Troubled by the Rising Cost of Malpractice Insurance?
A New Proposal - And A Changing Economy - Force Massachusetts Lawyers To Re-Examine Their Coverage
Published: 1:00 am Mon, February 2, 2004 1:00 am Mon, February 2, 2004
A new proposal by the Board of Bar Overseers that would require lawyers to disclose to clients whether or not they have malpractice insurance — and how much their coverage is — could have many lawyers shopping around for an insurance carrier.
Practicing without liability insurance has never been the most desirable course of action. But the new rule would, for the first time, force the hand of lawyers who have passed on insurance or taken policies in small amounts. After all, what lawyer wants to disclose to a client that he is uninsured or that his policy has paltry limits?
Unfortunately, the proposal comes at a time when malpractice premiums are soaring, according to lawyers and insurance specialists, and many attorneys who were happy with their coverage in the past are now scrambling to find better coverage.
In fact, “skyrocketing,” “huge” and “crazy” are just a few choice words lawyers shared when describing their recent malpractice insurance premiums. And though attorneys have been witnessing rising premiums for the past couple of years, it seems a recent spike has left them in the untenable situation of having to pay up, or even stop practicing in certain high-risk areas.
Most recently, the Massachusetts Bar Association Insurance Agency, the largest writer of attorney malpractice insurance in the state, and the Boston Bar Association have switched carriers in search of lower premiums or better policies for their members.
“The marketplace as a whole has gone crazy,” says Terence J. Welsh, president of the MBA Insurance Agency, explaining that the agency switched from Westport to CNA after more than 13 years when the former wanted to take steps that were not consistent with the bar association, including increasing premiums.
Smaller firms and solo practitioners are also on the hunt for better deals, alarmed by the fact that coverage for practice areas like real estate and intellectual property (two areas of law particularly popular among Massachusetts practitioners) is either being denied or priced so exorbitantly that the big firms might be the only ones able to absorb those costs.
But, according to attorneys and insurance specialists, there are many ways for attorneys to keep their premiums down — from attending continuing legal education courses to having foolproof docketing systems in place. And though options in the insurance market may be scarce right now, attorneys can still shop around to find a policy that suits their needs and their budget.
In looking for reasons to explain their soaring malpractice insurance premiums, lawyers — many of whom say they’ve never had a claim against them — can think of only one explanation: bad investments by the insurance companies.
“We are in the same category as the doctors,” says Douglas K. Sheff of Boston, who says his premiums have nearly doubled in the past year despite the fact that his firm hasn’t had a claim against it in 60 years. “It isn’t about the incidence of malpractice … it isn’t about the abilities of the practitioner. It’s about bad investments made on behalf of the insurance industry.”
Boston attorney Regina E. Roman, who has represented both insurance companies and lawyers in malpractice disputes, says she’s not sure the rate hikes can be attributed to bad investments, but adds that certainly everyone is scrambling to recoup costs in this down economy.
As a result, she adds, “not only are there rising premiums, but there are much stricter underwriting standards that are being applied” by the insurance companies.
Many attorneys report not being able to get coverage for certain practice areas now considered risky by the insurance industry. Intellectual property, real estate, class action work and securities are the practice areas that top the list. Insurers worry that too many inexperienced lawyers are trying their hands in these areas, and also that awards for malpractice damages in these cases can be huge, according to insurance brokers.
But for attorneys like Jill C. Shedd of Franklin, that’s a hard pill to swallow considering she just passed the patent bar in October and has 15 years of experience as an engineer in a software company. Flat out denied by one insurer already, Shedd says other IP lawyers have told her she could be looking at a premium price tag of up to $25,000 a year.
Still investigating other options for coverage, Shedd notes that it’s unfortunate that the entire patent bar is being painted with a broad brush by the insurance industry. And she worries that the effect could be that big firms monopolize patent work because they’re the only ones that can afford coverage, which ultimately does a disservice to clients who can’t swing those legal fees.
“Unfortunately there’s a whole range of practices in [intellectual property]. I’m not in the IBM-Microsoft range,” says Shedd. “I’m not going to take any IP cases until I find an insurance company that will carry me — if they will .”
Sometimes the only resort for practitioners in these high-risk categories, according to brokers, is to use a “surplus lines” carrier, like Lloyd’s of London or Evanston Insurance, for example. These are companies whose forms are not regulated by the state, and therefore they are not subject to the state’s insolvency fund. Accordingly, their prices tend to be incredibly high, brokers warn, and attorneys would be out of luck if the company were to go out of business.
“When I mean incredibly high, it’s not uncommon for a solo attorney to pay for an inception policy of $11,000 and have it increase to upwards of $30,000 and higher,” says Brendan Lawler, president of BL Insurance Brokerage of New Bedford. “I would say it would be tough for a sole practitioner to pay those kind of premiums.”
Keeping Your Premiums Down
Despite the limited options available for attorneys in certain practice areas, there are steps every lawyer can take to keep his premiums down.
Advice for reducing your risk may lie in the insurance application itself, according to Lawler, who says the forms read like “mini guides to avoiding malpractice claims.”
Among the things insurance companies are looking for to determine an attorney’s risk averseness is whether the lawyer or firm has reliable calendar control, sources say. Failure to timely file ranks first as the cause for alleged malpractice claims, according to MBA Insurance Agency statistics.
Therefore, sources recommend having a centralized docketing system that is crosschecked by multiple people within the firm, or among multiple locations of a firm. Being able to detail the effectiveness of such a system to the insurance company can help reduce premiums, according to sources. A similar system should be in place to check conflicts of interest.
“Put in practice … procedures at the firm that will ensure your answers are what [the insurance companies] want to see,” Roman advises.
Also critical is having the proper engagement and disengagement letters for clients, an area in which Roman says the insurance companies are now asking for more detailed information. Sample engagement letters provided by the MBA include elements like scope of representation, a description of fees and retainers, confirmation of the client’s address for all correspondence, and a clause about failure to maintain the retainer and the consequences that could result.
Per the BBO’s proposal, lawyers would also be required to inform clients in an engagement letter if they do not carry limits of at least $250,000 per occurrence and $500,000 aggregate in liability coverage. Additionally, the proposal requires lawyers to notify clients in writing if, during the course of representation, the insurance coverage lapses or falls below these limits.
“The absence of professional liability insurance is a material fact that consumers are entitled to know when they seek to engage counsel,” wrote the BBO’s general counsel, Michael A. Fredrickson, in a letter to Lawyers Weekly explaining the draft rule. “It is the Board’s unanimous view that lawyers should be required to provide that information.”
As for those risky practice areas like real estate and IP, sources recommend not dabbling in them to avoid the huge insurance costs associated when even a small percentage of your practice is deemed risky. However, total disclosure of your entire practice composition is a must, and specialists warn that fudging an application to save on your premium could end up costing you much more than what an expensive premium does.
“The risk of not being completely honest in the application is pretty enormous because they can disclaim coverage and rescind the policy,” Roman cautions.
To possibly reduce your premium in those risky practice areas, Roman suggests adding a footnote in the application that details the specific kind of work you do in that
specialty. For example, a firm might check off on its application that it does IP work, but it might want to stipulate that it is IP litigation and not patent preparation. which is perceived as riskier, Roman adds.
Haverhill attorney Marsha V. Kazarosian, who recently shopped around looking for a new insurance carrier, says attorneys might even want to consider supplementing their application with a letter that explains how any prior claims arose and how those were resolved.
Welsh adds that not all insurance companies will penalize lawyers for a claim by increasing their premiums, depending on the outcome of the claim. So he suggests attorneys shop around for companies that evaluate each claim on a case-by-case basis, and are willing to keep premiums consistent if it has been found the lawyer wasn’t at fault.
Running high overdue receivables is not looked upon favorably by insurance companies, sources say, because this only increases the likelihood that an attorney will have to sue for fees, which in turn increases his exposure to a countersuit.
Sharing office space could also make a practitioner appear susceptible to vicarious liability, Welsh explains. Thus, lawyers need to be certain they have established themselves as independent — with letterhead, advertising, signage, etc. — to limit their exposure. Additionally, insurers always look upon continuing legal education as a plus.
Another way for lawyers to save on their premiums is to limit their “prior acts” coverage. Rather than having policies that work in a forward-looking manner, legal malpractice insurance policies cover lawyers for a certain look-back period. Firms hiring new attorneys can save on their premiums by limiting prior acts coverage to the new attorney’s date of hire, rather than taking on an entire career of prior acts liability at a greater cost.
Attorneys who have been in practice for a number of years can also shave dollars off their premiums by changing their prior acts coverage. For example, if a lawyer has been in practice for 10 years but is fairly certain his first five years of practice won’t result in any future claims, he could limit his prior acts coverage to five years. However, there are risks associated with this, insurance specialists warn.
“They run a significant risk that if something pops up, they’re going to get clobbered,” warns Welsh. “It would save them a little bit of money, but in my mind not be worth taking the risk of getting hit with something from a crazy client.”
Taking all of this advice into consideration, attorneys should still be wary of trying to save dollars by opting for the cheapest policy they can find, sources say. Since legal malpractice insurance works on a “claims-made” basis, the policy that is in effect at the time a claim is made is the one that will cover you — not the one that was in effect at the time the alleged malpractice occurred. Therefore, if you no longer do real estate work, for example, and decide to switch carriers to get a cheaper policy, you may find that this cheaper policy won’t be enough to cover you from a claim that arises from your previous real estate work. Just keep in mind that old adage of “you get what you pay for,” sources say.
Finding The Best Policy
With your practice in tip-top shape to make it an attractive candidate for malpractice coverage, it’s time to shop around for insurers.
Though deciding on a policy often has a lot to do with the size of a firm, Roman says she has the same advice for all lawyers:
“Start the process early and make sure you work with your agent or broker to present your application to a number of different carriers.”
She notes that different companies have different underwriting policies, and some may not look as harshly on certain practice areas as others do.
Admitting that he might be biased in his comments, Lawler stresses the importance of dealing with a company and/or broker that specialize in professional liability.
“A broker, to me, is absolutely necessary,” says Lawler. “For one, you get us for free. The company is the one that pays us, not you.”
Additional benefits of a broker include having someone to assist you with preparing your application, and having someone who will remind you about sending in renewal applications to avoid costly lapses in coverage.
Attorneys should also research the insurance company they are considering as their carrier. Indexes such as the Standard & Poor’s and A.M. Best rank insurance companies and also include predictions about their financial stability.
According to Rachel Rivlin, chair of the BBA’s Insurance Committee, the bar endorsed Zurich American Insurance Co. as its new carrier when the rating of its former carrier, Chicago Insurance Co. of the Interstate Insurance Group, slipped.
Though the S&P currently rates both companies with an A+, just below the superior A++ rating, Chicago Insurance Co. was given a “negative” outlook, while Zurich was given a “stable” one.
Kazarosian, who recently searched around for carriers, says tops on her list was finding a policy with good “tail” coverage. “Tail” coverage comes into play if a lawyer is planning to retire, leave the practice of law, dissolve his practice, not renew an insurance policy, or when a company refuses to renew its policy, for example. If an attorney forgot to renew his policy or didn’t get renewed by the insurance company, the lawyer would have 30 to 60 days to buy a “tail” to cover prior acts. According to Lawler, a lapse in coverage without the purchase of a tail could mean that years of prior acts will not be covered simply for failing to file an application.
“Your ‘tail’ is your last resort to protect your prior acts,” he notes.
Lawler explains that tails are crucial because they can cover everything from the day they are purchased on back. Perhaps that’s why they’re so expensive, costing attorneys anywhere from one-and-a-half to two times their premium, with a requirement that they be paid in full. In searching for a carrier, attorneys should look into whether or not insurance companies offer tail coverage, and if they do, how it is offered: in increments of three, five or six years, or for a lifetime.
Kazarosian notes that attorneys need to do a cost-risk analysis in deciding whether they want to go with a cheaper tail, which might only cover them for two to three years, or splurge on an expensive tail, which guarantees lifetime coverage.
Kazarosian also suggests attorneys look at how different carriers raise premiums as a result of claims, and for how long premiums will stay at that higher rate. While some companies are more forgiving depending on the outcome of claims, others are stringent in raising rates for a certain number of years for claims against an attorney.
As for structuring deductibles in a policy, Kazarosian suggests evaluating your practice area and the likelihood of claims arising. If attorneys are in a high-risk area that is susceptible to claims of malpractice, they might want to opt for lower deductibles, which in turn result in higher premiums. But she admits that deductibles can be a double-edged sword because regardless of the amount of a deductible, if an attorney has claims against him, his premiums are going to increase.
Several sources also noted the importance of making sure you have the proper coverage limits in your policy. For example, banks require $1 million in insurance coverage for an attorney to do real estate closings, Welsh notes. And he adds that there is a correlation between the type of clients attorneys can get depending on the coverage they have — higher policy limits offer more protection and are often more attractive to prospective clients.
Roman adds that attorneys should consider whether they want the cost of defense to be included within the limit of their policy. For example, if you have a $1 million policy, does every dollar spent on defense reduce that limit? There are policies where defense costs are outside of that limit, which are more expensive. But these do have their advantages, Roman adds, especially in cases where the defense costs are substantial and could eat away at the dollars available for indemnification or settlement payments.
Welsh reminds attorneys to look into the insurance company’s cancellation and non-renewal clauses as well. A policy that can be cancelled within 10 days, for example, could leave an attorney without any coverage and searching for a new carrier if an insurance company decides it wants to abruptly leave the marketplace.
Unfortunately, attorneys warn, all the energy spent searching for that perfect policy can be for naught with the filing of just one claim that can send rates skyrocketing.
“I think in general an insured professional is in a no-win situation with insurance companies,” concludes Kazarosian. “Insurance is a necessary evil.”