Professional Liability: A Lawyer & Law Firm’s Major Exposure
By Phillip D. Fraim
At first glance that title may seem harsh, but every occupation, every industry, every profession has something that can be identified as the major exposure from a risk management perspective. For the lawyer, as well as the law firm, it is undoubtedly professional liability. Major exposures faced by law firms include professional liability, data breach/cyber issues, employment practices liability, property and workers’ comp. This article focuses primarily on professional liability, but the growing exposure of cyber liability and also employment practices liability are so closely intertwined that we will touch on those as well.
Someone once asked me if it was kind of sad to handle a product no one was excited about after they made the purchase. That was an interesting realization and one that was quickly followed by thoughts of all insurance purchases I’ve made, both personal and commercial. My conclusion was that I can’t think of a product I’ve been any more thankful to have when I’ve needed it, whether it was health insurance, auto insurance, homeowners insurance, etc. Of course, only my family will be excited about my life insurance.
It is true purchasing professional liability insurance doesn’t necessarily cause anyone to tingle with excitement; but like all insurance, it is a risk transfer, and that transfer makes absolute sense for lawyers, especially in today’s litigious world. My experience is that most practicing lawyers understand this fact, and we don’t have to spend much time with reasons why you should have professional liability insurance when you open a law office. Those who don’t, usually do not give us a chance to discuss the reasons, some of which are more obvious than others.
Like all third-party liability insurance, professional liability protects assets — both personal and firm assets. Litigation expenses continue to increase, and insurance provides defense cost coverage, above the deductible. Cost of defense and access to several leading defense counsel makes coverage more than worthwhile. Most any professional liability issue will be the most time-consuming and expensive file in your office, so the assistance provided in defending the matter helps mitigate this tremendously. In addition, we are seeing most institutional clients and all lawyer referral services requiring proof of coverage. Many of these specify minimum limits, many of which are much more than “minimum.” A lawyer’s most valuable asset is his/her reputation, and coverage through a company that cares and takes these concerns seriously is critically important. Finally, a reason somewhat less obvious, but every bit as important, is the fact that coverage makes your client whole in the event of an act or omission on your part.
CLAIMS-MADE POLICY AND PROFESSIONAL LIABILITY INSURANCE
An understanding of the claims-made form is vital to understanding a professional liability policy. One of the easiest ways to gain an understanding is to compare and contrast claims-made with the occurrence form found in auto insurance, homeowners insurance and general liability insurance. An occurrence form applies to accidents/events that occur during the policy period, regardless of when they are reported. Under the claims-made form, coverage is triggered when the claim is first reported, and it attaches to the policy in force at that time.
The date of the alleged act or omission is important as coverage is restricted by a second trigger, the prior acts or retroactive date. The prior acts date bars coverage for acts or omissions alleged to have occurred before the specified date. Typically, the prior acts date is known as retro-date incepted (date when coverage first becomes effective). Several things can impact and alter the prior acts date, so the insured must be aware. First, continuity of coverage is critical. A lapse or gap in coverage for several months can cause the prior acts date to change to the next effective date, losing all prior acts coverage. Also, leaving one firm for another can create a situation where the new firm only provides coverage from the date the attorney joined the firm, thereby changing the prior acts date. The lawyer must then consider an Extended Reporting Endorsement (ERE), which is discussed below. In summary, a policy must be in effect at the time a claim is reported and the act or omission must have occurred within the retro/prior acts date.
Assuring coverage after a policy terminates and no new policy is purchased due to retirement, leaving private practice or even a situation where a new policy will not match the last prior acts date, requires consideration to exercise the option under the policy for an ERE. The ERE (sometimes called tail coverage) requires an additional premium and extends the opportunity to make or report a claim after coverage terminates. Typically, the ERE option exists for only 30 days after coverage expires.
An important feature of a lawyer’s professional liability policy within the claims-made form, is the “Step Rating Methodology” used in the rating process. The first time coverage is put in place, or the first time after a lengthy gap, the lawyer enters in at step-rate one, no prior acts coverage. Because coverage only applies to acts or omissions from the effective date forward, the premium is reduced considerably from the actuarial determined rate. Each year, the lawyer moves up to the next step, where the premium increases slightly until they reach the maximum, known as the maturely underwritten rate, at which point the premium levels off.
The guiding phrase of coverage is “legal services provided to others as a lawyer.” This extends to include many fiduciary duties, such as serving in court appointed fiduciary positions. Coverage can also be extended to include title agent errors and omissions (E&O) for a very small flat charge premium. It is important to note there are many ancillary services that can be provided from the law office. Not all of these meet the definition of legal services and therefore, do not fall within the coverage of the policy.
Any insurance policy contains exclusions. The lawyer’s professional liability (LPL) policy does as well. You should familiarize yourself with these. Some of these include:
• coverage for punitive damages, sanctions and penalties
• claims for the return, restitution or disgorgement of fees
• discrimination or sexual harassment
• acts as a public official
• dishonest, criminal, intentional acts
• claims made by a business enterprise owned, managed or controlled, directly or indirectly, in which a conflict is alleged or in fact present
The application is critical and attention should be given to the way it is completed for a few reasons:
• It attaches to and becomes a part of the policy.
• Suppressing or falsifying information may cause cancellation or even voiding the policy ab initio.
• The form should be used as a self-audit/assessment of firm procedures.
• You should be as complete as possible putting your best foot forward so the underwriter better understands your operations.
Probably the most often-asked question by insureds is “what limit should they carry.” This is an important consideration and one that should be reviewed periodically. Unfortunately, no magical formula exists to accurately determine appropriate or optimal limits. I have often facetiously remarked that it is easy if you can predict the amount for which you may be sued. Absent this clairvoyance, we should look at areas of practice, which helps determine likelihood based upon frequency and case values. It is never wrong to buy what you can comfortably cash flow. The tragic circumstance is paying for coverage and not having adequate limits to satisfy the claim. Premiums do not increase at the same rate that the limits increase. In other words, doubling limits does not double the premium. Remember, the appropriate limit for the firm in 1995 is not necessarily the appropriate or adequate limit in 2015.
Defense costs can sometimes average 50 percent of indemnity costs on an annual aggregate basis. Therefore, it is not unusual on a specific claim for defense costs to exceed any indemnity amount. Be aware of how defense costs impact the per claim policy limit. Many LPL policies have limits that are reduced by every dollar spent in defense. The Oklahoma Attorneys Mutual Insurance Company (OAMIC) policy contains a “claim expense allowance.” This is an amount in addition to the limit which can be spent for defense, without impacting the limit. If the claim expense allowance is exhausted, each dollar spent above this amount reduces the available limit.
Most LPL policies contain what is known as a split limit. The first limit referenced is the per claim limit, and the second is the policy aggregate. As an example, a $200,000/$600,000 limit indicates the total of all claims in a policy year cannot exceed $600,000 and no one claim can exceed $200,000.
Cyber Insurance/Data Breach Liability
Exposures change as the world changes. When the only tech device in the law office was a fax machine, not much changed except the risk of losing information because the ink on the thermal roll paper faded away.
Today, we have all heard the horror stories of lost personal private information and confidential data. Hacking of Home Depot, Target and Anthem Insurance certainly make the news and get our attention, but how does that relate to law firms? A couple of years ago, PWC Forensic Services Group said, “Law firms are more at risk than financial institutions to be breached.” How and why? Because hackers do not typically discriminate, they simply attempt to breach the easiest target.
The OAMIC policy currently endorses data breach/cyber liability onto the LPL at a base limit. Higher limits can be purchased. The need for this coverage is here to stay and has become critical for businesses, especially law firms because they are held to a higher fiduciary standard. The endorsement provides not only a sub-limit ($100,000) for third-party liability (the OAMIC LPL coverage does not exclude this third-party negligence coverage), but also some important first-party coverages such as forensics, PR services and crisis management like credit monitoring. We have engaged a reinsurance partner who is an expert in working through these matters and will be able to assist us and our insureds. Cyber-related issues are important to be aware of and we need to develop risk management efforts and tailor coverage as exposures evolve.
Employment Practices Liability (EPL)
EPL can be added to the OAMIC policy by endorsement for a fairly minimal premium per lawyer, at a $100,000 base limit. Higher limits are available. Coverage applies to wrongful employment practices such as discrimination, harassment and wrongful termination. Recent reports project that over 30 percent of businesses will face an employment practices related claim over the next two years. This coverage should be considered in order to round out the firm’s insurance program.
Professional liability coverages are often taken for granted by law firms. We prefer you have a working understanding of the coverages available and how they protect both you and your clients. It is always better to think and talk through issues before a real matter confronts you. Please do not hesitate to contact us if we can assist in any way.
ABOUT THE AUTHOR
Phillip Fraim has served as OAMIC president since 1993. He joined the company in 1989 as vice president and treasurer. He is the National Association of Bar Related Insurance Companies past president and current secretary. He serves as Bar Plan Surety & Fidelity Company secretary, has served on the National Association of Mutual Insurance Companies board, is a Professional Liability Underwriting Society member, UCO Foundation board of trustee and an Edmond Economic Development Authority trustee.