Even in states like California, where carrying professional liability coverage is not statutorily mandated, obtaining legal malpractice and other professional insurance can help protect law practices from potential exposure. However, it can be more challenging for a law practice to know how much professional liability coverage is appropriate, or what terms are best suited for the practice’s needs.

Brokers and insurers can help navigate these decisions, but here are some considerations.

Know the Terms and Conditions

It is important for attorneys to be aware of the terms of their professional liability coverage—whether to negotiate new coverage or to be aware of coverage already in place. There are many considerations, such as the scope of coverage, types of coverage, limits, exclusions, notice requirements, choice of counsel, and the breadth of who may or may not be covered under a policy.

Attorneys should read the language of their policy carefully to understand the scope of the indemnity coverage being purchased. For instance, some professional liability policies may not cover business activities of the practice when not engaged in the provision of legal services to paying clients. It is also important to review any limitations or exclusions to the coverage being negotiated. Understanding the scope of coverage can help identify any gaps that may need to be addressed through supplemental coverage.

In addition to indemnity coverage, different policies can provide other benefits for insureds. For example, some firms will negotiate for the right to select the counsel of their choice if the firm is sued for malpractice (rather than work with the assigned panel counsel). However, electing the option to bargain for its own choice of counsel may result in the firm paying a higher self-insured retention before the coverage kicks in. That is, the insurer may require the firm to pay a higher amount in defense fees to the counsel of choice out of the firm’s pocket before the insurer starts paying fees.

Cybersecurity is another concern for many attorneys, given the rapid rise in technology employed in legal practice. The increased technology use can result in an increased risk of potential data breaches. That risk is handled by insurers in different ways. Attorneys reviewing coverage terms may want to take into consideration whether their insurance contemplates cyber breaches of data security within the scope of legal malpractice coverage.

Timing

Lawyers should be knowledgeable about when their coverage incepts and when it expires. Sometimes, solo practitioners establishing a new practice may be tempted to begin work for a client before obtaining professional liability coverage. This situation, however, could lead to a potential malpractice claim against the attorney without coverage to defend against that claim because of the date the policy went into effect.

In addition, paying premiums in a timely manner and renewing coverage before expiry can assist in avoiding potential lapses. Should a claim be filed, counsel should again look to the terms of the coverage in place to be aware of any reporting, notice, or other requirements which could affect coverage.

Choice of Insurer

There are many options in choosing a professional liability insurer. Reviewing the details of the offering is important—for example, what is offered by each insurer in terms of coverage scope, limits, and exclusions, and then comparing those figures to bottom lines of cost to the firm. While these details are important, it can be very daunting to go through the process alone. When in doubt, consider using a good broker to help find the right insurer (and policy). Brokers, particularly those who specialize in law firms in certain geographical locations, practice groups or areas of law, can be very knowledgeable and beneficial to the process.

For law practices with a relationship with an insurer over several years, it may be worth maintaining that relationship for the long term (particularly to avoid the risk of a gap in coverage in switching insurers). But the right course of action will depend on the firm’s needs.

Limits, Premiums, and Retentions 

When insurers review information to write or negotiate a policy, they are reviewing the potential risk or exposure that needs to be insured. These determinations are made after assessment of a lot of data, historical markers, and information. That data can include the insured’s history, such as the law firm’s prior claims, size of those claims, profits, firm size, coverage sought, and the type of law practiced. The data can also include reviewing those trends in the jurisdictions where the firm practices.

For instance, there is data suggesting that plaintiff’s personal injury and real estate representations receive a higher number of claims than other areas of practice. On the other hand, claims against IP lawyers typically have a lower frequency but a higher severity of damages. Thus, firms that have significant practices in high-risk areas may elect to choose higher aggregate limits to reflect the likelihood of repeat litigation or multiple claims, even if the per claim limit is expected to be lower.

Choosing the amount of coverage—or the limits of the policy—can be a challenge. Indeed, in many instances, the most relevant analysis is the type of legal work performed by the practice, rather than the amount of fees collected in a year. It is helpful for law firms to think about what a claim against the firm would actually look like.

For example, a law firm may receive a certain amount of fees for a corporate transaction or an intellectual property representation, but a claim from a client would be expected to seek damages reflecting the value of a lost corporate deal or forfeited patent. Thus, a policy with limits that track the amount of fees earned, rather than the overall risk, could leave the law firm dramatically underinsured.

Insurers then determine how much of that risk might be apportioned to the policyholder via self-insured retentions or deductibles. Relatedly, firms can give some thought to how defense fees for a malpractice claim should be addressed within the terms of the policy. For example, it is well accepted that defense costs for malpractice claims are among the most expensive type of litigation, largely due to the necessity of reviewing the “case within a case.”

For that reason, some law firms will negotiate to ensure that any defense costs are outside the limits, that is, that the amounts of defense costs incurred do not reduce the limits available for settlement or indemnity. This approach may result in higher premiums. On the other hand, if defense costs incurred will also erode the limits available for settlement or indemnity, the insured firm may need to consider higher limits to account for legal spend and remaining limits for resolution of a claim.

Attorneys should seek coverage that supports the individual and unique needs of their firms.