Many law firms finance their professional liability insurance with a premium finance company. There are a number of good reasons for this and it is a good way to manage cash flow. Some law firms whether because of cash flow issues or poor procedures let their Lawyers Professional Liability Insurance go into cancelled status with the finance company for premium nonpayment. The premium finance company as part of the agreement to finance a Lawyers Professional Liability Insurance is given a power of attorney to cancel the coverage for nonpayment.
Once the finance company has issued the cancellation notice and the carrier receives this notice, even if the carrier waits a few days to actually process the cancellation acknowledgement, many insurance carriers consider the coverage cancelled on the effective date requested by the premium finance company. If a claim is reported after the premium finance coverage cancellation date your Lawyers Professional Liability Insurance carrier could deny coverage.
There can be other ramifications to frequently letting your coverage cancel and then have it reinstate. Most Lawyers Professional Liability Insurance carriers have a set number of nonpayment cancellations and reinstatements that they will do. This varies widely from carrier to carrier from no tolerance to 3 or 4 times. Once the firm reaches that number, your Professional Liability Insurance carrier may refuse to reinstate. If they refuse to reinstate, you are likely in a backdating situation to try and protect your past acts and per your Lawyers Professional Liability Policy you may have no ability to purchase an Extended Reporting Period endorsement.
If you cannot find a carrier that is willing to backdate, which is extremely difficult if you have been cancelled for premium nonpayment, you lose your past acts coverage. Given that a Lawyers Professional Liability Insurance policy is a “claims made” policy and even if you have paid for coverage for years, you suddenly are bare for past acts and have no coverage. The options to fix this situation are very expensive.
Morale of the story is, if you are going to premium finance your Lawyers Professional Liability Insurance policy, keep you payments current.