Here are some answers to some frequently asked questions about professional liability insurance.

Do I really need professional liability insurance?

Approximately 6% -- or about 55,000 -- of the 951,000 people working as attorneys in the U.S. are likely to face an allegation of professional liability in any given year. Claims activity against attorneys has steadily increased in each of the past two decades, with no reason to believe the pattern will end. Lawyers in all parts of the country, all size firms, and all areas of practice are at risk every year.

Dealing with a professional liability claim can be expensive. Even if a lawyer is ultimately cleared, the money spent on defense, not to mention the hours of time devoted to addressing the claim and the anxiety the situation can bring, can be a very costly proposition. Professional liability insurance helps to ease that burden both by sharing some of the monetary risk (through indemnity coverage and defense expense coverage) and by shouldering much of the responsibility for responding to and defending against whatever claims are made (through claims handling services). Professional liability insurance can also help protect your clients against significant losses. Everyone can make a mistake, even lawyers. Professional liability insurance can help lawyers meet their obligations to protect their clients' interests even in the worst of circumstances.

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What are the common causes of legal professional liability?

Lawyer malpractice claims are as varied as the creativity of the plaintiffs' lawyers who represent the claimants. Probably the most common claims brought against lawyers are those alleging simple, straightforward mistakes, including administrative errors or substantive errors of law. Also frequent are claims alleging that the lawyer completely and improperly abandoned a representation or entirely failed to address the client's needs in any way. Increasingly, lawyers face suits in which the primary or sole allegation is one of breach of fiduciary duty, often because of a conflict of interest, and frequently based in duties arising through implication. Recent years have also seen an increase in claims related to representation in the settlement context, claims brought in response to fee suits, and claims brought by non-clients.

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What risks does lawyers' professional liability insurance typically cover?

Legal malpractice policies are usually designed to provide coverage for claims that arise from "wrongful acts" committed in the rendering of legal services (sometimes called "professional services") in your capacity as a lawyer and generally provide both indemnification coverage and claims expense coverage, subject to specified deductibles and endorsements. In general, covered acts usually also include those committed in a variety of ancillary services regularly provided by lawyers as a natural offshoot of their regular practices, such as:

  • Services as a notary public
  • Services as a title agent and or title agency
  • Acting as a trustee or executor of an estate in connection with representation of a client
  • Acting as an officer, director, or member of a legal professional association

Broader coverage often can be added through amendment of various endorsements depending upon the lawyer's circumstances and the carrier's interest and capacity.

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Is there anything that typically is not covered?

While the scope of coverage afforded is relatively broad, it is not unlimited. Some activities, errors, and omissions either may not legally be covered, or are simply beyond the insurer's interest. These uncovered areas are usually referred to as "exclusions" and are often delineated in a separate section of the policy. Examples of common exclusions include:

  • Fraudulent acts
  • Criminal acts
  • Malicious acts
  • Dishonest acts
  • Services rendered to a business enterprise that is owned or controlled by the insured lawyer or law firm
  • Services rendered as a fiduciary under the ERISA Act of 1974
  • Bodily injury or property damage generated by the lawyer or law firm
  • Claims involving one insured against another insured in the same law firm
  • Claims arising from legal services rendered by the lawyer or law firm where the firm or lawyer knew of or should have foreseen the claim at the inception of the policy and failed to alert the insurer to the possibility

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Who does professional liability insurance typically cover?

Typically, professional liability insurance policies are designed to cover lawyers and employees of the law firm acting on behalf of the firm (and, sometimes, lawyers currently with the firm who are sued over activities performed when with a different firm), and the firm itself, as specified in the policy. Often also included are predecessor firms; lawyers or employees no longer with the firm for actions taken while with the firm; and heirs, executors, administrators and other legal representatives and assigns of a named insured, or that insured's estate.

What if I'm sued tomorrow over a representation I completed sometime in the past?

These days, virtually all legal malpractice insurance policies provide what is called "claims made and reported" coverage. This means that coverage applies to claims made against the insured and reported to the insurer within the time the policy is in force, even if the activity giving rise to the claim occurred sometime before the policy was purchased. Frequently, actual claims do not arise until long after the alleged error or omission. Providing insurance on a claims made and reported basis affords insurance carriers a better basis for estimating potential losses and more accurately underwriting the risks.

In order to act responsibly, however, insurers do seek to place some limits on the activities any claims made and reported policy is intended to cover. And, sometimes, law firms want to place similar limits so that they do not carry the risks other firms or attorneys bring with them as lateral hires or in mergers. This is typically done through designation of what is called a "prior acts date," set by agreement between the carrier and the policyholder. Claims arising from errors, omissions, or other "acts" occurring prior to the prior acts date will not be covered even if they are made and reported during the policy's in-force period.

In light of this, it is particularly important to try to maintain continuous coverage whenever you are in practice, because only an in-force policy can provide coverage when a claim arises. The fact that you may have had a policy in force at the time you performed the services giving rise to the claim will not help allay the risk if you do not have coverage in place at the time the claim is actually made. Gaps in coverage can arise if you move from firm to firm or decide to stop practice for awhile. They can also come up if you switch carriers. One way to avoid a gap in coverage is to stick with one insurer over the years. Another way to avoid gaps is to purchase "tail coverage," which extends coverage beyond the initial policy year to cover claims made after that year arising from actions taken before or during the time the policy was in force. In a similar vein, an "extended reporting period" can allow you extra time to report to the insurer claims made against you while a prior policy was in force.

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Who will defend me if I'm sued?

At CNA, any claim will be managed by highly experienced and specially trained claims handlers, almost all of whom are lawyers themselves. Additionally, if defense counsel is needed, CNA will appoint a lawyer from one of its panel of distinguished and experienced legal malpractice defense attorneys to undertake the representation on your behalf. All defense attorneys are carefully screened and selected on the basis of expertise within the field of lawyer professional liability defense, litigation skills, and experience with the underlying area of law. Consulting experts on the underlying issues will also be used when necessary.

What determines my annual premium?

Professional liability insurance pricing is determined by a number of factors. Generally, insurers start out with a base rate influenced by state-by-state experience. That rate is then modified by various factors reflecting the individual characteristics of the specific law firm, including areas of practice, past claims experience, risk management practices, other firm management and infrastructure factors, and the number of attorneys to be covered. The rate is further influenced by the limits and deductibles chosen and the breadth of coverage requested, including prior acts coverage, extended reporting periods, and tail coverage.

Another factor that influences premium price is the length of time covered attorneys have been in practice. The risk that a policy will actually be called upon in any given year increases for the first several years that an attorney practices as the number of potential plaintiffs increases with every matter the lawyer handles. After a certain point, the risk flattens out as statutes of limitations and other forces begin to lower the risk that past activities will give rise to claims. To properly underwrite against these varying levels of exposure, professional liability insurers typically use what is called "step rating" as part of the premium calculation. Policies that cover less than one year of exposure (newly admitted attorneys, for instance) are rated at the lowest step rate. In subsequent years the rate is automatically increased in set "steps" (of decreasing increments) until exposure reaches maturity.

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What amount of coverage should I purchase?

The amount of coverage you should purchase should be guided by your own philosophies about risk-taking, your financial wherewithal, and the types of risk you face in your practice. The answer is best determined through consultation with an experienced lawyers' professional liability agent or broker who is trained to help analyze the risks you and your firm face and to suggest the appropriate limits and deductible for your situation.

Factors to consider when thinking about this issue include potential defense costs; indemnity for liability; and billable time lost to depositions, trial or other claims proceedings. Consider both the potential frequency and severity of claims. In some areas of practice (e.g., residential real estate or collections practice), the likelihood that you will face a claim is higher than in other areas of practice, but the average amount of any one claim may be lower. In other areas of practice (e.g., patent work, entertainment law, securities work), claims are rarer, but the potential that they will involve significant losses is higher. In still other areas (plaintiff's personal injury), frequency and severity risks are both high. Generally speaking, risk varies with what is emotionally, economically, and physically at stake in the underlying representation. The bigger those stakes, the greater the risk that the client will pursue a claim for recovery should the representation turn out to be less than satisfactory.

Limits are offered on both a per claim basis and in the aggregate. Additionally, under some policies, limits may be eroded by defense costs, while under others payments for defense costs do not affect available indemnification limits. Lawyers in practices with high frequency but low severity risks may want lower per claim limits and broader aggregates, while those facing different risks may be better served by some other structure. You should take into account what you need to protect your own assets as well as what will best protect clients who depended upon you and your firm.

What size deductible should I carry?

Like most other insurance, professional liability insurance is provided subject to a deductible representing the amount an insured must first pay toward covered losses before the insurance coverage is implicated. Under most policies, deductibles are applied to defense costs as well as indemnification. Under others, they apply only to indemnification payments. Like limits, they are offered on both a per claim basis and an aggregate basis. Most carriers set both minimum and maximum levels of deductibles that firms must carry, with flexibility available within those boundaries. Obviously, premium cost changes with the amount of the deductible; the higher the deductible, the lower the premium. You should confer with an experienced broker or agent and consider your financial circumstances, your level of risk - especially in terms of frequency - and your limits when making this decision.

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