lower or even a zero-dollar deductible. Ask your agent to quote you a variety of deductibles (subject to qualification) so that you can decide what works best for you.

I work for a law firm, but do moonlighting work on the side. Am I covered under my law firm’s professional liability policy?

Typically, a firm’s professional liability insurance policy will not cover services provided other than on behalf of the “Named Insured” law firm. It is always best to check with your agent for these types of scenarios. They may be able to have the policy endorsed to provide the desired coverage or write an entirely separate policy to fit with the situation.

Are ‘Of Counsel’ attorneys covered under my firm’s professional liability insurance policy?

It will depend on the policy language in the contract of your carrier as well as the type of services the ‘Of Counsel’ attorney is providing on behalf of the “Named Insured” firm. It is important to discuss this coverage with your agent prior to binding coverage or employing or contracting an “Of Counsel” attorney.

Can I still get a professional liability policy if I work only part-time? If so, does it differ from a full-time policy?

Yes, part-time policies are offered by some carriers. Availability of these policies is often dictated by the average number of hours per week the attorney is providing legal services, as well as the area of practice.

What is the difference between defense costs/claims expenses inside the limit and defense costs/claims expenses outside the limit?

When the defense costs are “inside the limit of liability” and the per-claim and/or aggregate limits are exhausted by the cost to defend a claim or claims, the carrier has no further responsibility to continue to pay the defense or indemnity costs associated with the claim.

When the defense costs are “outside or in addition to” the limit of liability, you will be afforded additional defense costs up to a specified amount. Coverage for defense costs “outside or in addition to” the limit of liability is usually available as an endorsement to the policy to qualifying firms for an additional premium. Some carriers offer a small amount of defense costs in addition to the limit of liability automatically in the policy.

What happens if I need to increase my limits of liability?

Simply contact your insurance agent. Subject to qualification, the policy’s limits can usually be increased at renewal only. Carriers prefer not to offer mid-term limit increases in the absence of a client requirement. If a client requires you to carry higher limits of liability than your policy currently provides, you may often be required to provide a copy of the client contract for underwriting review and consideration for a mid-term limit increase.

What happens if I let my professional liability insurance policy lapse or I cancel my policy?

Due to the claims-made and reported nature of the coverage, one thing you do not want to do is allow a gap in coverage to occur on your professional liability insurance.

Each year that you maintain continuous coverage, your prior acts date remains the date of your first original policy effective date. If a claim arises from work you have done in the past, your policy covers you back to that prior acts exclusion date*. If, however, you have a lapse in coverage and in the future you choose to pursue coverage again, your new policy will carry with it a new prior acts exclusion date, which will match the inception date of the new policy.

In addition, frequent lapses in coverage may concern the underwriter when applying for new coverage. You may be required to provide an explanation suitable to the underwriter.

In summary, if it can be prevented, it is best to always maintain continuous coverage without a gap.

How do I report a professional liability claim?

If you become aware of a claim being filed against you or your law firm, you must report the matter to your agent/carrier immediately. Most policies have specific time deadlines for reporting claims or potential claims. Coverage could be jeopardized, or the claim could be denied coverage if not reported during the policy or within the specified time period. To report a claim, contact your insurance agent or carrier directly by phone or email. After contacting your carrier, a member of the claims operations team will be assigned to gather information from you regarding the reported matter. Once this information is collected, a claims specialist (usually a licensed attorney) will be assigned to your case to assist you, and if necessary, will start the process of selecting your defense counsel.

Who will defend me if a claim arises?

If a claim were to arise and you have a professional liability insurance policy in place, the insurer or carrier will defend your business against the claim*.

*Subject to the terms and conditions of the policy.

Disclaimer: The information and content provided on this website is for general information purposes only. Professional liability policies are not standardized forms and can vary to a great degree. Our statements are in general and you should refer to your policy for specific coverages and terms.