Your legal malpractice insurance policy is more than just a compliance checkbox. It’s a contractual financial safeguard for your practice, finances and professional reputation. Nonetheless, many lawyers buy coverage without fully understanding its terms or checking whether it adequately covers their risks.
Unfortunately, discovering coverage gaps often happens at the worst possible time – when a claim arises. To avoid costly surprises, it’s essential to understand what your policy covers, what it excludes, and how it responds when a claim is made. Below are key features of legal malpractice policies that lawyers often overlook.
Claims-Made Policy Explained
Most legal malpractice policies are claims-made, not occurrence policies. That means your policy covers you if a claim is made against you and reported to your carrier, during the policy period, regardless of when the alleged malpractice occurred. It’s a subtle but crucial point. If you let your policy lapse or move to a new insurance carrier without securing proper tail coverage, you may find yourself without coverage for a claim arising from past services.
Prompt Reporting and Notice Requirements
Your policy will typically require you to promptly notify your carrier if you become aware of a potential claim or even circumstances that might lead to a claim. Failing to do this can affect coverage. Reporting promptly lets your carrier get involved early, which sometimes results in faster resolution and lower defense costs. To avoid trouble, consider putting a procedure in place at your firm to immediately report all potential issues that may arise. At the end of the day, insurers focus on actual claims and losses and showing that you are aware of potential risks shows the insurer that your firm is being proactive.
Policy Exclusions: Know What’s Not Covered
Lawyers Errors & Omissions (E&O) or Legal Malpractice policies commonly exclude certain risks from coverage, and these exclusions can be broadly defined. Examples may include fraud, intentional misconduct, punitive damages, and disputes over legal fees. Some policies may exclude certain practice areas, such as intellectual property or securities law. It’s crucial to review your policy’s exclusions carefully. At First Indemnity, we add endorsements where you need additional coverage for a particular area of practice that may be excluded from an insurer’s standard coverage to ensure your firm is properly protected.
Defense Costs: Inside vs. Outside the Limits
Some policies treat defense expenses as within policy limits, which means every dollar your carrier spends on your defense erodes the amount available to pay a judgment or settlement. Ideally, you want a policy where defense costs are outside policy limits, preserving your policy’s full amount for settlements and judgments. Naturally, this consideration can affect your premium, but it’s often worth it for greater peace of mind.
Deductibles and Retention Amounts
Your policy will likely require you to pay a deductible or retention amount before coverage applies. It’s important to know how much you’re liable for and whether your policy applies the deductible to defense costs, settlements or both. Higher deductibles typically result in lower premiums, but they can become a financial shock if you’re not prepared to pay that amount when a claim arises. You could consider a $100,000 to $1 million deductible to address nuisance claims in-house while having your insurance policy handle large awards.
Your legal malpractice policy is a powerful risk transfer tool to help protect you and your practice, but it’s only effective if you know exactly what it covers and what it doesn’t. Take the time to review your policy carefully, clarify any points of confusion and consider whether endorsements or additional coverage might be appropriate.
At First Indemnity, we specialize in professional liability insurance for attorneys and accountants. Our team understands the nuances of malpractice risk – and we’re here to help you secure comprehensive, cost-effective coverage.