Insurance World

Professional liability insurance is a necessity for lawyers. Unfortunately, not all lawyers are able to secure the coverage they need in the standard marketplace because they are considered to be a “distressed” risk. The question is, what exactly does “distressed” mean?

A “distressed” risk is one that has difficulty securing professional liability insurance because of claim frequency, claim severity or disciplinary complaints or actions. While “distressed” is often used interchangeably with “hard to place”, the two terms are different in that “hard to place” generally means the lawyer or law firm practices in a more risk prone practice category such as Personal Injury Plaintiff or Patent but is usually claim and disciplinary action free. If the term “distressed” describes the loss or disciplinary history of a law firm, the firm faces many more challenges in finding professional liability insurance and generally has to settle for less coverage at a considerably higher premium. The good news is that there are a few markets available, operating on a surplus lines basis, to meet the professional liability needs of the “distressed” law firm.

Surplus lines is often referred to in a negative connotation because the insurance product is not protected by any state insurance guaranty association nor is the policy form and rates charged subject to regulation and approval of the State Insurance Commissioner. However, not all surplus lines insurers are created equal. Surplus lines insurers are subject to review by the insurance company rating agencies such as A.M. Best and are generally published as an “Approved Surplus Lines Company” by state insurance departments. Before committing an insurance purchase to a surplus lines company, law firms should check with their state insurance department to be sure that the company is an approved surplus lines insurer and that it carries an A.M. Best rating of at least A VII. Many admitted professional liability companies will have a surplus lines facility to accommodate those applicants or insureds that do not qualify under their standard program guidelines, but would be acceptable on a surplus lines basis if a more acceptable premium could be charged for the exposure presented. There are several A and even A+ markets to approach in this arena.

To find an adequately rated surplus lines insurer that can be trusted to provide the needed coverage should a claim be presented often involves finding a broker that specializes in professional liability and deals regularly with distressed placements. As a general rule, most brokers that offer lawyers professional liability as a full time product line will have an insurance company or “distressed facility” that they have worked with successfully in the past. It is best to find a broker that is familiar with the policy form and claims handling ability of the company they are recommending.

Here are some valid questions to ask a broker about the insurance company offering coverage:

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Does the insurance company specialize in professional liability?
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Is it an approved surplus lines insurer in the state and rated at least A VII by Best?
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Does the insurance company oversee its own claims handling or farm that responsibility out to an independent adjustment firm or third party administrator?
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Will the claims adjuster provide you with a listing of law firms in your state from which to choose your defense counsel and will the company work with you to consider a firm you recommend?
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Is the insurance company willing to defend a spurious claim in order to protect your reputation in the community, or do they have a “get out the check book mentality” to close the claim regardless?
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Will the insurance company regularly communicate the status of the claim with you and seek your input as to settlement or defense strategies?

Once a viable insurance company has been identified, it pays to examine the policy form and discuss strengths and weaknesses of the coverage provisions with the broker. The broker should provide a list of “coverage highlights” that discuss not just positive marketing advantages, but important coverage restrictions as well.

One of the most important coverage features to be aware of when purchasing professional liability coverage is the availability of prior acts coverage under the policy. Distressed markets often offer terms “retro inception” which means that the policy’s prior acts retroactive date will be the same as the policy’s effective date. On a Claims-Made policy, the act(s) that resulted in the claim must have occurred after the policy’s retroactive date. That situation is also known as a “no prior acts” or “restricted prior acts” policy. If the policy has restricted prior acts coverage, an Extended Reporting Period (ERP) option will need to be purchased from the expiring insurance company. An ERP can be a very economic decision as, often times, the terms will be based on rates that were provided by the standard marketplace and not surcharged for claims or disciplinary problems. A broker should be able to advise the pros and cons of purchasing this option, but two things that should be considered are:

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Is the option cancelled automatically if your license to practice is suspended?
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Will open claims exhaust the limit of liability under the policy?

Other policy provisions that can be restricted on a distressed policy form are:

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Policy’s consent-to-settle provision
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Specific exclusions for certain practice areas such as SEC
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Specific exclusions for certain types of legal malpractice actions such as a counterclaim as a result of a fee collection suit
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Defense costs are generally included within and erode the limit of liability
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Coverage is generally limited to acts performed on behalf of the named insured named in the policy declarations which can limit predecessor firm coverage, individual prior acts coverage and outside moonlighting activities
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Extended reporting period options are restricted in length to 12 months or 36 months and are considerably more expensive than the standard marketplace

To receive the most favorable terms possible when submitting an application for professional liability insurance, a good point to remember is that you are the best representative of your practice exposure going forward. Underwriters that offer a distressed facility are not so concerned with the number and amount of past claims or even that the firm has been censored by the state bar, but that the underlying problems leading up to the claims or disciplinary ruling have been identified and addressed. A sincere, honest approach with full disclosure on claims or any other problem that has put the firm in this situation is always the best approach. Include a narrative of the systems and procedures that have been put in place to reduce the likelihood of similar claims in the future. Include comments on the merits of the claimant’s claim. Tell the underwriter what was done right during the representation. If at all possible, include loss reports from previous insurers showing actual paid and reserved amounts. If the underwriter has to interpret the value of the claim, it will likely be higher than the actual reserve that the insurance company has set. Take an active interest in the payments and reserves set for the open claim and be informed on the status of the claim on a regular basis.

If you are a small or mid-sized law firm that has experienced difficulty finding lawyers professional liability insurance due to paid claims or disciplinary actions, DefenseProSM Lawyers Professional Liability may be able to help. Administered by Lockton Risk Services, a subsidiary of Kansas City-based Lockton Companies, the largest independently-owned commercial insurance broker in the United States, DefenseProSM is specifically designed to meet the professional liability needs of distressed law firms. For more information, visit the DefenseProSM website at http://www.defenseproliability.com.

Insurance premiums are calculated according to several risk factors. These are the factors identified by the insurance company as most likely to have an impact on the insured against risk occurring. Insurance is a significant cost associated with the item insured and should not be rushed into. It is always a good idea to shop around for the best price available. Insurance premiums will vary considerably from insurer to insurer so do your homework.

Shop Around

Look up the various insurance companies you are interested in and ask them for a quote. They can usually give you a rough estimate fairly quickly and even more exact quotes should also be possible if you provide more details and wait. You should also look up insurers online and get instant quotes from their website. This is a very fast and effective way of shopping around. You will get a good idea of what prices to expect. You can also experiment with the quotation websites to see what effect it makes to your premium price if you select different options. With all insurance policies you will have a number of options that affect the price of the policy.

Therefore you should think about these options and if there are risks that you do not wish to cover then let the insurer know as your premium should become cheaper.

You should also try to make sure you do not double insure. It is a principle of insurance that you cannot benefit from the insured event’s occurrence. So you cannot get paid twice even if you have two insurance policies. So if a risk is already covered by one policy, again let your insurer know so they can remove it from their calculation.

Factors

Car insurance premiums usually depend on factors such as what kind of car you are driving, how old it is, how big the engine is, what make and model it is? What type of insurance you require also plays a part, do you need only liability, or also comprehensive? What use you will make of the car, for example will you commute to work and how many miles do you plan on driving?

Your driving history will be a strong factor in determining your risk, and linked to this will be the age of the driver, with younger drivers being significantly more at risk of being involved in an accident. If you are young, your sex will also be an important risk factor, however if you are older sex usually becomes less significant.