With lawyer malpractice claims being reported now more than ever, you may already know the importance of professional liability insurance coverage. But how much coverage do you need? Risks vary depending upon how, where, and what you practice, and you definitely don’t want to get caught underinsured. So how much coverage is “enough”?
How much coverage do I need for my firm?
You can gain insight into the riskiness of your practice by examining how professional liability insurers rate various practice areas. Although not every carrier rates each individual area of practice the same, or groups them the same on applications either, there are a few specialties that are generally considered “high-risk” across the board. Included among these are: securities, intellectual property, environmental, class action, real estate, and plaintiff’s personal injury cases.
Carriers rate risk based on two factors, frequency and severity: how frequently do claims arise from a particular area and, if a claim were to arise, what is the potential loss the carrier could face because of it? For example, although commercial real estate is a fairly straight forward area of practice, it’s still rated as a higher risk category because any claim that results from that transaction is likely going to be significant. Practice areas that involve more complicated matters, high stakes, or both, present greater downside risks should something go wrong. And the bigger the potential harm to the client, the greater the motivation for the client to seek compensation, should the outcome of the representation not be to their liking.
Risk rating can affect both the cost of coverage as well as its ultimate availability, which in turn will factor into your decisions about how much coverage you seek to purchase.
Firms that handle higher risk cases will most likely pay higher premiums than comparably-sized firms who focus on “safer” areas of practice. They may not only have to pay a higher premium for their coverage, but also may run into a few carriers that refuse to offer terms at all due to the riskier caseload.
Each carrier sets guidelines on how much of each specialty they will allow into their program overall. In other words, the carriers set their own limits on how many riskier practices they want in their portfolio. This can affect what coverage they make available to you, and at what price. For instance, many carriers have tight internal restrictions on work related to intellectual property, securities, and environmental law, and may decline an application for insurance based on the nature or volume of these cases the applicant firm regularly handles. In some circumstances, the insurer may choose to offer terms, but restrict the amount of coverage available.
Furthermore, insurance premiums and availability aren’t just influenced by whether you handle a type of law or not, but also by how much of each area you handle. A solo practitioner who practices 100% real estate will pay significantly more than another solo practitioner, in the same geographic area, who practices 50% real estate and 50% criminal defense.
What options do I have to choose from for my limits of liability?
There are a wide range of options to choose from for your policy’s limits of liability, so you should have no issues finding an option that fits your firm’s characteristics and potential exposure as well as your appetite for cost. Available limits of liability usually range from $100,000 per claim/$300,000 aggregate to $3,000,000/$5,000,000 aggregate. (Higher limits may be available through a separate excess limits policy.)
Professional liability policies will always have a per claim limit and an aggregate limit. These two amounts can be the same or different depending upon your appetite. The per claim limit is just as it sounds: it’s the most your carrier is willing to pay on one claim. The aggregate limit is the total amount the carrier is willing to pay out during the entire 1-year policy period. For example, if your limits of liability are $1,000,000 per claim/$2,000,000 aggregate, you can be covered on multiple claims during the policy period as long as none of them exceed $1,000,000 individually and the total combined doesn’t exceed $2,000,000. If you carry limits of $1,000,000 per claim/$1,000,000 aggregate and have an $800,000 claim, you would have only $200,000 left in coverage for the remainder of that policy period.
An important factor to consider in determining what per claim and aggregate options you want or need is how the claim expenses for a claim influence your limits of liability. The cost of responding to and defending against a claim can be significant and must be taken into account when deciding what expense limits treatment best fits your practice. There are two different ways you can structure your claim expense coverage: the amount paid by your carrier for claim expenses can reduce your per claim limit (called “claims expenses inside limits” or CEIL), or they can be paid in addition to your per claim limit (called “claims expenses outside limits” or CEOL). For example, let’s say you have limits of liability of $500,000 per claim/$500,000 aggregate, and you choose to have your defense expenses reduce your limits (CEIL). If the defense costs on a claim total $50,000, that amount is paid out from your available per claim limit; you then have $450,000 remaining to cover indemnity. If, instead, your coverage is structured with claims expense outside of limits (CEOL), the $50,000 of defense expense will not be subtracted from your available $500,000 of indemnity per claim limit, essentially providing you with $50,000 for defense costs and an additional $500,000 for indemnity purposes. This is an important detail to focus on when choosing your coverage, because although it may be fairly easy to predict the extent of indemnity your firm is exposed to, it is much harder to predict what the defense costs might add up to on a claim. Almost all carriers offer the option of having your claim expenses be outside your limits (CEOL), and although it may cost a bit more, it is highly recommended as a way to strengthen and expand your coverage.
Choosing the amount of coverage that is right for you and your firm can be tricky, but is an important decision. If you get caught underinsured and exhaust your entire limit on a claim, your personal assets and possessions could be in jeopardy. Carriers offer numerous limits of liability options and endorsements to make sure every type and every size firm is catered to. It’s important to remember that your carrier can be an excellent resource and can answer any questions you have when determining coverage.