What Is A Legal Malpractice Tail Policy?
Legal malpractice tail coverage is a type of insurance that covers legal professionals in the event that they face a lawsuit after their policy has expired. Essentially, if a lawyer or law firm is sued for legal malpractice, and the claim occurred after their insurance policy has expired, tail coverage can help protect them financially.
It’s important to note that "legal malpractice tail" damages can only be awarded if a claim occurred after the expiration date of the policy, and not before. The definition of a "malpractice claim" varies by jurisdiction. In most cases , it is based on whether there was an attorney-client relationship in place at the time that the negligent service was performed. In California, for example, the "act of malpractice" occurs when the attorney-client relationship is formed; in this case, having a couple of months of an expired policy after relationship with the client will not offer coverage under the legal malpractice tail definition.
This is why it’s so important for most attorneys and firms to have legal malpractice tail coverage: it keeps them protected, even after their original insurance policy has expired. Depending on the statute of limitations, this could mean several years after their legal insurance policy lapses.
What Affects Cost of Tail Coverage
Typically the higher a lawyer’s billing rate, the more it’s going to cost to purchase tail coverage. Those in high demand are likely to be charged more, and if malpractice coverage is mandatory in that state, those charges can be higher than a lot of professionals will want to pay.
A few things play into how much a firm will pay for tail coverage. The lawyer’s specialty is first and foremost; firms that specialize in certain areas of law, such as medical malpractice, will likely pay a higher base price for tail coverage than firms that practice in general fields of law. Lawyers with a higher claim history will pay more due to the increased risk the insurer is taking on, as well as for lawyers who have experienced larger claims payouts in the past.
For high-flying lawyers who experience a claim only occasionally, they may get a better deal on tail coverage, as insurers won’t see them as high risk. Newly admitted lawyers who have no prior claims history and have relatively low billing rates will likely find that their premium of tail insurance coverage is affordable.
Finally, the duration of the coverage also has an impact on how much tail coverage for malpractice will cost. A firm with a practice area that requires them to maintain 10 years of prior acts coverage will pay more for coverage than a firm whose practice areas require them to maintain the solutions for lesser periods.
Tail Coverage Cost By Provider
When comparing your legal malpractice tail costs with those of other providers, there are a number of costs and terms that you will want to keep an eye out for. This will not only allow you to save money on your premiums, but also gives you the peace of mind of knowing that you are getting a fair deal and good service. Here are some things to look out for when you contact various insurance companies for a quote on legal malpractice coverage:
- Key Terms: When considering your policy, you will want to know the difference between an occurrence policy, a claims-made policy as well as what exceptions apply, if any.
- Exclusions: Exclusions are exceptions to coverage that you will want to know about when purchasing or comparing policies. A competing firm may have a policy with a higher dollar amount for indemnification. Usually this means that the rest of the policy basics and qualifications are comparable to your existing policy. However, this should not always be the case. You should check to see if your competing law firm has abundant past claims on file, which may suggest that they require a higher policy limit to pay for future claims.
- Deductibles: A deductible is the portion of the total claim that the insured (i.e., your law firm) will need to pay out of pocket. For example, if a claim fails to meet the deductible requirement, then no indemnification will occur. Common deductible costs are $10,000, $20,000 or $40,000. If your fortunate, you may even find a policy that charges no deductible at all.
- Legal Malpractice Tail Limitations: When attempting to get a quote from an insurance company, you may find that your current provider may not offer exceed a certain time period to provide ample coverage. Many firms place a formal request for a higher time limit (sometimes known as an Extended Reporting Period or ERP) at the time of renewal. They will then argue that their request for an increased period is in anticipation of a large potential claim that may stretch beyond the typical statute of limitations. Your policy should allow you to make this request.
- Contacting Providers: Be sure to provide your claims history and any other relevant documentation to the provider you may be interested in. This will give them an ample idea of whether or not they will want to offer you coverage and at what rate.
How To Budget For Tail Coverage As A Lawyer?
Budgeting for tail coverage costs is an important part of forming any legal malpractice defense plan. There are several legal malpractice insurance agents in New York, and they are able to give you an estimate of what the costs will be. Of course, this information is subject to change. As budget planning for the next year is underway, keep in mind that changes may take place in the market economy that affects the tail coverage you have to save up for.
When you receive your estimate for the tail coverage cost, you will see a number that indicates how much more you will pay for last year’s policy, versus what you paid before the claims were filed. You could experience a few different scenarios:
The premium savings you realize when renewing your professional liability policy may be used to pay for your tail coverage. The best way to save up for the increased cost of continuing coverage for past acts is to plan for it a little at a time . Budgeting for it over the entire year is an attainable goal that will allow you to set aside the money you need, without facing a major financial hardship down the road. Other scenarios include people receiving a lump sum tax return that they can then put toward their insurance coverage and some simply save the money they had been paying in premiums towards the tail coverage in a separate savings account.
If you haven’t faced claims before, this may be the first time you have to buy tail coverage insurance. Generally speaking, this money is not tax deductible, although it is a business expense. Most professional liability policies are deductible business expenses because they are required to run a professional service. However, you should check in with a tax professional to find out if you can expect to face any losses at tax time due to your required tail coverage. If you do find out that you will have to face the financial hit of additional taxes, your accounting team can help you find ways to minimize the damage.
What Is The Risk Of Not Having Tail Coverage?
The decision to forgo the purchase of tail coverage can be fraught with potential risks. If an attorney misjudges their potential exposure and opts to go without this critical extension of coverage, they may find themselves in a precarious financial position a few years down the road. Consider the case of an attorney who successfully defends a client in a lawsuit filed in their final insured year. The case results in a verdict for the client and the plaintiff appeals. However, the plaintiff fails to perfect their appeal in time, and ultimately loses. Even though the attorney won the case, the ten year statute of limitations can easily expire within the policy period. This means that the attorney is not covered for a later, successful appeal by the opposing party. The risk is further compounded if the attorney is higher risk for theft or destruction of documents. If the lawyer does not purchase tail coverage and becomes no longer insured then another attorney has to defend the malpractice action or effective representation is suffered by the client; Hence, the court will grant judgement for the plaintiff on failure to answer.
Frequently Asked Questions: Tail Coverage Costs
How much will I spend for legal malpractice tail coverage?
There are many variables that are unique to the firm and you as an attorney. You should expect to spend 250% to 200% of your current policy limit to secure a 6 year tail. A majority of tail coverage policies are written on some type of installment plan, so these figures may be slightly inflated but would provide you with a ballpark figure of what your tail will cost.
How long will my tail coverage last?
You should expect to see a variety of lengths depending on the carriers . A 3 year term is more common than the often discussed 6 year term. Unless mandated by statute or the carrier, it has been a growing trend to purchase the shorter term plans. This is advantageous to the carrier as it lowers their exposure.
When should I buy my legal malpractice tail coverage?
The majority of insurers will require you to be with them for a minimum of 30 days before the end date of your current policy to purchase a tail. The sooner you purchase the better as this will decrease your probability of being investigated for a claim.