Professional Liability Coverage Issues

The Devil and the Deep Blue Sea:
Professional Liability Issues in Difficult Economic Times

Changes in the professional liability arena are sometimes hard to discern. As recently as a few weeks ago, as a member of a discussion group sponsored by a Managing Partners’ Forum, the question was put to the five of us on the dais about the changes we had observed in the professional liability insurance and coverage landscape over the last several years. The first three individuals (two professional liability brokers and a defence counsel) made a number of comments on the subject speaking of issues involving the professional liability insurance industry and its relationship to the legal profession in the U.S. When my turn came, thinking back upon my last two decades of law firms assignments, my comment was essentially that, with only small alterations, I really saw no difference whatsoever in the landscape. Laughter ensued but the gravamen of the comment is true. In fact, since the Fibreboard Cases from the 1970’s and 1980’s when the actual professional liability policy forms were changed, there has been little observable alteration on either side regarding the way that the industry writes the business and the way that lawyers perceive or comprehend the entirety of the professional liability insurance world.

This isn’t really an indictment of the insurance industry or law firms as it is a commentary on the way that lawyers view their own professional liability coverage and their level of sophistication related to their coverage. Of course, because of the dreary economic picture, the last few years have been an aberration of sorts. Speaking with an Insurance Underwriter recently on the subject of a law firm’s decision to switch from one company with whom they had had their coverage for 10 years, to another because the price was $30,000 US dollars less, we spoke of how economics have affected the insurance and coverage landscape. The truth is that in most firms of thirty lawyers or less (and many with a lot more) there is unfortunately a dearth of understanding regarding professional liability insurance coverage. Fundamentally, lawyers fail to comprehend that they may be sued for malpractice. Even some that have suffered that sling and arrow still believe they are impervious to another claim. That means that just as it is with any other class of business, lawyers are looking to pay as little as possible for their coverage and usually shop it as they would be looking for auto insurance. Those of you in the audience who have worked with larger, more sophisticated entities may find this hard to believe but it is nonetheless true. (I suspect you know it.)

Once upon a time, years ago, in providing CLE for about 3,000 California lawyers through both live and video sessions, we made the inquiry of the audience as to how many lawyers had read their professional liability insurance policy. Being basically honest persons (and having no one watching them), out of a total of about 3,000 lawyers, in four different broadcasts, in four different venues (San Francisco, Los Angeles, San Diego and Sacramento, California), we had a TOTAL of about 30 hands go up. Obviously, some didn’t care to raise their hands but still it points to the view of insurance coverage which lawyers generally assume: disregard coverage until it’s needed. That being the case, and I assure you gentle reader that it is, what has the last few years brought us in the world of professional liability insurance coverage?

For those of you who may be looking for solutions or even dispositive information on the subject of coverage levels, e.g., “How much is enough and what should we pay?”, this article may lead to disappointment. To begin with, there is not now, nor apparently has there ever been, a real formula (mathematical or otherwise) to determine what a particular law firm’s coverage level should be. Even being the hyper-litigative nation that is the United States, the level of insurance coverage needed for a particular practice class has never really been put to bed. In fact, in almost 1300 visits to law firms in which we were dealing exclusively with risk management and professional liability coverage over the last 21 years, the one question we can count on at the time of the visit is: “Do you think we have sufficient coverage?” or “What do you think our coverage level should be?” Now, it would be assumed somehow that a law firm dealing with a “high risk” area of practice needs higher levels of coverage, but again, what level should that be? If there is no sure and certain answer to that question then asking a question about the impact of the recession on coverage levels and decisions that law firms make regarding their coverage issues is even more problematic. Let’s look at the questions and see if there are some answers to be found.

Lawyers, quite reasonably, seek advice of brokers regarding coverage levels. Most brokers will make a survey of the firm through the application form and suggest what the level might be. Insurance comes generally in standard packages such as 1M/1M or 2M/2M or 5M/5M (each occurrence and aggregate coverage) and of course larger amounts in other, non standard markets (Lloyd’s being one). For this article we researched 22 different insurance web sites. This one was our favorite answer to the question of “How much coverage do I need?” The answer superimposed on the screen was, “There is no magic formula for determining appropriate limits.” (Now, that’s what I’m talking about! As they say). So, let’s just assume that there is no really good answer to the question, there are of course standard elements including the categories of practice area, type of law (plaintiff or defence), amount of money involved in common case assignments and so forth. However, most professionals in the industry will tell you, if asked, that the real costs involved with insurance today has to do with defence of a claim. That’s again a sidebar because most lawyers have no idea of the industry itself and why companies ask for a certain amount of premium for a certain level of insurance. In fact, we have seen lawyers insured for $1M USD pay as much as $100,000 USD (per lawyer) and other lawyers in the same community with a similar practice area pay $3,000 USD (per lawyer) for the same coverage. Of course, lawyer 1 had claims and lawyer 2 did not. Still…one wonders. The fact is that levels of coverage and resultant premiums, even those “regulated” by the individual states, will vary considerably and adding in the Surplus Lines Carriers (those that have not officially filed their rates with the individual states) lawyers are left with what one might say is an unregulated (yet) regulated market. Even if you do pay attention, it is a fairly blurry world with which to cope.

And coping is the operative word for the last four years for a great many law firms. The recent Dewey LeBoeuf implosion was said to have had its origins in a massive lawyers’ malpractice claim against the firm which, once settled, deprived the organization of sufficient capital in which to continue in its practice. Other law firms have faced similar circumstances. Some simply disappear off the landscape and others are “picked to bits” by firms in the region (what’s happening to Dewey at the time this is written). Not everyone has suffered economically, however. Some firms in fact have risen while others have fallen.

Professional liability coverage levels and costs, like many other things, are relative to the position of the firm. The list of firms that have not made it through this economic downturn is growing steadily and the number of firms that have lowered their coverage levels by virtue of nothing other than economic necessity has risen considerably. In some jurisdictions, insurance of this type is required by law. In some, it is difficult for a broker to make a case for having it in the first place and it is certainly not required. Notwithstanding other matters raised earlier in this piece, the reality is that many lawyers, like everyone else and like any other business entity, want to protect themselves from a disaster (even if they feel it won’t happen to them). For that reason, even though they may have little idea of how much coverage is appropriate, they do know or believe that they know what they can afford. Often, for that reason, the issues involving coverage are defined by what is seen as an appropriate premium level. “We don’t want to spend more than $X dollars. What kind of coverage can we get?” is a fairly common question asked of a broker in any market at any time. Thus, when the budget lines are re-drawn downward (in tough times), the question posed, lowers the level of premium to $Y dollars instead of $X dollars and whatever the market will bear is then what the firm will acquire. If there have been professional liability claims then the situation may very well deteriorate with the law firm having far less coverage than anyone would think is necessary. In fact, in the current “market” there seems to be two absolutely divergent (180 degrees) directions. Since the market remains “soft” (like the Euro’s stability: inexplicable) for firms without claims, the cost of professional liability insurance remains static
has gone down. However, for those unlucky enough to have suffered claims and even worse, been non-renewed by their current insurer, the roof has collapsed on top of the law firm and the rates have quadrupled.

Law firms rarely approach the professional liability insurance needs from a position of clarity, making determinations based upon an internal analysis of the risks they may run in handling their business. Firms handling Public Offerings (if those still exist) are generally considered to have greater risks and therefore require higher coverage levels. Firms handling ordinary business affairs have been in the past generally considered to have less risk. Larger law firms of 100 or more in population were for many years considered a safer bet than smaller, mid sized law firm entities (tell that to the Underwriters who are out of business because of the inaccuracy of the supposition). During the last three or four years, however, observations denote the fact that many general practice firms have been sued for the first time and many specialty boutiques have skated by unscathed. Real estate firms have become a special target for claims but contingency fee law firms are probably no more nor less a target than they were back in 2007.

It’s very hard to “read” the lawyers’ market, the economics of the law practice, or the prospects for the insurance market over the next two years. Assumptions made by “experts” point to the market “hardening” but that has been their position for the past three years and it hasn’t happened as yet. The yardsticks that law firms use to draw up a plan of insurance remain the same, as well. “How much can we afford for something we will probably never use?” remains an oft-quoted refrain which has as little to do with reality of the practice now than it ever had but remains probably the single most significant assumption still in the mix.