The Risk Manager, Spring 1998

Sallie Stevens, Marketing Vice-President

How much professional liability insurance coverage should a firm purchase is a question we are frequently asked . While only you can evaluate your tolerance for risk and factor in considerations such as the value of the personal assets of members of the firm, we can offer several suggestions that will help in making your decision:

• Consider the monetary value of matters handled by your firm. Average dollar value can be misleading because there is no guarantee that a loss payment won't exceed the average value of your firm's representations. Consider the potential damage to your firm if a claim arose from your firm's biggest case. Many lawyers use this worst-case scenario when choosing limits rather than the firm's average exposure. Risk averse lawyers often use a multiple of two or three times the highest loss they can anticipate in selecting policy limits.
• Determine whether your practice concentrates in areas of law that have a high frequency of claims. Loss experience studies identify plaintiff personal injury cases and real estate matters as the areas with the highest frequency of claims. Practice areas with high but somewhat lower claims probability are business transactions, family law, collection and bankruptcy, workers’ compensation, and estate planning. All other areas have relatively low claim exposure. In Kentucky we are seeing an increase in bankruptcy, workers’ compensation, estate and probate, and family law claims. Note that over-diversifying your practice into a number of relatively claims-free areas may result in a greater malpractice exposure than concentrating in areas with higher claims frequencies.
• Take into consideration the personal assets of the attorneys in the firm when selecting limits. If personal assets are substantial, higher policy limits may be desirable even though the firm’s practice has low exposure to malpractice claims.
• Consider the number of attorneys to be covered under the policy. Frequency of claims increases in direct proportion to increases in the number of lawyers in a firm.
• Evaluate the firm's attitude toward risk:
  • Does your firm have an active risk management program?
  • Are you confident of your docket, work control, conflicts check, filing, and mail handling procedures?
  • Does your firm have a good record of providing legal advice in a careful, responsive manner?
  • Do you provide risk management training for new attorneys and staff ?
• Consider the risk tails that may exist for your firm's areas of practice. The risk tail is the time between when an error is made and the claim is asserted. For example, real estate claims have long risk tails because errors are typically not discovered until the properties are resold – usually a number of years later. Similiarly, estate and probate claims have long risk tails. A long risk tail means that claims are more costly because of inflation. In these circumstances higher insurance limits are warranted for inflation protection.
• Keep in mind that defense and other claims costs are included in the limits of coverage of many lawyer liability policies, including ours. Defense costs vary with each claim depending upon the complexity of the claim. These costs can erode policy limits substantially before a claim is finally paid. In choosing policy limits consider both indemnity and defense expense.
• Understand the requirements of a Claims-Made and Reported policy, the policy form used by virtually all providers of lawyers liability insurance and the one we use. “Claims Made” means that the policy and limits in effect at the time the malpractice claim is first made against the lawyer covers that claim.– not the policy and limits in effect at the time of the conduct giving rise to the claim. Increasing limits as a firm’s malpractice exposure grows over the years should be considered to protect against several claims from prior years’ representations being asserted in the current policy year.
• Review your firm's malpractice exposure annually, well in advance of your policy's renewal date. Compare the cost of the limits option you think you should have with the next highest option, and evaluate the cost of a lower versus a higher deductible. We can easily provide you with several alternative premium quotes to assist you in your analysis. Just give us a call and we will be glad to give you all the information you need to make an informed decision on your best coverage.