By Deanna Brady, Claims Counsel, The Bar Plan
When making the decision on the amount of policy limits for legal malpractice insurance, there are many factors to consider, including the:
- potential exposure based upon the types of cases
- cost of defense of a legal malpractice claim
- jurisdiction in which a claim could be brought
- nature and extent of both business and personal assets as they could potentially be subject to collection under a judgment if the attorney is underinsured.
“High Risk” Areas of Practice
When considering lawyers’ professional liability insurance, certain areas of practice, such as trusts and estates, plaintiff’s personal injury, securities and intellectual property, may carry a higher risk in terms of the likelihood of a legal malpractice claim or the cost to defend or resolve the claim. Many attorneys believe the risk of a claim against them is minimal. However, mistakes happen. Lawyers cannot control every situation. Some may find themselves in a situation where they are liable for not only their own mistakes, but also mistakes by a partner, associate, paralegal or legal assistant within their firm (see more about meritless claims below).
In addition to evaluating potential exposure based upon the types of current cases handled, also consider past cases – this is especially true for those that practice in trusts and estates. It may be that the situation has changed and the attorney no longer represents large estates; and therefore believes lower limits of liability are now appropriate. However, trusts and estates pose more risks for legal malpractice claims as non-client beneficiaries may have standing to sue. Additionally, the statute of limitations may not begin to run until the death of the client and the alleged negligence is discovered. As most lawyers’ professional liability policies are claims-made and reported policies, attorneys could be exposed to potential liability from estate planning conducted many years, or even decades, in the past. If the estate was a large estate, the attorney may not be adequately insured to make the client or the third-party beneficiary whole, or to defend the merits of the claim based upon current limits of liability.
The Cost to Defend – Even in Other Jurisdictions
When choosing policy limits, an attorney should not only be concerned about the potential damages that may stem from a potential lawsuit, but also the cost to defend the lawsuit. Most legal malpractice insurance policies, unless a separate defense expense limit is purchased, are eroding policies. These policies are also referred to as wasting or “pac-man” policies because the limits of liability are reduced by the cost for defense as well as any expenses incurred. The defense expenses are paid first, which reduces the amount available to pay any potential damages. If the policy limits are exhausted by the defense costs, the insurance carrier may have no further duty to defend an insured attorney, and there will be no limits remaining to pay on any judgment entered or settlement later reached in the claim. When this occurs, the insured attorney’s business and personal assets could potentially be subject to collection under a judgment. If limits of liability are very low, it is possible that the costs of defense would exceed the policy limits; thus, making it very difficult for the attorney to defend his actions.
An attorney must also be aware that it is possible for a lawsuit to be filed in another, more costly jurisdiction, than the jurisdiction in which the attorney practices. Unfortunately, The Bar Plan sees claims arise when attorneys refer clients, friends or family members to another attorney in a jurisdiction in which the insured attorney is not licensed to practice law. The insured attorney may continue to help out on the case behind the scenes and rely upon the local counsel to properly know the local procedures and to timely file the necessary pleadings. However, if the local counsel makes a mistake or misses a deadline, the insured attorney may also be exposed to a potential legal malpractice claim in the foreign jurisdiction.
The Bar Plan has also seen claims in which an attorney attempted settlement of a claim that arose in another jurisdiction. The attorney determined the claim could not be settled and referred the client to an attorney in the foreign jurisdiction. It was then that the attorney realized the statute of limitations in the foreign jurisdiction was shorter, and that he missed the deadline to file suit.
While the insured attorney’s policy limits may be adequate to properly defend a claim and/or make an indemnity payment in the attorney’s practicing jurisdiction, the same may not be said for the foreign jurisdiction. It is not uncommon for The Bar Plan to see an insured attorney get sued in a jurisdiction such as Los Angeles or New York, where the costs for defense and/or verdicts in favor of a plaintiff are much higher than where the insured attorney normally practices.
If an office sharing arrangement is in place with other attorneys, take into account any potential exposure faced by this arrangement. If attorneys who share an office look like a firm to potential clients, it is possible for the negligence of one of the attorneys to be imputed to others who share the office. While steps should be taken to avoid any confusion, be aware of the potential damages that may stem from the liability of the other attorneys in the office. While one attorney may practice in an area of law that poses low risk for legal malpractice claims, the same may not be said for other attorneys who share the office. If a claim is made against one for the negligence of another in an office-sharing group, attorneys may find they do not have adequate coverage to defend the claim or to make an indemnity payment.
Claims Without Merit
Oftentimes, The Bar Plan handles cases where an attorney did not make a mistake and/or the underlying claim is without merit. However, if the attorney has low limits that do not adequately cover the costs of defense through trial, the attorney may be faced with consenting to settle the legal malpractice claim in order to protect himself from a potential verdict or defense costs outside the limits of liability. We often see the difficulties the attorney has in making the decision to consent to settle with an undeserving claimant in order to avoid personal exposure. If the attorney had adequate policy limits, we may have been able to vigorously defend the claim and try to obtain vindication for the attorney.
Even if a mistake is not made that may not stop a client who has “buyer’s remorse” after a settlement, or who has an unreasonable expectation about the outcome of a case, from making a claim. It has also become increasingly more common for an adverse party who was successful in the defense of a claim against them to make a claim for malicious prosecution against the losing party and their attorney. If a legal malpractice claim is made, attorneys need to ensure not only that there is enough in policy limits to adequately compensate the client when warranted, but also to have the opportunity to defend when a claim is without merit. Without adequate policy limits, the opportunity to make the client whole, or to defend the merits of the case, may become compromised.
A common misconception about legal malpractice claims is that having more insurance coverage would invite larger claims. However, if the limits of liability are low, an opposing attorney may use that to his advantage and make an inflated opening demand in order to leverage his client for maximum recovery. While it is difficult to plan for this type of tactic, if sufficient limits of liability are in place it is easier to defend the claim on its merits.
The Bar Plan has seen situations where attorneys miss the statute of limitations in filing personal injury cases on behalf of clients. As an example, the client (now claimant) may only have $20,000 in medical expenses from the underlying injury, but the new attorney may make an initial demand of $250,000 due to the clear liability in missing the deadline. When the claimant’s attorney discovers there may only be $100,000 in policy limits, he might make a policy limits demand and used the low limits to his advantage. Claimant’s attorney may not discuss the damages or negotiate in good faith and remain firm on the $100,000 demand. In this type of situation, it may be difficult to defend the claim, as the estimated cost of defense through trial may exceed the $100,000 policy limits.
While the attorney and the insurance carrier want to compensate the claimant for the malpractice, given the low limits, the attorney may not have the opportunity to dispute the damages or the merits of the underlying case. The attorney may find herself in a situation where a decision is made to pay the policy limits to the claimant rather than argue over damages and reduce the available limits for a potential judgment or settlement. Having adequate policy limits ensures that the insured attorney can properly defend or settle a claim on its merits and not based on the amount of policy limits available.
When contemplating your limits of liability, be sure to take into account all potential exposure based upon your clients and the costs of defense for a legal malpractice claim. Being adequately insured affords attorneys the opportunity to make clients whole should a mistake occur, and to defend yourself and your actions, especially when liability is questionable. If you have questions about your policy or your coverage limits, please contact our Agents at 1-800-843-2277 or firstname.lastname@example.org.