Defining Matters: What is a Claim?
Because insured lawyers are generally required to report malpractice claims to their carrier as soon as they become aware of them in order to bind coverage, it is important to know what constitutes a claim according to the definition that can be found in the policy. Not understanding how the insurer defines a claim can create a significant problem if a matter that should have been reported to the carrier was not reported in a timely way.
Professional liability insurance policies may define a claim more broadly than a simple lawsuit naming the policyholder as a defendant. For example, a claim may be defined as “a demand or communication to the insured for damages or professional services,” or “an act, error, or omission by any insured which has not resulted in a demand for damages but which an insured knows, or reasonably should know, would support such a demand.”
By having a broader definition of what constitutes a claim, the carrier will have a better chance of knowing about the troubling matter when there still may be options to get the matter back on track—avoiding additional and perhaps unnecessary claim expense. Insurance carriers call this concept “claim repair,” which is hiring an expert attorney early in the process to assist the policyholder in correcting the situation before significant damages are incurred and a malpractice lawsuit can no longer be avoided.
Claims-Made vs. Occurrence Policies
One of the most significant differences between a professional liability policy and a general liability policy is that professional liability policies are almost always written on a claims-made basis as opposed to an occurrence basis, and it is the policy that is in force at the time when the claim is presented that pays the loss. For example, an error made by a policyholder in 2010 but discovered by the policyholder in 2014 should be reported to the carrier providing coverage for the policyholder in 2014 at the time the claim was discovered.
Professional liability insurance policies are typically written on a claims-made basis in order to acknowledge the unique way in which errors by legal professionals are often discovered long after the error was made. An attorney’s error may present itself in several different ways, including being notified of the error by a lawyer who has been newly appointed by the client, or after receiving notification of the error directly from the client.
In order to establish coverage on a claims-made policy, important conditions must be met by the policyholder. First, a policy must be in place at the time the claim is made. Additionally, the policyholder’s “retroactive date” or “prior acts date” must be dated at least as far back as when the services giving rise to the claim were provided. Finally, notice to the insurer of the claim must be given in a timely way, according to the claim-reporting requirements defined in the professional liability policy.
The insured attorney’s “prior acts” or “retroactive” date is established at the time the policy is created and always is clearly defined in the declarations page of the professional liability policy. For an attorney who sought insurance coverage at the time he or she first became licensed to practice law and has had successive, continuous years of uninterrupted professional liability coverage, the prior acts date will typically go back to the first day of the lawyer’s first insurance policy.
Claim Reporting and Policy Renewal
It’s important that policyholders report claim matters to their insurance carriers in a timely way. Reporting claims quickly ensures that the carrier will have ample opportunity to respond to the matter with all the resources at its disposal, and the policyholder will lock in the insurance coverage. Because late reporting of claims can sometimes severely limit the claim handler’s options when trying to resolve the matter, policyholders are strongly encouraged to report anything that might be a claim as early as possible.
Lawyers sometimes worry that reporting a claim will automatically trigger an increase in annual policy premiums. However, professional liability insurers generally do not debit a policy premium simply because the policyholder reports a claim. To do so would discourage the early reporting of claim matters. Reporting multiple claims of a similar type over a period of time, however, indicates that there may be a systemic problem in the way the firm organizes its client matters, thus triggering an increase in the policy premium at the time of renewal.
Policyholders will be asked at the time they are renewing their professional liability insurance whether they are aware of facts or circumstances that might lead to a malpractice claim. This question helps identify the correct claims-made policy for providing insurance coverage. Once a particular policy ends, there is no coverage under that policy for claims that were unknown to the insured or known but not reported in that policy year.
Lawyers who are aware of a claim matter but choose not to report it to the carrier risk losing coverage if they report it later under a subsequent insurance policy. This sometimes happens when the lawyer ignores the frequent pleas from an angry or frustrated client, assuming the matter will “go away,” only to realize later that the matter has spiraled out of control and the policyholder desperately needs some after-the-fact help from the insurance carrier.
One of the more perilous things a lawyer can do is to allow a gap in time between insurance policies. Policyholders who continuously purchase new, yearly policies will typically find that their prior acts date goes unchanged—allowing these attorneys to “build up coverage” over time. Policyholders who skip a year or two and do not have continuous insurance coverage, on the other hand, do not “build up coverage”; when they finally seek to purchase coverage again, they likely will find that their prior acts date is reset to the first date of the new insurance policy. Insurers do this to discourage buyers from waiting until they believe they might have claim exposure before purchasing a policy.
Lawyers, especially new ones, often have a misunderstanding about the cost of professional liability insurance. You would think the more inexperienced lawyers have the most risk, and therefore they should be subject to higher premiums; this is not the case.
Risk exposure to malpractice claims increases dramatically for lawyers during the period from five to ten years after they begin practicing law. To put this in perspective, lawyers in private practice for five years or less generally report around 3.5 percent of malpractice claims, whereas the attorneys practicing law 11 to 20 years report about 37 percent of the claims. Why is this happening? Simply put, the new lawyers don’t have a “tail”—meaning they simply haven’t been in practice long enough for some of the mistakes they made to be discovered and reported. Additionally, the more experienced group of lawyers who have been in practice a decade or more tend to handle more matters, the matters they handle tend to be more complicated, and they are likely responsible for overseeing matters that are handled by other lawyers in their firm.
For these reasons, insurers have priced their professional liability policies to be commensurate with the level of risk by the applicant. A new lawyer policy is affordable and may sell for as little as $500 annually. As these lawyers’ risk level goes up during their first five to seven years in practice, their premiums also will rise—this is called step pricing. Eventually, the annual price levels off, and a typical insurance policy for an experienced attorney can average between $1,500 and $3,000 annually, depending on the level of risk the policyholder may be exposed to and whether the attorney has had significant claims.
Also, lawyers who devote a significant amount of their practice to areas that experience a frequent number of claims, such as plaintiffs’ personal injury or real estate, are more likely to pay higher annual premiums. Higher premiums can also be expected for lawyers in practice areas where the severity of their legal matters can cause them to be quite expensive to resolve—such as patent/trademark, entertainment, and securities law.
Avoid Two Rookie Mistakes
Want to significantly reduce your risk for a malpractice claim? Two common errors made by new lawyers involve client interaction. These matters are particularly troublesome because the lawyer may not have made any mistakes, but somehow these clients believe the lawyer let them down by not keeping them fully informed or because the outcome of the matter seemed completely unexpected to them. You can avoid common malpractice claims by using effective client selection and by communicating well with clients throughout the entire legal process.
Choose clients wisely. Often the impulse of a new lawyer is to accept legal work from the first client who walks in the door. Good client service usually involves trying to assist customers and focus on their needs as soon as possible, but don’t forget that sometimes the best thing you can do for customers is to tell them you are not the right lawyer for the job. Take some time during the initial intake process to get to know your potential clients and find out what their expectations are for your legal services and what they think will be a successful resolution of their matter. Your gut may tell you that finding a successful solution for the client is an unwinnable battle; in these cases, you’re both better off if the client seeks legal counsel elsewhere. Good client selection is one way of avoiding a communication breakdown with a client before it even happens.
Keep in touch. It seems like such a simple idea, but communicating regularly with your client can help avoid significant malpractice claims. In 2012 the ABA Standing Committee on Lawyers’ Professional Liability reported that more than 13 percent of claims resulted from a breakdown in communication between lawyers and their clients. Communication breakdowns are especially troubling malpractice matters because they often have nothing to do with how well the lawyer knows the law. Most commonly they are the result of a misunderstanding between the lawyer and the client, resulting in the client developing a different expectation of what will be a successful outcome of the case. The best way to avoid a troublesome misunderstanding is simply to communicate regularly and often with clients. Good firms often require their lawyers to communicate with their clients at least every 30 days—even if nothing is happening with the client’s matter. Good client communications can happen in many different ways, including regularly scheduled phone calls, update letters from the lawyer to the client, and even highly descriptive invoices. Also, it is important to document client communications in the client file. Clients sometimes “misremember” key facts or advice provided to them during the course of the representation; a copy of the advice should always be placed in the client file.
Just in Time May Be Too Late
New lawyers who are establishing a firm and do not yet have any clients may sometimes choose to wait for their doors to open before binding coverage on their first policy. However, any opportunity to provide legal advice is also an opportunity for individuals to rely on defective information to their detriment. Therefore, it is vital that new lawyers seek coverage for professional liability as soon as possible after they first receive their license to practice law.