I was meeting with the partners of a medium sized insurance defense law firm a few years ago, trying to understand why they were paying what seemed about 3 times what the attorney malpractice premium should be. According to the practice area grid (AOP) the firm did 100% insurance defense. But when we got to the claims questions, they had a family law malpractice claim. In reviewing the loss runs the indemnity payment was over $500,000. My next question to the partners was how in the world did they manage to get a family law claim when all they do is insurance defense work? (Tact is not one of my fortes.)
One of the partners piped up that he was responsible for the claim. He had a friend that needed an attorney for a divorce and as a favor took on the case. Needless to say he was not very popular with the other partners.
A recent newly minted solo practitioner that specialized in family law saw an opportunity for a big settlement in a med-mal case that a friend had. Attorney had never done med-mal and decided to go it alone so as not to share the fee. Problem was that he never got the ‘expert’ witness he needed for the case. Things really went off the rails after this. Attorney had let his malpractice insurance lapse, so he had no place to turn in the claim. Not sure who gave him the next piece of advice, but the attorney decided to file bankruptcy to avoid paying the claim himself. This managed to get the attorney suspended. Now that his suspension was nearly up, he wanted to get back into practicing law. One of the requirements to practice again was obtaining attorney malpractice insurance. This attorney will be in surplus lines paying many times what he would have been paying without the suspension. And almost to the end of time will get to explain the suspension on his malpractice insurance applications.
Beyond these horror stories, there is the practical matter of taking every case that comes in the door. Do you really want to be a jack of all trades master of none? Does the firm really have time to get up to speed in areas of law the firm is not competent in? Malpractice insurers know that when law firms get out of their field of expertise bad things happen. And the insurers charge accordingly.
In addition there are higher risk practice areas that that just a few percentage points on the AOP grid will significantly increase the malpractice premium; get the firm declined; or get the firm non-renewed.
If a law firm thinks that they are paying too much for their insurance premiums they might want to look at the AOP grid on their malpractice application. If there are a number of areas with just a few percentage points look at the revenue stream these few percentage points generate. And if the dappling is in high risk practice areas, know that just having those on the AOP grid will limit the insurer’s that will write the firm. And the insurers that will write the firm will charge accordingly. A few of the areas that will increase premiums are collections, entertainment law, environmental law, intellectual property, international law, class action, med mal, foreclosure, loan modifications, syndications, securities, and tax opinions. Note that this is not an all-inclusive list and for some underwriters too many practice areas will increase premiums even in lower risk practice areas.
Doing a cost benefit analysis on the firm’s practice areas plus a little culling of practice areas may save large amounts on your malpractice insurance. By focusing on your core competencies you will have fewer misses and more wins. Remember you are only rewarded if you hit the target which should translate into more profits with less effort.