January 31, 2014

Attorney Malpractice Insurance: Who’s Got Your Back?

Todd C. Scott

Obtaining professional liability insurance is typically high on the to-do list for new attorneys starting a firm. Lawyers, especially new ones, have a healthy fear that one day they will be the subject of a malpractice claim. By obtaining insurance coverage, they can rest easier at night knowing that a missed deadline might not result in an expensive, out-of-pocket payout during an otherwise unblemished legal career.

But often there is a lack of understanding by attorneys of how professional liability insurance works. Lawyers generally know they will need some indemnity come the day that something slips through the cracks and one of their clients suffers a loss as a result of a mistake. But usually it isn’t until the error is reported that these lawyers start to wonder about the limitations on their insurance, or depending on the timing of the mistake, whether there will be any insurance coverage at all.

Lawyers are not being overly cautious to assume they may encounter a malpractice claim (or two) over the course of their legal career. Industry statistics show that lawyers starting their legal career in private practice today are likely to have one to three claim matters during their professional career, and even more if their legal work involves a high-risk practice area such as plaintiff’s personal injury or real property matters.

But having a malpractice claim does not always mean the lawyer did something wrong. According to a study of malpractice claims published in 2012 by the ABA Standing Committee on Lawyers’ Professional Liability, about 67 percent of the claims asserted against lawyers during a four-year period were abandoned without any payment to the claimant. That same study showed about 13 percent of the claims asserted against lawyers developed into lawsuits against the attorneys that were eventually dismissed, with a judgment in favor of the lawyer/defendant. The remaining 19 percent of claims, however, resulted in some sort of payment to the claimant, whether or not a suit had been commenced. And in very rare instances—about 1 percent of all cases—payment was made to the claimant after a judgment was found for the plaintiff/client.

Despite the large number of unwarranted malpractice claims against attorneys that are eventually dismissed or abandoned, just being labeled by your client as negligent can be extremely time consuming, as you and your insurer proceed to formulate the response to a meritless claim. The cost of your time can start to evolve into out-of-pocket expenses if an insurance deductible payment is involved and your insurer starts incurring legal expenses while proceeding with the goal of getting your claim dismissed.

Feelings of stress and anxiety that even a meritless claim can produce should never be discounted. The fear and worry experienced by lawyers who find themselves defending a malpractice claim can be extremely significant—sometimes debilitating—eventually affecting other legal matters being handled by the lawyer that have nothing to do with the subject matter of the claim. Such fear and worry add additional strain to the relationships lawyers have with clients and staff.

For all these reasons, many lawyers could benefit from having a better understanding of what they are getting when they pay their professional liability premiums. By not having a full understanding of what professional liability insurance covers and what actions could put this coverage in jeopardy, lawyers are at risk of significant liability exposure and possibly experiencing a very expensive, worst-case malpractice event.

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