Attorney malpractice insurance paid via installments by financing with a premium finance company or direct bill payments through the insurer helps manage cash flow. Problems happen when a law firm allows their attorney malpractice insurance to cancel for premium non-payment. The premium finance company as part of the finance agreement has a power of attorney. This allows the finance company to cancel the coverage for premium non-payment. If direct bill the insurer has the right to cancel coverage for premium non-payment.
Once the finance company or the insurer issues the cancellation notice the insured only has just days to act. The non-payment notice gives the insured normally 10 days before the cancellation becomes effective. Even with no further notice, insurers consider coverage cancelled on the effective date on the notice. Claims reported after the coverage cancellation date allows your legal malpractice insurer to deny coverage.
Law firms that use the pending cancellation notices as a trigger to pay is costly. In addition to racking up late fees, there are ramifications to frequently letting your coverage cancel and then having it reinstated. Malpractice insurers have a set number of non-payment cancellations and reinstatements cycles. This varies widely by insurer from no tolerance to 3 or 4 times. Once the firm reaches that magic number, your insurer may refuse to reinstate. If they refuse to reinstate, you are in a backdating situation trying to protect your past acts. Attorney malpractice policies may or may not allow the purchasing of an Extended Reporting Period endorsement (ERP).
Without another insurer backdating coverage, which is extremely difficult, you lose your prior acts coverage. With a claims-made attorney malpractice insurance policy this means you are uninsured for past acts. So even if you have paid for coverage for years, you suddenly are bare. The options to fix are expensive and limited.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080