Whether this is your 1st attorney malpractice policy or you have had coverage for many years, law firms want to know if they have adequate insurance coverage limits. No one wants to pay for unneeded coverage but being underinsured could be a life altering event.
So not surprising that a frequently asked question is what limits should my firm carry? It difficult for an insurance agent/broker to answer. Aside from the errors and omissions liability that the broker assumes by answering; the broker simply does not know your law practice well enough to give more than a ballpark of needed limits. There are general guidelines, but there is no set answer for a law firm. Best answer is given the type of practice and the type of clientele, if you make a mistake how much could it cost? Also if a attorney malpractice case goes to trial the average defense costs are over $75,000.
Even the type of practice criminal versus plaintiff work, is not enough to answer the limit question. Some criminal law attorneys handle very high-profile clients. If allegations of malpractice or 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 work can range from small property damage cases to med-mal baby-trauma cases that run into the tens of millions of dollars.
Estate work exposures vary widely by the size and types of estates. This holds true for almost all areas of law. It is not the average case value it is the size of the largest or potentially largest case that the firm handles that needs to be considered.
Your malpractice insurance application asks risk assessment questions, making it one source to help evaluate limits needed. 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. As you fill out the area of practice grid, think about the types of cases and clients in each practice area.
Once you settled on a per claim limit, the next step is to determine the likelihood of multiple claims in one policy year. The aggregate policy limit is very important. It limits how much the insurer is responsible for in any one policy year. For example, the collections area of practice is one area that you could end up with many claims in one year over one procedural error. Burning through the aggregate limits although rare can be financially devastating to the firm.
Unless there are circumstances such as a client requiring higher limits increasing limits mid-term is difficult. Once there is a claim made against the firm, it is too late to be looking to increase limits and it may be difficult to increase your limits in the future.
An underinsured attorney can find that their insurer pays out the policy limits on a claim that exceeds the limits on the policy. Once the insurer has paid the policy limits the attorney is on their own for defense and indemnity costs. Being underinsured could be a very expensive proposition.
Attorney malpractice policies are written on a claims-made policy form. This means that the insurer settles using the policy form that is in place at the time the claim is made. Keep this in mind if your practice changes. It is not only your future acts that you need to be concerned about. It is also your past acts when setting policy limits.
Remember attorney malpractice insurance is “Sleep Insurance”. Question that needs to be asked is given the policy limits that you have, how well will you “Sleep” at night.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080