Frequently Asked Questions
for Lawyers
1) What is a lawyers Professional Liability policy?
The professional liability policy is designed to protect
an insured member of the policy holder from catastrophic
financial loss. In the event the professional is sued
for malpractice and becomes legally obligated to pay
damages, the professional liability carrier will:
- defend the insured in the suit; and
- pay damages the insured becomes liable to pay, up to the limits of liability, less the deductible, and subject to the policy terms, conditions and exclusions.
Malpractice occurs when the professional either does something incorrectly or fails to do something that the standards of the profession would dictate they should have done.
2) I have a small, local practice and I know most of my clients well. Do I still need this type of policy?
The answer is an unqualified, "Yes!" Although professionals may spend years practicing law and may feel that in their type of practice they will never be sued, mistakes can and do occur with alarming frequency. Even the most careful professional can make a mistake in judgement in the day to day practice of law. Any lawyer can be sued when a statute of limitations is missed or due to seemingly simple errors in a title search or estate planning document,
whether the lawyer or one of the lawyer's employees is responsible for the error.
Furthermore, you do not actually have to commit malpractice to be sued. In today's litigious environment, even a perceived error could trigger a suit from an unsatisfied client. You depend on your reputation for your livelihood. You should consider a Lawyers Professional Liability policy to help you to protect something it has taken you a lifetime to build.
3) What does "claims made and reported" mean?
"Claims made and reported" is a type of insurance policy in which three (3) separate dates are important:
- the date the act or omission occurs;
- the date the attorney becomes aware that the act or omission has occurred; and
- the date the attorney reports the claim to the insurance company.
A policy written on a "claims made and reported" basis
is designed to cover claims made during the policy period,
even if the mistake giving rise to the claim occurred
prior to the policy period (subject to any prior acts
exclusion or retroactive date). A claim is deemed to
have been made if the attorney is actually served with
suit papers, or if the attorney becomes aware of a situation
that could reasonably result in a claim. A "claims
made and reported" policy requires the attorney
to report the claim or potential claim to the insurance
carrier within the same policy period as the claim is
made.
4) What are "prior acts exclusion” or “retroactive” dates?
Although a claim may be made against an attorney at any time, the act or omission giving rise to the claim most likely occurred sometime in the past. The act or omission giving rise to the claim covered by the policy must have occurred on or after the "prior acts exclusion date." This date is usually shown on the declarations page or on an attached endorsement, and is sometimes referred to as the "retroactive date." There are various reasons that an insurance company would attach a "prior acts exclusion date" to a policy. Some of the most common are:
- the insured does not currently have insurance coverage;
- the insured has purchased an extended reporting period (ERP or "tail") coverage from another carrier;
- the insured has left a firm to start their own practice; or
- the insured is joining a currently insured firm and either has no prior insurance, or is relying on coverage under a former firm's policy.
5) What is "step rating" and how does the "retroactive" date
tie into it?
Because the retroactive date controls the amount of time that the insurance carrier is covering the actions of an insured, the premium that the company charges must increase each year to cover the increase in time-exposure. If the insured has a prior acts date that is equal to the effective date of the policy (for example, January 1, 2006), the insurance company is only covering those errors committed by the attorney since that date. Because there is less exposure during the first year of coverage, the insurance company does not need to charge a high premium to cover its risk. The next year (January 1, 2007), the company will be covering more time (now, year 1 + year 2) and therefore, needs to charge a higher premium. These "steps" in premium continue to go up annually, finally capping at the "maximum step," which is anywhere from six to eight years from the retroactive date. This is sometimes referred to as the "mature" premium.
6. What is an "Extended Reporting Period" endorsement, or "Tail" coverage?
Because of the nature of "claims made and reported" coverage, once the policy has expired or been cancelled, coverage ceases to exist for any claim that may arise after the expiration or cancellation of the policy. To address this issue, most insurance carriers offer, for an additional premium, endorsements (called extended reporting period or "tail" endorsements) that extend the time for a firm to report claims to the insurance carrier. "Tail" endorsements are often purchased when a firm is dissolving or an attorney is retiring. This endorsement provides peace of mind to the insureds that a claim which arises from an act or omission made by the insured prior to the end of the policy period may still be reported to the company after the end of the policy period.
7. What is the difference
between a "per claim" and an "aggregate" limit
of liability?
A "per claim" limit of liability is the maximum that the insurance company will pay on behalf of an insured for any one claim. An "aggregate" limit of liability is the maximum the carrier will pay on behalf of an insured for an entire policy period, regardless of the number of claims. Both of these limit amounts are usually listed on the declarations page.
8. What is "defense inside the limits" versus "defense
outside the limits?"
Most insurance companies break down claims payments into two categories:
- the cost to defend the claim; and
- the actual damages paid to the claimant.
"Defense inside the limits" means that the cost of defending the claim and the actual damages paid are all part of the "per claim" limit of liability.
"Defense outside the limits" means that the costs of defending the claim are in addition to the each claim limit of liability. Often, an insurance company that offers this option will cap the total amount it will pay in defense costs to an identical limit of liability. Because of the additional amount of insurance available, the "defense outside the limit" option is usually more expensive than the "defense inside the limit" option.
9. What is a deductible and what are the various types of deductibles available?
The deductible is the amount of money that the insured is required to pay out of pocket when a claim arises. A "per claim" deductible is one in which the amount shown applies to each and every claim. An "aggregate" deductible is one in which the amount shown applies only once during the policy period, regardless of the number of claims. Because of the additional amount of insurance available, the “aggregate” deductible option is usually more expensive than the “per claim” deducible option.
10. What is "lateral hire" coverage?
Many professional liability insurance policies only cover services performed "on behalf of the named insured." This means that those services performed for the current firm would be covered, while those services performed prior to joining the current firm would not be covered. Other policies cover all services performed. Policies that provide coverage to insureds for their professional services rendered at prior firms are said to give "lateral hire" coverage.
It is important to read the policy form to determine whether services performed at prior firms will be covered. This type of coverage information is usually found either in the definition of the "insured" or in the "insuring agreement" portion of the policy.
11. Is the application important to the issuance of the policy?
It is extremely important! This is the document that the company relies on to determine coverage options and the extent of limits, deductibles, prior acts coverage and etc. If it is discovered that an applicant firm or individual has misrepresented information on the application, then the policy could become null and void and no coverage would be afforded in the event of a claim. Please contact us for assistance in the completion of your application documents if you have any questions.
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