What professional liability limits should a law firm carry is a frequently asked question. It’s difficult for an insurance agent/broker to answer. The broker simply does not know your law practice well enough. There is no set answer for a law firm. Best answer is given the type of practice a law firm has and the type of clientele, if you make a mistake how much could it cost?
Here are some of the issues to consider:
Even knowing the type of practice areas criminal versus plaintiff work, is not enough to answer the limits question. Some criminal law attorneys handle very high profile clients. If allegations of an inadequate defense are made how much could that cost? Reality is a wealthy criminal law client could have the resources to pursue you for many years versus an indigent client. Or if all you handle are drunken driving cases, what could the damages be? Plaintiff case values can be$10,000 or $10 Million. Estate work can vary widely by the estate size. This holds true for almost all areas of law.
Some states have minimum mandates based on the size of the firm or some other criteria. Some clients and referral services require certain minimum limits.
Remember it is not the average value of the cases that the firm handles; it is the size of the largest or potentially largest case that the firm handles that determines the needed limits.
Typical Policy Language, from the Axis Insurance Attorney Malpractice Policy:
Limits of Liability & Deductible
1. Claim Expenses. Claim expenses paid under this policy shall reduce this policy’s limits of liability and are subject to the policy’s deductible. However, subject to specific conditions and limitations, some claim expenses shall not be subject to the limits of liability nor to the deductible as fully described in the Special Benefits section of the policy.
2. Limits of Liability – Each Claim. The most we will pay for damages and claim expenses for each claim, in excess of the deductible, is specified as “each claim” in the limits of liability section of the Declarations and is subject to the amount specified as “aggregate” in the limits of liability section of the Declarations.
3. Limits of Liability – Aggregate. The most we will pay for damages and claim expenses for all claims is specified as “aggregate” in the limits of liability section of the Declarations.
Once you determine the maximum potential value for an indemnity payment you’re not quite done. Next are claims expenses. For simplify sake, assume that your policy is ‘Claims Expenses inside the liability limits’ (CEIL). Claims expenses can be substantial. The average cost of defense for an attorney malpractice case if it goes to trial is over $80,000. Claims expenses need to be added to indemnity cost to come up with an adequate per claim liability limit.
Once you settled on a per claim limit, next step is to determine the likelihood of multiple claims in one policy year. The aggregate policy limit can be very important. For instance collection firms are likely to have many small individual claims but could have 1000 of those very small claims from one procedural error.
An underinsured attorney will find that the insurer pays up to the policy limits on a claim (or multiple claims). Once the limits are exhausted, the insurer’s obligation to you is done and you are on your own. Being underinsured could be a very expensive proposition.
Policy limits are very difficult to increase during the policy year, unless there are circumstances such as a client is requiring higher limits. Once there is a claim made against the firm, it is too late to be looking at increasing the limits to cover that loss.
Remember Attorney Malpractice Insurance is ‘Sleep Insurance’. Question that needs to be asked is given the policy limits that you have chosen, how well will you ‘Sleep’ at night.