Submitting, underwriting and placing lawyers professional liability
Lawyers professional liability, sometimes called legal malpractice, belongs with the selected “traditional” professional liability lines, such as physicians, accountants and architects/ engineers. Lawyers, in particular, are required to have a four-year college degree prior to being accepted in law school. While licensure varies by state, the lawyer must pass an examination to be licensed to practice in a particular state, thus becoming a member of the particular state bar. Membership in other associations is voluntary. Typically, firms specializing in defense work are members of the Defense Research Institute, while trial lawyers belong to the Trial Lawyers Association.
Back in the 1970s, lawyers professional liability used to be written on occurrence form. However, precarious loss experience coupled with costly long-tail (late-reporting) claims forced the market to go to claims-made forms.
The mid ’80s saw the introduction of the first general liability claims-made policies in an attempt to solve the same problems found in professional lines. In 1986, a lawyers professional liability claims made London policy written through the Los Angeles County Bar Association unintentionally granted an unlimited tail to its policyholders. During the ’90s, some strong carriers went out of business, and London LPL syndicates were shaking pretty badly. There are some who defend claims-made and those who oppose it. Clearly, there is a distinction in points of view between insurers and insureds. The truth is that this class is still written on a claims-made basis today, and most likely will be for years to come.
Submitting the application
The lawyers professional liability submission is a bit different from other professional liability risks. While an LPL completed application is required, resumes are usually not needed, nor does the underwriter need copies of contracts or agreements. The application itself asks whether the firm uses engagement and disengagement letters when taking on a new client or dismissing one. Most applications ask for the county where the firm is located, as claims data including loss adjustment expenses vary greatly among counties and can affect the rating.
A key item to attach to the completed application is a copy of the firm’s current letterhead. The underwriter needs to see that the firm does not share space with another firm. If the firm does share space with another firm, the underwriter should attach the appropriate exclusion for such entity. The attorneys shown on the letterhead must match those listed on the application.
Most applications break down the attorneys by partners/officers/shareholders, associates/employed lawyers and counsel/of counsel. It is worth noting that when the firm uses the services of independent contractors or “of counsel” attorneys, it is important to advise the underwriter as to the number of hours per week the of counsel attorney will be working because the carrier may waive a charge or offer a discount (usually 20 hours per week or less). Some carriers also take the continued legal education (CLE) hours completed by the attorneys in the firm into consideration to apply some credits.
There are a few key items on the application, such as the AOP, or area of practice breakdown. Depending on the items filled in — which should total 100 percent of the firm’s billings — a specific supplement may be required. Such is the case for real estate, plaintiff or firms involved in securities work, among others. The firm’s policies and procedures, especially those dealing with docket control systems (how many and whether computerized or manual or both), as well as conflict of interest avoidance will be carefully reviewed and evaluated by the underwriter. That conflict of interest applies not only to clients of the firm, but to positions held by the attorneys in other business enterprises not associated with the firm, such as the case of outside directorships, equity or non-equity, and for-profit or not-for-profit.
The underwriter will be interested in seeing how new associates are supervised and whether the firm has a management committee or peer-review system.
The last section on the application usually deals with claims history and prior coverage information. If there are claims, it is important to have the firm complete a claim supplement, including the steps taken by the firm to avoid similar claims in the future. Sending in copies of summons and other lengthy material usually delays the underwriting process. So while these may be helpful, the underwriter is looking for specific information on the claim supplement, and the firm is looking for terms as soon as possible.
The last item to attach to the submission is a copy of the expiring declarations page — if coverage is in force — to confirm policy limits, deductible and/or retention, as well as the retroactive date. Some policies attach a specific prior acts endorsement, rather than showing this information on the dec page. Depending on the size of the firm, the limits and deductible requested, the underwriter may want to see financial statements.
Understanding coverage
At a glance, the underwriter can provide an idea of the premium, which is usually flat, per number of attorneys commensurate with the state/county the firm is located in, the AOP, claims history, limits/deductible and retroactive date. Naturally, firms involved in somewhat “hazardous” services and tough claims history will require more involvement. In situations where the firm has been non-renewed due to claims, the new carrier will most likely write the coverage “retro inception,” meaning the firm will have to purchase a tail from its incumbent insurer and start fresh.
LPL policies are not typically auditable in terms of revenue. Some contain language that requires the insured to advise the carrier when a new attorney joins the firm or when a certain percentage of growth, attorney-wise, is attained. That varies by form, and some carriers will charge an additional premium during the policy period as of the effective date of the change, while others won’t.
Nearly all LPL policies include personal injury coverage and can be written as “named perils,” meaning the professional services covered are specifically enumerated, while others are more on the “all-risk” approach, providing coverage for “the practice of law.” Both forms require careful review, as one states what specific professional services the carrier intends to cover, while the latter lists those the carrier does not intend to cover.
Predecessor coverage, if needed, must be explored and negotiated if it is not built into the LPL form. Predecessor coverage normally is applicable to the firm whose majority of assets was acquired by the named insured. The language needs to be reviewed carefully.
Another important item is the “insured versus insured” exclusion. While the exclusion typically is found on all PL policies, when dealing with LPL, the exclusion may be amended to provide coverage if a claim arises out of a client-attorney relationship, such as a partner of the firm representing an associate in a particular matter. The exclusion modification must be negotiated before coverage inception.
One item that seems to always come up is whether the form affords “innocent insured” coverage or not. While it is more advantageous to the insured to have specific wording to that effect, the underwriters’ consensus is that due to the principle of severability, the carrier will be expected to provide defense even without the specific wording.
The usual concerns involving claims-made policies apply to LPL forms. Consider these, among others: Is the form duty to defend or not? Is choice of defense counsel available? Is the form claims made or claims made and reported? Does the form allow for an automatic period or window to report claims after its expiration? Is the claim considered made when it is received by the insured or by the carrier? Is the form circumstance sensitive? The definition of insured, services and claim must be carefully reviewed and discussed with the firm.
The exclusions on the form also must be reviewed to make sure none of the services performed by the insured and for which coverage is being sought are listed there. Last but not least, review whether the carrier is offering bilateral (two-way) or unilateral (one-way) extended reporting periods (a.k.a. tail). The ERP is commonly referred to as a tail because the option to purchase it is available at the end of the policy term, following the policy’s expiration, although its terms must be negotiated at policy inception. Bilateral is the most advantageous to the insured. Some forms offer an automatic, free of charge extended reporting period. Few forms under certain programs provide a firm dissolution, retirement, death or disability ERP options.
In 2006, we are seeing the return of the defense outside the limit, as well as loss-only and aggregate deductible options, among others. Domestic markets, as well as London, are interested and eager to write this line. From a solo practitioner to the multi-lawyer firm, coverage seems to be not only available but offered at competitive pricing.
Rocio L. Orta is a professional liability specialist with Western Security Surplus Insurance Brokers in Pasadena, Calif. E-mail: rorta@wssib.com.