Front Page
Aug. 21, 2002
Breaking the Bank
Dicta Column - By Patrick McGinty - While the practice of law comes in many shapes and sizes, all law firms and lawyers share one common denominator: the issue of professional liability insurance and risk management. All lawyers face the uncertainty of events that they can neither predict nor control. Badly managed, these risks can become emotionally, physically and financially devastating.
By Patrick McGinty
While the practice of law comes in many shapes and sizes, all law firms and lawyers share one common denominator: the issue of professional liability insurance and risk management. All lawyers face the uncertainty of events that they can neither predict nor control. Badly managed, these risks can become emotionally, physically and financially devastating.
Today's economic climate strains the business of lawyers. Navigating in today's climate can be treacherous. To make matters worse, professional liability insurers are raising prices and deductibles and altering policy terms and conditions, and the marketplace of interested willing underwriters is shrinking.
What can lawyers do about these conditions?
Lawyers must understand what is going on with their professional liability policy and what they can do to maintain insurance coverage at an affordable, yet responsible, level. In short, the key is to know your policy, know your insurer, know your salesperson and understand the balance between policy cost and policy terms, conditions and exclusions.
If lawyers knew how likely they were to have a claim filed against them, they would take their insurance more seriously. Statistically, claims follow a pattern that has been consistent regardless of the size of firm, type of practice or location.
And although certain practices, such as immigration, insurance defense and criminal defense generate fewer claims and firms located outside metropolitan/urban areas of Orange County, Los Angeles and San Francisco generate smaller claims, the patterns tend to be similar throughout California.
One of seven to 10 attorneys will experience a professional liability incident serious enough to lead to an investigation and a payment of expense and/or damages. Sole practitioners will experience an incident every seven to 10 years of practice.
The average adjustment and defense runs between $50,000 and $75,000. The $25,000 spread is a variation by different insurance carriers and their practices.
What steps can you take to improve your practice and manage your risk?
• Carefully review insurance policy dates. Professional liability policies are written on a claims-made-and-reported basis. Your current insurance pays and defends claims made during the policy period which occur after the retroactive date. Understand and monitor these important policy dates.
• Maintain continuous coverage. While maintaining some insurance may appear to be prohibitively expensive, it is far better than "going bare" or self-insuring. Given the statistics, having no insurance is not a prudent option regardless of client disclosures in fee agreements.
• Read the policy. If an offer is too good to be true, it probably contains some unpleasant surprises. One insurer excludes malicious prosecution - not a good option for a personal-injury firm. Some policies are written as part of a "risk purchasing group." Under this type of policy, others in the "group" can use up all of the limits of liability, which means you may be paying for insurance that may not protect you when you need it.
• Buy insurance from an "A" rated insurer. More than 50 percent of the insurance companies reviewed by AM Best Co. of Oldwick, N.J., are "A" rated or better, so they should not be difficult to find. Do not be deceived by terms of "good" or "excellent." An "A" rated company is demonstrably better than a "B" rated company.
• If possible, buy insurance from an insurer admitted to do business in California. The California Department of Insurance audits rates and business practices of admitted insurers. Also, the California Insolvency Guarantee Association offers some level of consumer protection in the event of insurer insolvency. If you purchase insurance from a nonadmitted company, you are on your own dealing with the insurance department of the insurer's state of domicile.
• Recognize that bar associations are paid for their support of sponsored insurance products and services. Like the accounting auditor that is also the business consultant, this relationship may compromise impartiality.
• Premiums are a function of limits of liability and size of deductible. Reducing your limit, raising the deductible or absorbing more of the initial cost of a claim for a period of time will reduce the premium and are better choices than dropping insurance altogether.
• Many deductibles are written on an aggregate basis. Going to a "per claim" deductible can help reduce the premium.
Do not, however, alter, move forward or ignore the impact of the retroactive date of claims reporting unless a "tail" or extended period of reporting endorsement is purchased. The tail extends the period in which a claim can be reported in order to be made against a previous policy.
If you are considering retiring soon, align your insurance with the strongest admitted underwriter you can afford. Remember, a tail in retirement, whether free or purchased, is only as strong as the insurance underwriting company. Don't expect an insolvent insurance company to protect you. Remember that, at least regarding professional liability insurance, quality pays.
Don't use your insurance as a crutch. Insurance is not a backstop to poor practice management, calendaring programs or billing/collections policies. Always look for ways to improve your practice.
Finally, if a claim occurs or an incident develops, report it immediately. Like fine wine, a claim can get more expensive with time.
Patrick McGinty, a chartered property casualty underwriter, is a principal with Applegate Insurance Services in Torrance. He may be reached at pat@applegatepro.com.
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