Legal Malpractice Insuring agreements are not created equally. The insuring agreement might also be called “Defense and Settlement” or a similar name. This plus the “Additional Coverages” sections tell you the intent of the policy. Lookout for these key terms in the insuring agreement:
1. Is the policy a ‘duty to defend’ or ‘reimbursement’ policy? Most admitted attorney malpractice insurance policies are a ‘duty to defend’ policy.
a. A few policies, particularly with the non-admitted carriers, are ‘reimbursement’ policies. There are places for a reimbursement attorney malpractice policy. Particularly for a large law firm and other firms with high deductibles in practice areas that have frequent small claims or incidents that can be settled within the deductible. The reimbursement policy allows the firm to keep the defense costs and settlement costs inside the deductible which helps the firm maintain lower overall attorney malpractice costs.
b. For most law firms that are not prepared to foot the bill for a large deductible a ‘duty to defend’ policy makes more sense. With a duty to defend policy the insurer is required to provide a defense up until the time coverage is determined to not exist; or the cost of defense has exceed the applicable policy limits or the claim is settled. This is an important distinction as with a reimbursement policy the law firm must provide its own defense and foot the bill “up front”. With a reimbursement policy the only costs that will be reimbursed are for those after coverage is determined to exist. For most firms a duty to defend policy is preferred. It should also be noted that with some insurers, the policy may be a duty to defend, but the additional coverages section(s) may be a reimbursement policy.
2. Is there a ‘consent to settle clause’? If so, is there any penalty for withholding consent (Hammer Clause)? Most professional liability insurance policies give the insured the right to approve settlement. In most cases the insured will want settle the matter and move on. But there are occasions where the insured may not want to settle. If the insured does not want to settle it is important to understand the consequences of that decision. Many ‘consent to settle clauses’ state that if the insured does not settle when the insurer could have, any additional expenses for defense and indemnity are the responsibility of the insured (The Hammer Clause). Some ‘consent to settle clauses’ provide for the insured to refuse to settle and force the insurer to continue the defense, until limits are exhausted without additional liability to the insured. Some policies have some sort of mediation of the right to ‘consent to settle’.
3. Are there additional coverages included, either in the insuring agreement or a separate additional coverage section such as disciplinary coverage, regulatory agencies inquiries or loss of earnings payments? Generally the additional coverages cannot be endorsed to higher limits. The additional coverages normally are not subject to a deductible. Some of the addition coverages are:
a. Disciplinary coverage for regulatory agencies or government entities: These coverages are almost always defense only coverages. While these limits may seem unimportant, one carrier that has a $100,000 additional coverage limit for this exposure reports that the average cost of defense is around $20,000 to $25,000. If the policy has an additional limit of only $10,000 for this coverage, then it is likely too low. Some policies also only offer reimbursement of defense costs if the attorney or firm is found “innocent”. Many non-admitted policies provide no coverage for this exposure.
b. Another additional coverage is loss of earning for the time spent in assisting the insurance carrier provides a defense for the attorney or firm.
c. Subpoena Assistance is another coverage that might be available helping the insured respond to a request for information.