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Stopping Dominoes FallingSome law firms are reluctant to report small claims.  Many times the law firm feels that the legal malpractice claim is small and they can cover it themselves.  These strategies will help their insurance history thus keeping their attorney malpractice insurance premiums lower.  But there can be expensive long term consequences to this strategy.

For property insurance this strategy makes sense.  With a property claim generally you know with great certainty the amount of damages fairly quickly.  If the property claim is below or right around your property claims deductible, then by all means handle the claim.  Problem with attorney malpractice claims is that a ‘small’ claim might not stay small.  Once the dominoes start to fall, they are hard to stop.    

Non-reporting of attorney malpractice claims will put you in violation of the policy conditions.  In addition to the current non-reported claim(s) at hand there can be more consequences.

 The following is typical wording of requirements in an attorney malpractice insurance policy for reporting a claim.  This one is the Medmarc Insurance Company policy form:

7.1. NOTICE OF CLAIM

In the event of a claim, the Insured must immediately give notice to the Company of the claim or other communication received by the Insured or his or her authorized representative. If the Insured receives information of specific circumstances involving a particular person or entity that could reasonably be expected to result in a claim, the Insured shall notify the Company as soon as practicable with the available information.

 

 The policy language clearly states that you must report the claim.  Even if you chose to ignore this condition, the Medmarc renewal application and other malpractice insurers’ renewal application ask:

12.  During the current policy year, have any claims or suits been made against the firm, its predecessor firms, or any of the lawyers proposed for this insurance that have not been previously reported to this Company

 

The renewal application must be signed by an authorized individual from the firm who attests to its accuracy. 

Particularly if your firm goes through a renewal cycle with non-reported claims more dominoes start to fall.  A key rating and underwriting criteria for malpractice insurers is past claims frequency and severity.  Past claims are the best predictor of future claims for a law firm.

Now at a later date the malpractice claim turns out to be something that was not ‘small’ and the law firm now turns it in, the claim will get declined.  More problems are in store for the law firm that has gone through the renewal cycle.

 

The law firm’s coverage problems have only just begun.  If an unrelated malpractice claim is turned in at a later date and the insurer finds out that the firm did not disclose the 1st claim.  The malpractice insurer can use this as justification to decline coverage on the 2nd claim.  Depending on the circumstances, it is likely that the insurer will non-renew the attorney malpractice insurance or they might rescind coverage entirely.   

A nonrenewal notice for not reporting claims will guarantee the law firm is going to surplus lines.  The firm can count on premiums being much higher for a number of years.   But it can get worse.

Attorney malpractice insurance is written on a claims-made policy form.  Simply the coverage inforce at the time a claim is made is the policy that will answer and the insurer that will cover the claim.  With claims-made coverage, the other condition is the act needs to have occurred after the prior acts date.  If coverage is rescinded, no prior coverage exists and the firm suddenly has no past acts coverage.  There is now no insurer to report any current or future claims to.  The firm’s next attorney malpractice insurance policy issued without prior acts coverage will be very expensive for years to come.   The firm’s prior acts coverage is permanently gone.

Once the dominoes start to fall they are hard to stop.

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