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Legal Malpractice Insurance Buyer’s Guide
(Current as of August 2020)
Most states don’t require attorneys to carry legal malpractice insurance. But practicing without professional liability coverage is a huge risk, because no matter which legal structure you choose for your law firm, you’ll always be on the hook for your own professional wrongdoing. Without adequate insurance coverage, your personal assets may be vulnerable.
Key Legal Malpractice Insurance Concepts
It’s important to familiarize yourself with a few key insurance concepts so you know what type of coverage you’re paying for.
“Claims-Made” Policy
Most legal malpractice policies are sold on a “claims-made” basis, meaning the policy covers claims that are made during the policy period, regardless of when the event giving rise to the claim occurred. Because professional liability policies typically have one-year terms, it’s critical that you renew your policy every year. If you don’t have an active policy when a claim is made, it won’t be covered, even if the alleged malpractice occurred back at a time when you had a policy in effect.
Retroactive Date
All claims-made insurance policies list a retroactive date, which defines how far back in time an incident can occur and still be covered under your current policy. If you’re purchasing malpractice insurance for the first time, your retroactive date is generally the same as the start date of your policy. Your retroactive date will then remain fixed for as long as you maintain continuous coverage, with each annual policy renewal covering events going back to the start of your first professional liability policy.
“Per Claim” vs. “Aggregate” Limits
Your policy will contain a payment limit on both a “per claim” and “aggregate” basis. For example, if your policy contains a limit of $100,000 per claim with an aggregate limit of $300,000, the most your insurance company will pay to any one plaintiff is $100,000, and the most it will pay in total under the policy is $300,000 (regardless of how many plaintiffs make claims during the policy period).
Defense Costs “Inside” vs. “Outside” The Limit
If you’re sued for malpractice, you’ll need a lawyer to defend you, so it’s important to understand how your policy handles defense costs. If your policy puts defense costs “inside the limit,” your legal costs will be deducted from your policy limits, which will reduce the insurance money available to pay any judgement or settlement in the plaintiff’s favor. But if defense costs are “outside the limit,” your insurance company will generally pay your defense costs in addition to the policy coverage. Given how quickly legal fees can accumulate in an active litigation, it’s generally advisable to secure a policy where defense is outside the limit.
“Loss & Expense” vs. “Loss Only” Deductible
Nearly all professional liability policies will require you to pay a per claim deductible, which is generally structured one of two ways. If you have a “loss & expense” deductible, you’ll be responsible for paying the full deductible amount out-of-pocket before the insurance company will pay anything at all. By contrast, a “loss only” deductible (also called a “first dollar defense” deductible) does not apply to defense costs. In that scenario, your insurance company will begin paying from the very first dollar of defense costs incurred, and you’ll only be responsible for the deductible amount if the plaintiff wins a judgment or settlement.
State Disclosure Requirements
Although legal malpractice insurance is still mostly optional, many states now have laws requiring lawyers who do not carry professional liability insurance to disclose that fact to clients. Some states also require lawyers to inform clients if they do not carry legal malpractice insurance above certain minimum statutory thresholds. Be sure to check your state’s professional liability insurance disclosure requirements.
Where To Find Coverage
CoverHound is a popular online platform that allows you to compare quotes from leading insurance industry providers.
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