Why Reducing Liability Limits on a Claims-Made Lawyer Malpractice Policy May Come back to Haunt You
Law firms look for ways to reduce overhead expenses as their practice evolves. One common thought is lowering professional liability insurance limits. While this may generate short-term premium savings, reducing limits on a claims-made lawyer malpractice policy can create serious long-term financial consequences.
Legal malpractice claims can arise years after performing the underlying legal work. Because lawyers professional liability insurance uses a claims-made policy form, the policy inforce when reporting a claim, not when the alleged error occurred, determines claim coverage.
Understanding How Claims-Made Coverage Works
Unlike occurrence-based insurance, the claims-made policy inforce when the claim is first reported responds. The policy inforce at the time the claims made determines coverage. Hence claims-made coverage.
A legal matter five or ten years ago could result in a malpractice claim today. The insured law firm may have had higher limits during the legal work period. But that does not matter if reduced coverage limits are inforce, the lower limits apply for the claim made.
The False Economy of Lowering Limits
Firms reduce limits to save on annual premiums. However, the savings can be insignificant when compared to the financial exposure created by inadequate coverage.
As an example, an attorney faces a malpractice loss exceeding $200,000 while carrying only a $100,000 per-claim limit. The insurer fulfills its contractual obligation by paying the policy limit, leaving the attorney responsible for amounts above the limit. Once upon a time the attorney maintained a $500,000 liability limit but reduced policy limits to save money.
The lesson is straightforward: work performed in the past requires the insured to maintain coverage for that work.
Your Past Exposure Does Not Disappear
Attorneys should not reduce limits as they narrow their practice, slow down, or approach retirement.
Past legal work continues to present potential liability. Clients may not discover alleged errors until years later. Estate matters, business transactions, tax issues, real estate matters, and complex litigation can all generate claims long after the representation ends.
Attorneys should evaluate coverage needs based not only on current cases but also on prior matters that could still generate claims.
Why Tail Coverage Can Create Other Problems
To lower the Extended Reporting Period (ERP) cost an attorney lowers liability limits before purchasing an Extended Reporting Period (ERP), commonly called “tail coverage” assuming that the higher policy limits for earlier years remains inforce.
That assumption can be dangerous.
An ERP endorsement does not create a new policy. Instead, it attaches to the final claims-made policy and extends the time for reporting claims. It does not increase policy limits or alter coverage terms.
An ERP endorsement preserves the ability to report future claims arising from past work maintaining the underlying policy limits rather than creating new limits.
As a result, if an attorney lowers limits immediately before retirement and then purchases tail coverage, the lower limits govern claims reported during the tail period.
Final Thoughts
Lowering limits on a claims-made lawyer professional liability policy may produce immediate premium savings, but it can also create a significant gap between the protection attorneys need and the protection they have. Because claims-made policies respond based on the coverage inforce when making a claim, reducing limits can jeopardize protection for work performed years earlier.
For law firms considering tail coverage, or looking to control insurance costs, maintaining adequate limits is often one of the most important decisions in protecting both personal and business assets. The premium savings achieved by reducing limits may be small, but the consequences of an underinsured malpractice claim can be substantial. Do not let past decisions come back to haunt you.
Request a Legal Malpractice Quote
Contact Me Today
Lee Norcross, MBA, CPCU
California License # 0D87292
L Squared Insurance Agency, LLC ® DBA in California as L2 L Squared Insurance Agency, License # 0L93416
Managing Director, CEO
Lee@L2Ins.com
616-726-7080
