Law firms should consider new insurance options

Law firms have an increasing number of options when it comes to purchasing legal malpractice insurance, as new insurers enter the malpractice marketplace, and all insurers continue to offer new products and expanded coverage at lower rates. With the insurance marketplace growing, law firms should consider all available alternatives and should explore their options in renewing coverage with an existing insurer or exploring new options.

Although there may be advantages to changing insurers, the single biggest risk is a gap in coverage between when one policy ends and the new one begins. This ambiguity can create real risks for attorneys and law firms changing insurers. With these risks, attorneys and law firms looking to save a few dollars on insurance premiums may soon find themselves facing potentially uncovered legal malpractice claims, with defense costs and indemnity dwarfing any premium savings.

There are generally two kinds of potential gaps in coverage when an attorney or law firm changes insurers: (1) a time gap caused when there is a period of time during which the attorney or law firm is without coverage, and (2) a scope of coverage gap when there is a difference between the expiring coverage and the new coverage. Both situations can lead to an uncovered legal malpractice claim. By preparing for these risks, however, law firms can take steps to ensure a better result.

Attorneys typically think of a time gap as a gap between the expiration date of the old policy and the inception date of the new policy. However, this almost never happens. Instead, most attorneys, law firms, and insurance brokers are quite careful to make sure that the end of the old policy and the beginning of the new policy are seamless, with no gap between the two policy periods.

If such a gap did occur, any alleged malpractice occurring between the two policy periods would be uncovered. This is where Murphy's Law comes into play: Anything that can go wrong, will go wrong. Inevitably, something will happen during the gap period that creates unwanted headaches for attorneys and law firms.

Instead, the more likely gaps in coverage occur in more unexpected, less obvious ways. The two most significant risks of a time gap in coverage involve coverage for pre-inception date acts and post-expiration date claims.

Most legal malpractice insurance policies are claims-made policies, covering claims made during the term of the insurance policy even when the alleged acts of malpractice occurred before the inception of the policy. This coverage for pre-inception date acts is not without limitation, though, and generally subject to a "retroactive date." Essentially, to be covered, a claim must be made during the term of the legal malpractice policy and arise out of an act that occurred after the retroactive date. Continuously renewed legal malpractice policies typically keep the same retroactive date. Therefore, with each successive renewal, the length of coverage expands.

Of course, when an attorney or law firm changes insurers, the length of coverage can change. If the retroactive date in the new policy is different, then there may be a time gap in coverage - even if there is no gap between the inception date of the new policy and the expiration date of the old policy.

For instance, if a claim is made during the new policy period based on an act occurring before the retroactive date of the new policy, there likely will be no coverage - even though there would have been coverage under the expiring policy if the act occurred after its (different) retroactive date. In other words, claims based on acts occurring between the retroactive date of the expiring policy and the retroactive date of the new policy may fall within a time gap that would leave the claim outside the coverage of either policy.

A similar situation can occur at the end of a malpractice policy. Sometimes, attorneys are aware of circumstances that might give rise to claim but for which no claim has been made. Most policies give the attorney the option of reporting the claim as a potential claim in these situations. If properly and timely reported, then a resulting claim would be covered under the policy in effect when the potential claim was reported. Still, there may be good reasons that an attorney chooses not to report a potential claim.

For attorneys renewing with the same insurer, this is largely a distinction without a difference. But, for new policies, there is an important change.

Generally, a new policy requires a new application. Unlike renewal applications, applications for new insurance often include some version of this question: "Is anyone to be covered under this insurance aware, after reasonable inquiry, of an act, error, omission, or circumstance that might give rise to a claim under this policy?" The net effect of this question is to create a cut-off for pre-inception date potential claims.

If the applying attorney answers "yes" to the new policy application question, the new insurer typically excludes the claim as a pre-inception date prior claim. If the applying attorney answers "no," that answer can be deemed misrepresentation in the application if the law firm, or any attorney within the firm, was aware of a potential claim. California's Insurance Code and case law allow an insurer to rescind a policy based on a material misrepresentation in an insurance application, even if unintentional. See Cal. Ins. Code Sections 359, 331 and 334. With either answer in the application then, the attorney and the law firm likely lose coverage for a resulting claim that would have otherwise been covered under a renewal policy.

Law firms and their insurance brokers can mitigate these risks, by matching up the retroactive dates of the expiring policy with the new policy, requiring and setting up a system for their attorneys to report all potential claims under the expiring policy, and, if necessary, purchasing an extended reporting period under the expiring policy to eliminate any time gap between the two policies.

No two different insurers' legal malpractice policies are the same. Sometimes, the differences are obvious. Other times, the differences are subtle and only arise in the context of a specific claim. The question for attorneys is how to manage the risks associated with those less-than-obvious differences.

The nature and scope of client representations do not change on the same timetable as do changes in coverage. Instead, client representations continue on, before and after attorneys and law firms change insurers. If an expiring policy has been tailored to meet the needs of a particular practice area, then the coverage under the new policy should be tailored to do the same.

Aside from time and coverage gaps, there are other issues that attorneys and law firms should consider before changing insurers.

The most significant consideration is how the new insurer will respond when a claim is made. The answer to this question implicates a number of related issues, including the wherewithal to financially respond, the experience to competently handle the claim, the access to attorneys who can effectively defend the claim, and the long-term interest to do all of these things with an eye toward building goodwill for renewals to come.