What is Legal Malpractice Insurance?
Legal Malpractice Insurance is essentially an insurance policy that holds attorneys accountable for their work by providing a means to compensate clients who suffer financial harm as a result of the attorney’s negligence. Legal malpractice insurance covers the costs of defending claims of negligence filed against attorneys, and indemnifies attorneys or pay compensatory damages awarded by a court or an arbitrator.
Common claims made under legal malpractice insurance include a wide range of negligent acts, errors, or omissions committed by the insured parties in their professional capacity in the course of providing professional services in the practice of law. Areas of law commonly covered include criminal law , personal injury, employment law, intellectual property, corporate transactions, mergers and acquisitions, and tax law.
In addition, many policies will also cover the ancillary costs of prosecuting a collateral claim (a claim on a different theory against the same defendant) and will even cover costs associated with appealing the disposition of a collateral matter. Some policies also cover other professionals who are involved along the way. This could include expert witnesses, paralegals, investigators, co-counsel and so on.
The Factors That Influence the Cost of Legal Malpractice Insurance
Numerous factors can play a role in determining the cost of malpractice insurance. One of the more significant is the area of practice. For example, coverage for firms that largely represent plaintiffs may be greater than the coverage secured for a predominantly defense firm. Yet firms that represent plaintiffs rarely have claim activity, as opposed to those that represent defendants, who can have claim and lawsuit activity that is costly. The number of years a firm has been in existence also plays a role. If a firm is quite new, this could be a plus, or a minus, depending on other factors. Additionally, being part of the local bar association can be helpful. Annual dues of a few hundred dollars can provide an insurance company a myriad of cases to tally premium costs, as well as a complete record of attorneys and the cases they worked on. (This is why smaller, niche firms can pay less on legal malpractice insurance premiums on average; there are fewer people to manage.) It can also help to walk into a firm’s local bar association office and ask for a copy of their most recent malpractice application. This can be done relatively easily without providing any identifying information regarding you or your firm. That way, if there is another inquiry later on, the results of the most recent one can be recalled. Geography also can be a factor, as certain states are known for both their frequency of claims, as well as the severity. For example, New York, California, and Illinois are known for being heavy claim states. The general population within a state can also influence whether more or less insurance may be purchased. For example, as populations and metropolitan areas increase, the likelihood for claim activity rises, as well. Another factor is the number of attorneys in a law firm. Again, exact numbers can be obtained from a bar association, as this information is public, but it can be difficult to locate. In many cases, a simple email or phone call can lead to more insights regarding the dynamics of a particular firm. For example, if a firm is growing quickly, its executives may be gaining more legal experience, and not finding as much time to hone their skills. This could lead to claim activity. On the other hand, a firm that is downsizing may simply decide that the costs associated with purchasing insurance are too great, and may forgo another year of coverage. A firm that has employees that have worked at the same law firm for a long time may be in a better position when it comes to cost. In any instance where an employee departs with a full clients list, the potential for a "mini-Starr" issue can evoke both claims and civil activity, increasing premiums and limiting coverage options. In short, there are numerous factors that can contribute to the price of purchasing legal malpractice insurance. It is impossible to prepare for every potential consideration that may come into play, however. Legal malpractice insurance can be unpredictable and highly variable. Firm leadership must take the time to build a relationship with their broker and find out more information regarding these factors, as well as how they can impact costs now and in the future.
The Cost of Legal Malpractice Insurance on Average
Legal malpractice insurance premiums can vary significantly based on a range of factors. According to industry data, the typical cost for legal malpractice insurance averages between $9,000 and $10,000 annually for a solo attorney or small law firm. For larger firms, rates can rise, with some paying upwards of $30,000 per lawyer.
A comprehensive national survey conducted by the National Association of Bar Related Insurance Companies (NABRIC) in August 2017 found that the median cost of legal malpractice insurance coverage for an individual attorney was $4,068. This compared to a median of $5,445 for lawyers in small firms with 3-5 attorneys, and $7,650 for those in mid-size firms with 6-10 attorneys. Of the attorneys surveyed, 62% reported purchasing malpractice insurance through their bar association.
Other per-attorney figures from the survey, for group policies purchased directly from carriers, were as follows: for firms of 11-25 attorneys, the average premium was $6,868; for firms of 26-49 attorneys, $14,156; for firms of 50-99 attorneys, $28,681; and for firms of greater than 100 attorneys, $41,338.
In addition to the premiums, malpractice insurers may also impose co-insurance and deductible requirements, both of which vary by insurer and coverage type. Overall, as standard-legal malpractice insurance has become more of a line-of-business necessity than a luxury, higher-end policies provide broader coverage at a lower cost-per-dollar, when compared to lower-end policies.
How to Save Money on Legal Malpractice Insurance
Effective risk management practices are an important strategy for keeping your premiums low. Primarily, this means consistent attention to developing and updating procedures that will ensure that you practice law competently, efficiently, and in a way that reduces your exposure to claims. It is also important, however, to bear in mind the fact that as a firm’s business and financial health improves, so does its ability to charge reasonable rates for services. Obviously, a firm that is well-organized, well-run, and relatively profitable is less of a risk than one that has to charge very low rates or that is going through a period of financial difficulty. In addition, having a clean claims history and submitting a thorough and detailed application can result in lower premiums .
Another strategy that may be effective in reducing your firm’s premiums is to shop around periodically. Soliciting competitive bids from several firms can give you a picture of what the market will bear and may even allow you to negotiate a lower rate on your policy with your current carrier. Of course, if a firm has been with the same carrier for a significant amount of time, the carrier may be hesitant to let the matter go to another firm if only because it will incur additional administrative costs in taking on the client and taking the application and other steps necessary to put the policy in place. On the other hand, it will probably do so if it believes that the firm presents a higher level of risk than is acceptable to it.
What to Look For in a Legal Malpractice Insurance Policy
When it comes to purchasing legal malpractice insurance for a solo or small firm, there are several factors every practitioner should consider. While it may seem tempting to select the cheapest available option, this could be a big mistake in the long run. Coverage limits, policy terms, and exclusions all factor into the price of the premium. Make sure you select a policy that has enough coverage limits for your needs, so you can avoid being under-insured. Many carriers allow their coverage limits to increase as necessary over time while placing caps on available limits. This can work to your advantage. Since coverage limits have a big impact on the cost of the policy, this option to increase coverage limits as necessary may save you money down the road.
Most carriers will not include coverage for prior acts for a period of time, known as your "retroactive date." Attempts to add these dates after the application process is complete may increase your premium as legally malpractice coverage is generally higher then general liability coverage. Look for a policy with a retroactive date that matches as closely as possible to when you began practicing. The term of coverage can also vary significantly from carrier to carrier, generally ranging from an annual policy to a three-year policy. Again, this can greatly impact your premium. If you purchase a one-year policy, you could be facing substantially increased premiums during the next policy renewal.
Exclusions are also important to understand before choosing a policy. For example, if a policy does not include coverage for claims by former employers, and a former employer becomes the victim of legal malpractice, those claims will not be covered under that particular policy. Policies can vary greatly in this regard. Likewise, it is important to consider the reputation and reliability of your potential carrier. A reputable insurance carrier will pay out on valid claims. A not-so-reputable carrier may fight any claim to avoid paying out, and may also shy away from paying out on frivolous claims.
The Effect of Legal Malpractice on the Cost of your Legal Malpractice Insurance
The impact of having made a malpractice claim on the later costs for legal malpractice insurance is hard to value. Although claims-made policies base rising (or falling) premiums on the number of claims made, policy premiums will also always rise with one or more claims and with time. As in any insurance situation, claims are a factor in policy extension / renewal decisions.
At the time of renewal, insurers consider a variety of factors in determining risk including: the type of policy (some are occurrence policies , some are "claims made" policies), length of time in practice; past experience with the insured; results of prior claims; and whether their claims-made policy limits have been reached.
With claims made policies, the premium may be reduced if no claims have been made. A loss in coverage can occur if a claim is first reported after a termination / expiration date. Since many insurers use retrospective rating plans, retrospective experience lowers premiums for practitioners who have shown less risk than their peers.