Volume 20, Number 3
Insurance Options for the Solo
By Mitchell A. Orpett and Katja KunzkeMitchell A. Orpett is managing director of Tribler Orpett & Crone, P.C., in Chicago, Illinois. He is past chair of the Tort Trial and Insurance Practice Section of the ABA, will chair the Section Officers Conference in August 2003, and serves as a member of the Standing Committee on Lawyers’ Professional Liability. Katja Kunzke is vice president-claims for Wisconsin Lawyers Mutual Insurance Company in Madison. She is a member of the ABA Standing Committee on Lawyers’ Professional Liability and a past president of the Civil Trial Counsel of Wisconsin. One of the laments we hear often from our friends and colleagues in the practice of law is that they find it easier to apply their legal skills for others than they do for themselves. This is perhaps never so evident as when it comes to purchasing insurance. All of those faculties that enable us to maneuver successfully through tax codes, write artistic and legally pure contracts, and master the rules of evidence without disturbing a hair on our heads suddenly abandon us when it comes to deciding what we should do to protect ourselves with the right kind of insurance. Astonishingly, many of us are under-protected, or not protected at all. In addition to leaving us vulnerable to matters beyond our control (a concept difficult for some of us to grasp), lack of proper insurance places our careers and our financial security in unnecessary jeopardy.
This article offers a broad overview of the types of insurance that any lawyer, especially the solo and small firm practitioner, should consider purchasing for his or her own protection and planning. Much has been written about each of the types of insurance identified, and this article should be taken only as an introductory step. More detailed resources are available for those who would like to learn more and be better-educated insurance consumers. As we regularly tell our own clients, good professional counsel can be very helpful, and a good insurance provider will be able to review these and other available coverages and explain why certain insurance is or is not appropriate.Lawyers’ Professional Liability (LPL)
Although Oregon is the only state that currently requires its lawyers to purchase malpractice insurance, it is folly to practice without it. Malpractice claims are made regardless of whether the lawyer is truly negligent. All that needs to happen is that a client, or even a non-client, perceives that a lawyer has made a mistake and caused harm. Because we are often involved in what are, for our clients, emotionally charged matters, a lawyer is often a lightning rod for client discontent. It is also a mistake to believe that lawyers don’t make mistakes. The standard of care generally requires lawyers to avoid mistakes at all times. Between the twin specters of mistakes and discontent, practicing without professional liability insurance is akin to walking a tightrope without a safety net.
How much insurance should a lawyer buy? There are two ways of looking at this. If the goal is to protect the lawyer, sufficient insurance should be purchased to protect his or her assets, both business and professional. If the goal is to protect the client, sufficient insurance should be purchased to protect the value of the client’s matters. For example, a lawyer
or law firm handling real estate and estate/probate matters with total values rarely exceeding $100,000 can probably rely more comfortably on a policy with a per-claim limit of $100,000. If that same lawyer or firm serves multimillion-dollar businesses, policies with higher limits should be seriously considered.
One important caveat here is that many malpractice policies include the cost of defense within the per-claim limit. In these policies, every dollar spent on defending a claim will reduce the available coverage provided. The cost of defense can equal or even exceed the amount of the claim, so higher limits should be considered if purchasing a “defense within limits” policy.
Another factor to consider is the amount of the aggregate limit. This is the total amount of coverage afforded for a policy year regardless of how many claims are paid. If a lawyer has a policy with a $100,000 per-claim limit and a $300,000 aggregate, that policy would provide coverage for three full-value claims. On the other hand, a lawyer might buy a policy with a per-claim limit of $1 million and a $1 million aggregate. One “full-value” claim in the first month of the policy year would “use up” all of the coverage for the remainder of the policy year, in effect leaving the lawyer without professional liability protection. Generally, the aggregate amount of coverage should be a multiple of the per-claim coverage amount.
What kind of professional liability coverage should a lawyer buy? Policies do vary, and it is important that a lawyer purchasing insurance carefully read the policy to make sure it fits his or her practice. Some, but certainly not all, coverage issues to consider include:
l Who is covered? Current lawyers only or also lawyers formerly affiliated with the firm? Are staff members such as paralegals included in the definition of “named insured”?
l What is covered? Services as a trustee? Services as a real estate title agent? Services rendered in a specific area of practice, such as intellectual property? Equally important is what is not covered. Pay careful attention to the exclusions identified in the policy, as there will be no coverage for these claims. For example, does the policy exclude coverage for securities work or claims arising out of fee collections? Like a good suit of clothes, the policy purchased must be tailored for each lawyer’s or firm’s particular practice.
l When does coverage exist? Claims-made policies provide coverage for the time at which the claim or
demand for money or services is received and reported to the insurance company (provided that the lawyer did not know about the claim prior to the policy period). Some policies exclude coverage for claims asserted during the policy term but that involve professional services rendered before the inception date of the policy or some other specified date. This is known as the “retroactive date” and should be identified in a claims-made policy. In contrast, “occurrence” policies, now rarely used to insure professional liability, provide coverage based on the date of the professional services that form the basis for the claim.
l How do the conditions specified in the policy affect coverage? Every professional liability policy imposes certain duties on the insured, involving such issues as when claims or circumstances likely to give rise to a claim must be reported, how the insured must cooperate with the insurance company, who will have the power to retain defense counsel, and whether the insured has the right to approve any settlement with the claimant. Subtle differences in these conditions may make a particular professional liability policy more or less valuable or appropriate for a particular lawyer.
In addition to finding an insurance product that meets the lawyer’s or firm’s specific practice and precise coverage needs, lawyers should evaluate the insurance company’s price, financial strength and stability, and the services that company offers to its policyholders.
l Price is often an influential factor in buying malpractice insurance. Price, like coverage, can vary significantly. However, before purchasing a policy based solely on price comparisons, make sure the comparisons are valid. A policy that costs 30 percent less may offer considerably less coverage. For example, the cheaper policy may contain a retroactive date that provides coverage only for professional services rendered after the commencement of the policy. The more expensive policy, in contrast, may provide “full prior acts” coverage, typically providing coverage for professional services rendered at any prior date. Other factors that can
influence price include the limits of liability (amount of coverage provided by the policy), the amount of the deductible that must be paid by the lawyer in the event of a claim, the type of practice being covered, and the claims history of the lawyer(s) seeking coverage. Certain kinds of coverage can be added, usually by endorsement, which will also influence price. These include services provided as a real estate title agent, defense expenses incurred in a grievance proceeding, and coverage for claims made against a retired lawyer. Certain coverages may also be excluded by endorsement, again influencing price. One such example is when a new lawyer is added to the firm in the middle of a policy period. If that lawyer seeks coverage for professional services rendered prior to joining the firm (“full prior acts” coverage), an additional premium will likely be charged. On the other hand, if that lawyer seeks coverage only for work done on behalf of that firm, a “retroactive date” can be assigned by endorsement, and the lawyer can probably be added without additional premium.
l Financial strength is an important consideration in selecting a professional liability carrier. The policy is no good without a strong company behind it. A fairly simple way of checking for financial strength is to check the company’s “rating.” These ratings are published by experienced rating agencies, such as A.M. Best or Standard & Poor’s. These agencies look specifically at financial strength, considering factors such as breadth of business, quality of investments, extent of surplus, and reserving practices. They synthesize those factors and publish a rating for each company.
l Services offered to policyholders by a professional liability carrier might be important or valuable as well. Some companies offer law firm audits, continuing legal education, practice management assistance, and lawyers’ assistance programs. Some also offer web-enabled underwriting and claims reporting. Such services may offer significant advantages and should be considered in selecting a carrier.
The factors listed above for selecting an insurance company and the type of coverage are far from exhaustive. An excellent resource offering a great deal of additional and valuable information is “Selecting Legal Malpractice Insurance,” a publication of the ABA Standing Committee on Lawyers’ Professional Liability, which
is available in both booklet form and
on the ABA website (www.abanet.org/
Lawyers are used to being lawyers. Some of us never quite appreciate the other roles we play. One of the more important of these from the perspective of assessing potential liabilities is that of employer. When we employ associates, paralegals, clerks, secretaries, or messengers, we face on a daily basis a vast and dangerous array of potential liability as an employer. Given the myriad federal, state, and local laws and regulations governing employment, it is increasingly dangerous to practice law without an EPLI policy. The day-to-day administration of a law firm, even by a sole practitioner, is fraught with activities that increasingly give rise to claims. These include hiring and firing, disciplining employees, drug testing, and “normal” interaction with employees that is later alleged to constitute discrimination or harassment. A lawyer who terminates an elderly assistant owing to performance inadequacies and hires someone younger to fill that role may be sued for age discrimination. A lawyer who works closely with an assistant and buys drinks and dinner for that employee for a job well done may be the target of a sexual discrimination or harassment claim. An off-color joke told in an informal office setting may become the centerpiece of allegations that the law firm constitutes a “hostile work environment.”
Although it is especially tempting for a solo or small firm practitioner to avoid the expense of purchasing EPLI protection, the high cost of defending EPLI cases and the size of many verdicts against employers make this a dangerous decision indeed. As with lawyers’ professional liability policies, there are many types of coverages available under EPLI policies, and careful consideration should be given to the precise protection offered and the exclusions contained within each policy.Other Business Coverages
Whether you work out of an office or your home, you will want to make certain that your place of work is protected by insurance. Most homeowners’ policies have a “business pursuits” exclusion that would likely leave you unprotected if a business activity causes a loss within your home. Attorneys should purchase the following business coverages, regardless of the location of their office:
l Commercial General Liability. This coverage insures against most risks encountered by any business, including third-party bodily and personal injury and property damage claims. This policy typically will provide protection against losses for such occurrences as fire and claims for personal injury and property damage brought by visitors to the firm. The policy should provide coverage for claims for libel, slander, and false advertising. It typically will not provide coverage for the other types of claims discussed in this article.
l Business Income. This coverage insures against loss of business income as a result of property damage or natural disaster. Business income insurance should include loss of income caused by interruption in the services provided by utilities such as online service providers. This coverage will also, under specified circumstances, respond when a covered event renders the lawyer unable to practice in the insured premises. This was a significant issue for several downtown Chicago law firms a few years ago when the water from the Chicago River flooded a number of office buildings, rendering them unusable by their tenants.
l Electronic Data Processing (EDP). This coverage protects against loss caused by computer virus or off-premises power failure. A power failure is much more likely to occur than a fire. The more valuable the information stored in your computer, the more important this coverage becomes to your practice.
l Crime Coverage. This coverage protects a law firm against its exposure when an employee steals money, securities, or property from a client. The coverage should include claims caused by the dishonesty of both non-lawyer employees and lawyers, whether partners or employees of the firm. If the firm’s retirement account is an ERISA plan, this coverage may be required even if the plan is administered outside the law firm.
l Fiduciary Liability. This coverage protects the firm against claims arising out of a lawyer’s role as a trustee or other fiduciary.
l Commercial Auto. This coverage protects the firm against claims arising out of the use of a firm-owned, non-owned, or hired vehicle used in the course of firm business. This coverage “sits on top” of other applicable automobile insurance, which may protect only the driver or owner, not the firm.
l Workers’ Compensation. This coverage protects against claims for injuries arising out of and in the course of employment. If a firm has an employee—even one part-time employee—the law requires this coverage.
Usually, business coverages such as these can be purchased in a package, combining all of the insurance typically needed for the small or midsize law firm. As with lawyers’ professional liability policies, legal fees and other defense expenses may reduce the limits provided by these policies. Because these policies are designed to fit with each other (one policy’s exclusions being covered by another, for example), it is often both desirable and cheaper to place all of these coverages with one insurer.
Depending on the amount of coverage afforded by the insurance policies, lawyers should also consider purchasing “umbrella” coverage, which provides higher limits but which is not triggered and does not pay unless and until the underlying coverage (such as a business auto policy or a commercial general liability policy) has been exhausted or fully paid. An umbrella policy is usually relatively inexpensive and will provide the insured with a significantly higher level of protection over and above the underlying coverages.Personal Insurance
Other protection that can be afforded by insurance is more personal in nature. Personal insurance products can help protect a firm from the loss of its primary income source—the people doing the work. This is particularly important if the income source is only one or two lawyers. Personal insurance products to be considered include:
l Health Insurance. As anyone who has followed the national debate of the last decade or so can attest, health insurance is increasingly complex and controversial. Moreover, its costs have been rising and show no signs of abating. This protection, althoughseen by many as essential in this age of astronomical health costs, is also expensive and very detail-specific. The nature of coverage, whether in the form of a preferred provider organization (PPO), a health maintenance organization (HMO), or otherwise, may also differ a great deal depending on the access to health care and one’s degree of choice. The benefits provided by these various plans and coverages are complex and vary significantly. Those who are sole practitioners should explore the potential benefits of group insurance through various professional or other organizations.
l Disability. This insurance is available for both short-term (30 days or less) and long-term disabilities. Long-term disability is more significant for protecting the income of a law firm or individual lawyer, as firms should have liquid assets to cover routine operating expenses for at least one month. The limits offered and the period of time that one must be disabled before the coverage begins under a long-term disability policy are both important characteristics and should be carefully reviewed and understood.
l Long-Term Care. This coverage provides benefits for the costs of nursing home care. Coverage should also include the costs of any necessary home health care as well.
l Life Insurance. In addition to protecting the insured’s family and assisting in financial planning for such events as retirement, life insurance can also be used within the law firm. Many firms use life insurance to provide retirement benefits for partners or as an additional perk for employees. Others purchase “key man” insurance, which pays a benefit to the firm in the event of the death of a key individual. This may be very helpful to a new firm that is highly dependent on one or more individuals for its business and existence. This insurance is typically not very expensive and can afford the firm a means of continuing even if a key individual dies.
In addition to protecting the insured against accidents and other assorted liabilities, insurance can play an important role in a lawyer’s financial planning. Someone interested in this aspect of insurance will also want to seek advice from a professional whose particular expertise and experience lie in assisting others with their financial plans. It is not uncommon for such a person to be someone other than the insurance provider who sells the types of business coverages discussed above. A coordinated and well-thought-out insurance plan is crucial in order to be fully protected without overspending and to meet your established goals.Going Bare and Other Insurance Issues
Some people, either out of avoidance or choice, never purchase insurance and “go bare.” We cannot recommend this approach to life, either personally or professionally. There are certainly those who have managed quite well without insurance, just as there are those who have the great luck of never being hurt or seriously ill or being involved in an accident. The great difficulty, of course, is that we never know what lies ahead, and it is for this reason that insurance is so important—it protects us from the risks of the unknown. While “purchasing insurance” may not be a good bet in blackjack, life is not a game of “21.” There are many benefits to a sound insurance portfolio that should considerably outweigh the expense.
Insurance coverage should be reviewed on a regular basis. Your assets will grow. New and previously unknown liabilities that threaten those assets will emerge. Insurance policies will be modified and changed. No one can be certain that what was purchased ten years ago—either for protection or financial planning—is adequate today. Thoroughly review your insurance every few years to make certain that it is working for you in the way that you want and at an efficient cost.
As this issue of GPSolo makes clear, risk is all around us. Insurance policies are still the best method for reducing the impact of risk on a lawyer’s professional and personal life. Although no one likes to read insurance policies, it is well worth some time and effort to obtain a basic familiarity with the different types of coverage available. The career you save may be your own.