What is Legal Malpractice Insurance?
Legal Malpractice Insurance (LMI) is a type of professional liability insurance policy that covers defense costs, damages and settlements if an employer’s employees or other agents are sued for professional negligence in rendering the firm’s legal services. Litigation is an inevitable part of having any business, but particularly for a law firm. Legal Malpractice Insurance provides law firms with security, protect their license to practice and ensure they have the resources if needed to continue to serve their clients.
LMI insures the firm against claims by clients that it provided improper or negligent legal representation and pays for the cost of a legal defense in the event of such a claim. Claims can involve anything from a misunderstanding about the meaning of a certain provision in a contract to inappropriate disclosures about a client’s confidential information. Any of these could harm the client and financially hurt the firm. LMI protects lawyers against claims for alleged malpractice and negligent conduct that harms the client’s likelihood of success in a lawsuit , including lead counsel of relation to such a lawsuit or other matter.
The LMI policy may have a deductible that is paid first by the insured firm or lawyer in the event of a claim. If the claim involves an amount in excess of the deductible, the policy pays the remainder. If a firm or lawyer has multiple policies, the maximum payout for a claim will be the limit of the policies added together. In some states, there is a cap on the maximum limit of the policy.
Factors That Affect the Cost of Insurance
When it comes to legal malpractice insurance, one size rarely fits all. As such, costs are driven by many of the same factors that can impact a firm’s risk of a claim. Generally, factors such as practice area, geography and firm size play important roles in determining whether your firm pays a little or pays a lot for its insurance.
Geography is one of the most significant considerations, because insurers analyze the likelihood of a claim in each state of your practice and the firm’s prior claims history in each state. It is important to know that every state does not have the same laws, which means firms that operate across state lines can be at increased risk because the insurer will have to pay defense costs in multiple states.
As you might expect, geography has a direct impact on the cost of legal malpractice insurance in both the primary and excess markets. Firms that practice in high claim frequency states such as California, Massachusetts, Florida and New York can expect to pay higher premiums than firms in lower claim frequency states like Delaware or Wyoming. In many instances, the premium adjustment is direct and straightforward. A typical premium adjustment for a firm that practices in both New York and Massachusetts at 50 percent in each state would add 50 percent to its premium. If the trial teams are bi-coastal, losses tend to get worse and the premium adjustment can be even higher. (Note: Since more than 70 percent of all litigation in the U.S. is in federal court, a firm’s federal court practice must also be taken into account.)
Firm size is another major factor when it comes to determining legal malpractice insurance costs. Many insurers have minimum premium requirements, so firm size tends to impact premiums less for larger firms. But this isn’t always the case, particularly among small firms where attorneys’ firms can be responsive to the needs of the firm. Even when firms have the same number of members, insurers know that solo attorneys and partners with one or two associates have a different risk profile. It is also important to remember that every attorney you add to the firm increases the rate of exposure. If an associate leaves, employees should be reminded that letterhead is property of the firm and practice area restrictions should be honored.
Legal Malpractice Insurance Cost Breakdown
The average cost of legal malpractice insurance has historically ranged anywhere from $1,500 to $30,000 a year. Depending on the types of services offered a law firm may need to pay higher premiums, however, the vast majority of attorneys will find that their premiums fall somewhere in between. For example, a law firm specializing in complex commercial litigation may pay over $10,000 per year depending on its size, while an attorney primarily practicing in criminal defense or personal injury may pay $1,000 to $3,000.
The strongest factors influencing the cost are the amount of coverage requested and the area of specialization. For example, a $5 million limit may add up to 15 percent to the premium, whereas a $10 million limit can double or triple the premium.
There are several other cost factors as well. Underwriting practices may vary from state to state and among carriers. For example, some carriers will require liability caps in order to be quoted. Others do not write policies for plaintiff attorneys.
An increasing number of companies also conduct claims experience rating. In this case, insurers ask firms to disclose prior claims history and adjust premiums based on whether the firm has a history of claims or whether it has settled prior claims. Firms with more claims pay a higher premium.
In most cases, greater risk translates to a higher cost, but with legal malpractice insurance, risk is difficult to gauge and therefore underwriters use other methods to ascertain risk. The cost of insurance depends on many factors, and varies by state, type of coverage and a variety of other elements unique to each firm.
How to Reduce Your Insurance Costs
There are various strategies that an attorney can enact to try and lower their malpractice insurance premiums, in addition to seeking out other insurance companies that provide competing offers.
Looking closely at the policy, and pursuing a higher deductible can not only make sense but also may be in the best interest of the attorney if larger claims are unlikely to arise. Reducing the number of staff members currently listed on the policy, such as revising and cutting payroll columns with all but the most essential employees listed, may save on premiums. Determining which staff member you do not need to list on the insurance policy will likely save you money. Having staff members with non-lawyer titles, such as "Intellectual Property Consultant" merely adds to your premium. Listing employees with the title "Paralegal" may be necessary, but perhaps not.
Comparing Insurance Companies
With so many options available, it’s essential that you take the time to compare the pros and cons of the coverage options available. Start by reviewing the list of companies on the A.M. Best List, which will give you a good idea of what is available. From there, consider the following factors when weighing the options of each provider.
Coverage
What type of coverage is offered?
You want to make sure that your provider offers the full range of coverage options you may need, either now or in the future. Both excess and surplus policies come into play when you have more than one office or have significant income and assets. State Bar requirements also vary for coverage amounts, so be sure to understand the legal requirements where you practice.
Cost
While it’s essential to understand the costs of a policy, you should not make a decision based on cost alone. Poor service and lack of support can cost you money in the long run if you ever have to file a claim or update your coverage . However, shipping and processing fees can add up, so be sure to ask about those when getting a policy quote and comparing the options.
Customer Service and Support
One of the most important things to consider is how quickly they answer phone calls, emails, and the overall level of communication. You want to work with a provider that is readily available and easy to communicate with. Be sure to ask about the objections to their level of service when you get a quote. Ask them if they can help you with a sample complaint. This will tell you a lot about the level of service they provide to clients.
Policy Exclusions
When comparing quotes, it’s essential to analyze the policy exclusions as well. What is not covered by the policy? These exclusions can make a huge difference in whether or not you end up filing a claim or having to pay a portion of it out of pocket.
Understanding the Cost of Legal Malpractice Insurance
Finding the most comprehensive and reliable provider will take some time and research. However, it will be well worth it in the end when you have peace of mind that you and your clients are protected.
Debunking Coverage Myths
The first misconception surrounding legal malpractice coverage is that it covers will-drafting error. This is just not true. A will-drafting error is not a professional service. It is a breach of fiduciary duty, but it is not legal malpractice, and will not be covered under a legal malpractice insurance policy. A good argument can be made that an attorney drafting a will cannot be acting with the requisite "Duty of Care" or "Due Diligence" where he/she is pre-disposed to do the testator’s bidding without questioning the client’s motives. In other words, an attorney simply rubber-stamping a client’s request in order to receive a fee would not satisfy the "Duty of Care" owed to the client. Thus, a claim based on such a situation would not qualify as legal malpractice.
Another common misconception is that a legal malpractice insurance policy covers both malpractice by the insured attorney as well as claims of negligent supervision against the insured law firm. Legal malpractice insurance polices are written to cover only the negligent acts of the attorney actually in charge of a matter. Sometimes when the client sues the law firm citing negligent supervision and cites multiple attorneys within the firm as being negligent, the law firm as a whole will tender the claim to its legal malpractice insurer only to find that it does not cover claims made against more than one attorney in its employ. A law firm can purchase internal coverage to protect a managing partner from claims being made against him or her for negligent supervision. However, because it is an internal coverage, often times the managing partner may not have an interest in purchasing that coverage for him or herself and can end up being surprised when there is no coverage at all.
The Legal Consequences of Lack of Coverage
The failure to maintain the required coverage might cause disciplinary action by the state attorney general. A court might also impose other penalties, including the imposition of civil liability, for taking a case without insurance . For example, an attorney who takes a case without insurance when he or she knows that damage exceeds limits of coverage, may be deemed to have acted in bad faith and be ethically liable for the amount of these damages. Imposition of penalties may also occur in a private context, or as an adjunct to civil liability.