Professional Liability: No Place For Bargain Shopping.

Lawyers are coming under increased scrutiny by their clients, making the selection of malpractice insurance (also known as professional liability insurance) more critical than ever. The decisions you make during your purchase will determine how well you'll protect your personal practice or contribution to your firm, not to mention the time, money, and effort you've put into developing your profession.

When purchasing professional liability insurance you need to pay close attention to how the policy will respond to your needs as an individual attorney as well as the needs of your firm. You need to consider issues such as:

length of time in practice

area of specialization 

prior affiliations

past insurance purchases (coverage type, etc.)

Your agent or broker should review all of this information with you in order to help you decide which carriers to consider, insurance limits, and whether you'll need coverage extensions for certain areas of practice and specialization. Professional liability insurance is definitely an area where one size does not fit all. Therefore, "price shopping" can lead to problems. In fact, it's rarely even possible to make a straight price comparison with this type of insurance since there is no standard policy form.

Consider an example. Two attorneys have been in practice for five years with a mid-sized firm. They decide to specialize and create their own firm of "Smith & Jones." They purchase professional liability insurance as anew entity. This is their first experience buying professional liability insurance since, when they were employed with their previous firm, the senior partners and office manager handled buying insurance for the firm. Even though Smith, Jones and the other attorneys in the firm received summaries of the coverage, their participation was minimal.

Like most law firms, Smith and Jones' previous firm carried "claims-made and reported" professional liability insurance. Claims-made and reported policies are how insurance companies protect themselves from the "long-tail" of liability, or the time lapse from when a loss event occurs and when it is discovered or develops into a claim. Simply stated, claims-made and reported policies respond to claims that are made during the policy term (effective date to expiration date).

In our example, Smith and Jones are fortunate to have had no professional liability claims three years after they started their firm. Their liability insurance costs have risen, but only because of the growth of their firm and length of time in business. However, their luck runs out when an heir to an estate trust they setup while employed with their previous firm decides there was a breach of duty and makes a claim against the previous firm as well as Smith as an individual, Jones as an individual, and Smith & Jones as the firm continuing to handle the trust.

Unfortunately, Smith & Jones is exposed to liability because, when money was tight during their first year, they purchased a liability policy with no "prior acts" coverage. Looking back, they never questioned how their previous coverage would extend or how they should cover themselves for previous acts or omissions. The new broker and underwriters never asked about this gap in their coverage, nor did they offer any risk management solutions for potential uncovered claims.

Now the premium savings they experienced during their first year as Smith & Jones doesn't seem like such a bargain. Of course, this is a hypothetical situation and doesn't mean that, even if you did base your purchasing decision on price, you're not properly covered. It simply illustrates what can happen if you don't make a careful examination of your coverage needs before you purchase.

So what should Smith and Jones have done? Three simple steps would have saved them a lot of anxiety (not to mention money):

Review the adequacy of coverage for all phases of the practice including individuals who are of counsel part time, unique specializations, and adequate limits of liability.

Look carefully at the insurance company in terms of their experience and reputation for lawyer's professional liability, willingness and ability to explain coverage, history of handling claims, ability to give risk management advice and their philosophy of handling professional liability claims defense and investigation.

Examine your policy's deductibles and defense terms and conditions. Legal defense expenses can be very costly. Many insurance policies put both damages and defense costs within a single policy limit, but most place legal defense costs outside the policy limits. Either approach can have substantial deductibles or self-insured retentions. Also, even if you have a prior acts extension from a previous firm, the deductibles and self-insured retentions that applied to your previous firm's professional liability policy could be substantial and could be your responsibility if there is a claim.

An insurance agent or broker experienced in working with law firms should walk you through this process and help you find the right policy at the right price. Even though-bargain shopping doesn't work, you still want to get the best value for your insurance dollar by finding that balance between adequate protection without over protection. Your agent can help you find that balance, but keep in mind that an insurance policy is a contract between you and the underwriter. Like any contract, you are ultimately responsible for reviewing and making sure you understand the terms, conditions, coverage, limitations and exclusions.

Lisa Applegate is the principal agent for Applegate Insurance Services, a Torrance, California-based insurance agency specializing in law firms in Southern California. She can be reached at 310-856-2801.