Mapping out lawyers liability

Attorneys are singularly aware of liability exposures and the impact of litigation in modern society. Accordingly, attorneys are adroit and meticulous about the insurance coverage they purchase. Insurance must fulfill general expectations of intelligent risk transfer as well as the individual character of particular firms. This commitment to detail can signify the difference between adequate and inadequate insurance.

Professional liability policies protect the law firm (including all attorneys and employees) for claims involving wrongful acts such as acts, failures to act, errors, omissions, statements, misstatements, or failures to render professional services. To cover such conduct is the purpose of lawyer’s professional liability (LPL). However, the LPL contains numerous extensions, restrictions, and conditions that change coverage; which can vary greatly from one insurer to another. Attorney insurance buyers and brokers must be aware of the nuances of the protection and how the policy language operates in the real world.

Insurance reality

Too often, attorneys divorce themselves of insurance reality as they interpret their own insurance policies. This can be misleading for two reasons.

First, an insurance policy, above all else is made to indemnify; and it will in the event of a covered claim (given a reasonable and responsive insurer).

Secondly, policy access requires less of the abstract legal inference attorneys use to construe syntax and more of the intent and relationships between insurer, broker, and insured. Nevertheless, an insurance contract is nothing more than a contractual agreement between the insured and the insurer, with the broker factoring as a catalyst for coverage applicability.

The ideal law firm for many LPL underwriters will be completely defense oriented, with little or no litigation work, mundane administration counseling, lots of dependable clients, and no insurance claims for the past few years. Thus, there are few truly ideal law firms for selective insurance company underwriters to review. As the firm’s practice percentages grow in areas like intellectual property, civil rights, plaintiff representation, or mass tort/class action, etc., the potentially less interested many underwriters become.

The companies that underwrite insurance consist of state bar association sponsored or endorsed programs, large national insurers, mid- to small-size insurance companies, direct insurers and captive insurance arrangements.

Attorneys should select a specialized insurance broker who not only understands the coverage and exposures, but also has relationships with a variety of insurance markets that are capable of providing broad coverage at competitive prices that are representative of market conditions at the time coverage is placed (and keep in mind that the insurance business is indeed cyclical).

Moreover, the prudent LPL insurance buyer will question and review insurance policy language to ensure that it protects the law firm and meets general expectations.

Professional liability insurance is very different from property/casualty insurance. The products have great variance and require sophisticated analysis and understanding to ensure the optimum level of coverage.

The following items represent important coverage aspects that require broker and attorney attention. This list is in no way exhaustive but does provide a good roadmap.

Insurer viability

This may seem like a foregone conclusion but implied in every policy is carrier stability. A good way to evaluate a company’s overall financial strength and reputation is through A.M. Best (and other rating organization) ratings. Insurance ratings can often be accessed online. The fact is insurance companies are acquired, merge with other companies, or declare bankruptcy on a regular basis. Communication is essential when changing a law firm’s insurer. The law firm’s broker or the firm should actively review the new underwriting guidelines, appetites, capacity, and stability of the new insurer. Also, avoid insurance companies of which total assets are small relative to the law firm’s assets and revenues.

New or terminated attorneys

Law firms of any size experience fluctuations in the number of staff attorneys. When attorneys are added or subtracted, the corresponding change in underwriting information can create a premium change. Whether a premium change occurs is generally dependent on a number or percentage threshold of attorney additions/subtractions agreed upon by the client and the company. Some policies require notification for all new or departed attorneys while others only require notice if the number of new or departed attorneys exceeds a set threshold number.

The cost of these additions/subtractions can vary depending on the carrier. The top insurance companies in the LPL field do not assess premium changes mid-year but assess premium increases and decreases at the end of the annual policy term. Ideally, the rate that was assigned to each attorney of the law firm by the underwriter at policy inception should not change (keeping other underwriting criterion constant). However, if a firm grows substantially or hires specialist attorneys, the per-attorney rate may increase. Negotiations of this possibility in connection with obtaining the coverage can be not only beneficial to the law firm’s budget, but can also ease the periodic staff changes.

Definition of insured

Much like a baseball team is more than the nine players on the field, a law firm is not just staff attorneys and gilded partner names in the law library. Law firms can have significant support staff and ancillary positions that should be included in a professional liability policy’s definition of insured. A typical policy provides coverage for the law firm as an entity, past/present/future attorneys and officers, non-lawyer employees, spouses, and estates. This is sufficiently broad to cover attorneys, paralegals, and secretaries. However, the definition does not include interns, outside counsel, pro hac vice attorneys, independent contractors, or courier services. Accordingly, the definition of “insured” on a lawyer’s professional policy should be sufficiently broad so that all persons under the direction of the firm have coverage for work performed on the firm’s behalf. The definition of “insured” should include some language that invokes the “lawyer client” relationship capacity as a coverage trigger.

Definition of professional services

The definition of professional services is the keystone for building a proper lawyers professional liability policy. The policy definition may be taken for granted based on unverified assumptions. Because every firm is unique, so too is the suite of professional services offered to the client. A good professional services definition may read like this:

“Services and activities performed for others in your capacity as: a lawyer; notary public; an arbitrator or mediator; a title insurance agent; a designated issuing lawyer to a title insurance company; a court-appointed fiduciary; a government affairs advisor or lobbyist; a member of a bar association, ethics, peer review, formal accreditation or licensing, or similar professional boards or committees; an author, strictly in the publication or presentation of research papers or similar materials and only if the fees generated from such work are not greater than $10,000; or an administrator, conservator, receiver, executor, guardian, or any similar fiduciary capacity or court-appointed trustee; however no coverage will apply to any loss sustained by you as the beneficiary, recipient or distributor of any trust or estate. Any other services performed by you in a lawyer-client relationship on behalf of one or more clients, are considered professional legal services but do not include the provision of any financial or investment advice.”

The key is to make sure all of the firm’s activities are covered. For instance a mortgage closing firm would want mortgage services included. An intellectual property firm would expect intellectual property work included. Escrow agents would expect policy language for work performed as an escrow agent. The best definitions of professional services are always terse and utilize omnibus language.

Remember that definitions can sometimes work as exclusions by intentional omission of key terminology, or blatantly narrow explanations of key terms.

The contract exclusion

It is generally understood by federal and state courts that breach of contract exclusions will generally apply only if alleged by the plaintiff’s attorney in their formal complaint. This rule applies even when slick insurance attorneys try really hard to prove that “all claims arise out of an underlying breach of contract claim!” If it’s not listed in the allegations, then an insurance company cannot raise the exclusion as a defense. The contract exclusion itself typically looks like this:

“Contract Exclusion: any liability or failure to render services of others assumed under written or oral agreement unless such liability would have attached to the insured even in the absence of such agreement.”

The plain meaning and intent of the exclusion definitely prevents a policy from paying for any sort of hold harmless agreements included in an arms length transaction between two sophisticated entities. Of course, if there is no contract in place and the client is responsible by default, then this exclusion will not apply. An example of such liability by default is the general good faith obligations implied in every business transaction. The bottom line is that most legal malpractice claims are breach of contract claims that sound in tort. The insurance policy’s contract exclusion can have devastating implications if not properly understood.

Prior acts

Some firms consist of predecessor firms that are part of the current entity. These firms bring more than just names to the partner list; they also bring latent liability from their previous legal work. The new entity may be implicated for the prior acts of attorneys who counseled on behalf of the predecessor firm. Therefore, full prior acts coverage should be negotiated into the policy if at all possible.

The policy may specifically enumerate the predecessor firms or underwriters may decide to award full prior acts per attorney or for lateral hires while excluding others from full prior acts coverage. Certain firms will not be permitted coverage if there is loss history. An additional premium is usually associated with this affirmative grant of coverage.

Disciplinary proceedings

Firms and counsel attorneys must comport with the legal and ethical requirements of the State Bar, Professional Codes of Conduct, jurisdictional law, and client requests. A good lawyer’s professional liability policy should contain language that extends coverage for bar censure and disciplinary proceedings, or at a minimum, defense expenses for the some. These mini coverages may enumerate special sub limits for costs associated with a disciplinary proceeding.

Examples of costs include fines, penalties, and investigative costs as well as subsequent costs of compliance and resolution. A superior professional policy will contain coverage language for all fees and associative costs, not just defense related expense.

Extended reporting periods

Along the same line of insurer viability, extended reporting periods or tail coverage can be extremely beneficial to the firm or an individual attorney should the firm change insurance carriers. The extended reporting period and personal tails can be purchased from the carrier to provide extra time for a claim to be reported, while not extending the policy’s actual expiration date.

The cost for ERP’s generally range from 75 percent to 300 percent of the current annual premium depending upon the number of years purchased for claims reporting. Should the firm cancel or non-renew coverage, the payment of an additional premium can extend the period for reporting covered claims for a specific time. The ERP generally covers claims first made against covered persons (or the firm itself) following the termination of the policy but for whatever reason are not reported until after the policy termination dates.

Conversely, individual tail coverage is just like an ERP but adapted for individual attorneys. Therefore, should an attorney leave a firm, he has the option of purchasing personal liability coverage for claims that occurred under the original policy period. Of course, once the attorney joins a new firm, he will be covered by that firm’s current policy. Certain material terms and conditions may have changed as the attorney changes employers. Accordingly, coverage may by enhanced or restricted; which is further justification for attorney purchases of individual “tail” coverage for anticipated transitions.

Handling/disbursement of funds

Attorneys are often called upon to act as fiduciaries for clientele. A solid LPL policy will include language that provides coverage for negligent handling and/or disbursement of funds. Do not confuse this coverage grant with a true crime/fidelity bond which reimburses the insured for loss of monetary-related assets. Instead, mistakes involving client money should be covered, as this represents a large exposure for many firms.

ERISA defined plans

Federal legislation that created the Employment Retirement Income and Securities act created in 1974 created personal liability of fiduciaries who handle or manage any fund, plan, or program providing retirement benefits, income deferral, medical/life insurance, or other benefits for employees. ERISA prohibits any self-benefit transactions or clear conflict of interest implications including reasonably prudent behavior in managing these plans. Those persons in a law firm who meet the definition of fiduciary (and it can run from the HR manager to the partners who approve plan management with signatures or conduct) expose personal assets in exchange for making difficult decisions. The only insurance coverage mandated by ERISA is for employee dishonesty and requires amounts not representing less than 10 percent of total assets up to a maximum of $500,000 for each plan.

Accordingly, ERISA bonds are considered mandatory but the more appropriate way to cover this exposure is through a fiduciary liability policy. Law firms face numerous fiduciary liability exposures from 401K plans, stock options, plans integrated from predecessor firms, new health savings accounts and flexible spending accounts, and HIPAA administration. Law firms typically offer non-ERISA compensation plans as well that need to be covered through insurance. Often, when HR directors discover their personal assets and not the firm’s are exposed, this policy is much easier to justify. Pricing is generally much less expensive in comparison to other lines of coverage subject to plan asset size.

Duty to defend/no duty to defend

A typical policy will allow choice of defense counsel to either the insurer or the insured. More often than not, the carrier will utilize specialized firms for the particular claim or a large national firm that is experienced in insurance related litigation. Many law firms trust and prefer familiar counsel as opposed to letting the insurer choose defense counsel on the basis of geographic location or reduced fees for volume defense. If a firm takes issue with the insurer’s chosen defense counsel, then the insurer should be approached for consent of alternative counsel.

To succeed in having alternative counsel, reasonable rates and solid specific defense experience are mandatory. Submit preferred defense counsel to the insurer to obtain the insurer’s approval prior to the occurrence of a covered claim. At a minimum, wording that permits the firm to provide input into the carrier’s final choice of defense counsel.

Personal injury

A good LPL policy should include coverage for personal injury type allegations. While the definition should summarily include invasion of privacy, the more applicable coverage triggers that should be included are abuse of process, malicious prosecution, wrongful detention and arrest. The best policies will include language covering allegations of mental anguish and emotional distress.

Punitive damages

This is a great test question. If getting coverage for punitive damages is important to you on a LPL policy, you do not understand LPL. Punitive damages in most states are not permitted for breach of contract claims which constitute vast percentages of all legal malpractice claims. Therefore, adding coverage for punitive damages carries little real effect at least in practice, on the scope of coverage.

Punitive damages may be needed to pay certain claims and it is natural to want this coverage, but the actual may be debatable. Be wary of the insurer who permits law firms affirmative grants of punitive damages for an extra premium charge. Also always ask for most favorable jurisdiction language so that a proper venue is fixed before potential legal action. Punitive damages are considered by some scholars to be a red herring in LPL, so be skeptical of these meaningless overtures.

Summary

There are a number of considerations to be made when evaluating individual LPL policies. Some attention should be paid to how the policy responds to legal advice not on behalf of the firm, intra firm representation, or perhaps the definition of claim. Complete satisfaction on all fronts may not be realistic but the effort must be made. I hope this brief primer will assist law firms and brokers further understand the important aspects of the LPL policy.