w w w. m y a z b a r. o r g18 A R I Z O N A AT T O R N E Y S E P T E M B E R 2 0 0 6

The New Disclosure RuleIn 2005 the Arizona Supreme Court adopt-ed a new rule requiring Arizona attorneys todisclose whether they carry legal malprac-tice insurance. That rule may give pause tolawyers and may lead many to review theirinsurance decisions.

Effective January 1, 2007, SupremeCourt Rule 32(c)(11), based on the ABA’sModel Rule on insurance disclosure,requires members to disclose by February 1each year if they are engaged in private prac-tice and, if so, whether they are covered byprofessional liability insurance. Members’information will then be published on theState Bar Web site. If lawyers who reportedhaving insurance later discontinue coverageor are cancelled, they must report thatchange within 30 days; lawyers who werepreviously not insured and pick up coveragemay inform the Bar of the change and haveit reflected in the Bar’s public records.

Because of the new disclosure rule,lawyers who do not presently carry lawyersprofessional liability insurance may discovera new or renewed interest in obtaining thatcoverage. The State Bar, in conjunctionwith its Lawyers Professional LiabilityInsurance Committee is currently engagedin developing resources to assist memberswho are interested in obtaining malpracticeinsurance for the first time.

Aside from the new rule, there are otherreasons to consider obtaining legal malprac-tice coverage. Lawsuits against lawyers haveincreased dramatically in the last 15 years.There is a disturbing increase in the number

of legal theories being successfully advancedagainst lawyers. And the cost of defendinglegal malpractice lawsuits has risen dramati-cally, a trend that shows no sign of slowingor reversal.

By carrying malpractice insurance,lawyers protect their personal assets and theassets of their law firms from depletion bythe high cost of professional liability. And itprovides protection for clients who mightsustain damage as a result of a mistake.

Despite many compelling reasons forcarrying it, to many lawyers, legal malprac-tice insurance—what it covers, how it worksand how to buy it—is still a mystery. Thisarticle is intended to generally familiarizelawyers with the LPL marketplace and LPLinsurance policies. My intention is todemystify the process of understanding,shopping for and selecting a legal malprac-tice policy.

Introduction to Claims-Made InsuranceLawyers Professional Liability (LPL) poli-cies are written on a “claims-made” basis.That fact may be the single most importantdistinction to grasp when you are used tocommonly understood insurance terms.But what does it mean?

Though most lawyers are familiar withoccurrence-based insurance (which is wide-ly used for general commercial liabilityinsurance and other, nonlegal professionalliability coverage), relatively few are wellversed in claims-made policies and how theywork.

In short, occurrence-based policies cover

BY VICTORIA ORZE

Victoria Orze is Senior Counsel in thePhoenix office of Hinshaw & Culbertson LLP.She can be reached atvorze@hinshawlaw.com or (602) 631-4400.Prior to joining Hinshaw, she was a legal mal-practice claims attorney with, and thenGeneral Counsel to, Attorneys LiabilityProtection Society (ALPS), a Risk RetentionGroup, which provides LPL insurance tolawyers in more than 25 states and territories.

Lawyers may be accomplished,even expert, in their chosen practice areas,but law practice questions often take a backseat in the minds of many attorneys.Striving to do the best for their clients,lawyers may defer or ignore questions aboutthe business side of practice. And even whenlawyers turn their attention to those issues,their complexities may baffle and frustrateeven the most detailed of attorneys.

Professional liability insurance—com-monly known as “malpractice” or “LPL”insurance—can appear to fit that descrip-tion, though it doesn’t have to. This yearespecially, lawyers should strive to becomefamiliar with the nuts and bolts of the topic.

This article is not intended to be a dis-cussion of insurance law or the law of cov-erage or coverage disputes. It is intendedmerely to introduce lawyers to the world ofclaims-made insurance and to assist poten-tial policyholders in understanding the fun-damental concepts that make up the frame-work of legal malpractice insurance.

A LAWYER’S GUIDE TO PROFESSIONAL LIABILITY INSURANCEA LAWYER’S GUIDE TO PROFESSIONAL LIABILITY INSURANCE

O PROFESSIONAL LIABILITY INSURANCEO PROFESSIONAL LIABILITY INSURANCE

w w w. m y a z b a r. o r g20 A R I Z O N A AT T O R N E Y S E P T E M B E R 2 0 0 6

claims arising out of conduct or errorsmade while the policy is in force, even after thepolicy expires. An occurrence-based policywritten for the calendar year 2006 will covera lawsuit brought against the policyholder in2007, even though the 2006 policy expired.

In contrast, a claims-made policy onlycovers claims made and reported to the carri-er while the claims-made policy is in effect.Unless the claims-made policy provides prioracts coverage (explained subsequently), to becovered the claim also must arise out of anerror made while that policy was in effect.

Thus, in a claims-made policy, three con-ditions must coincide for coverage to exist:1. A policy must be in effect at the time

the claim is brought against the insuredand reported to the carrier.

2. There must have been an effective policyin place at the time of the act, error oromission giving rise to the claim.

3. There must have been continuous cover-age—without a gap—from the time ofthe act, error or omission to the timethe claim was made and reported.There is often a lag between when a legal

error is made and when it is discovered orwhen the aggrieved client brings a legal mal-practice claim. With an occurrence policy thiswould not be a problem, because as long asthe lawyer had a policy in place when shemade the error, the occurrence policy wouldcover it even after the policy expired.

This is not the case with claims-made cov-erage. When the claims-made policy expires,so does the insured’s ability to report a cov-ered claim under that policy.

Notwithstanding these apparent limita-tions, claims-made insurance can and willprovide the same extensive breadth of cover-age as occurrence-based policies, but only ifthe policyholder understands how claims-made coverage works and follows certainguidelines in obtaining and keeping cover-age. In particular, lawyers should be aware ofthree fundamental concepts that provide theframework for claims-made legal malpracticecoverage.

• The first of those concepts is that of a“loss inclusion” or “retroactive” date.These terms are interchangeable; theyrefer to and coincide with the first datethat a policyholder obtained and main-tained continuous claims-made cover-age.

• “Continuous claims-made coverage”refers to an unbroken string of consecu-

tive claims-made policies, with no pas-sage of time occurring between theexpiration of one policy and the incep-tion of the next.

• A “gap” refers to a period of time forwhich no claims-made policy coverage isin force and effect. Great care should betaken to avoid a gap in coverage,because once one exists it might beimpossible to bridge it. And even whenit is possible to bridge the gap, it will beexpensive.Only by understanding how these con-

cepts work together, and then by maintain-ing continuous claims-made policies withoutany gaps between them, can a lawyer obtainthe broadest coverage possible from his LPLpolicy. In other words, to get the most valueout of your legal malpractice premium dol-lars, you need to put these concepts to workfor you. The next section should help youunderstand the importance, once you pur-chase a malpractice policy, of maintainingcontinuance claims-made coverage andavoiding a gap.

Anatomy of a Legal Malpractice PolicyIt is unlikely that anyone will be inspired bythe new disclosure rule or this article to readan LPL policy in its entirety, but for new-comers and current policyholders alike, thereare four sections of an LPL policy that mustbe read in order to have a workable under-standing of what protection the policy pro-vides. Those sections are the declarations, theinsuring agreement, the conditions and theexclusions.

The declarations page is the portion ofthe policy that describes the coverage pur-chased by the policyholder. It identifies thenamed insured and contains the “policy peri-od” (usually reflected as “effective dates ofcoverage”), the amount of coverage pur-chased (commonly referred to as the policylimit), the amount of deductible, if any, andthe amount of premium paid in considera-tion of coverage. The declarations also iden-tify any special endorsements that modifypolicy language. With claims-made coverage,the declarations should also reflect thenamed insured’s retroactive or loss inclusiondate.

Another must-read portion of the policyis the “insuring agreement,” which may ormay not be clearly labeled. This is the lan-guage that creates coverage by describingwhat risks are protected, who besides the

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— continued on p. 23

named insured is included within the pol-icy’s protection, and what types of eventstrigger coverage. Typical insuring agree-ment language reads like this:

In consideration of the premium paid,the Company shall pay, on behalf of anInsured, all sums in excess of thedeductible, which the Insured shallbecome legally obligated to pay as dam-ages for Claims made against theInsured and reported to the Companyduring the Policy Period, by reason ofany act, error or omission in the render-ing of Professional Services by theInsured or any person for whom theInsured is legally liable, while acting onbehalf of the Named Insured.The “conditions” portion of an LPL

policy describes conditions that must existfor coverage to apply and usually states obli-gations of the policyholder in the event of aclaim. This section specifies how and whatan insured must report to trigger coverage.It might also require the insured to reportto the company whenever the insured learnsof facts or circumstances that might give riseto a claim, but which have not yet ripenedinto a claim. This last clause is importantbecause it permits a policyholder to triggercoverage under that policy for a mistake orpotential claim, even though the claim hasnot yet been brought. Likewise, failure totimely report to the Company when aninsured learns of a potential claim can com-promise coverage for that claim when it isfinally made.

Finally, all LPL policies have an exclu-sions section, which usually begins “Thispolicy does not apply to … .” Virtually allLPL policies exclude claims arising out ofdishonest, fraudulent or intentional con-duct, exclude coverage of punitive damages,statutory fines or penalties, and do notcover damages resulting from comminglingclient funds. Most policies also excludeextraordinary risks such as securities-relatedpractices, investment counseling or sexualharassment. Theexclusions mayalso addressknown risks notreported to thecarrier in thea p p l i c a t i o n ,claims that arecovered by otherpolicies, and

claims arising out of services renderedbefore the policyholder’s retroactive date.

How Claims-Made Legal MalpracticeCoverage WorksConsider the mythical law firm of Able &Crane P.C. (“A&C”), a firm of two lawyerswho first began practicing together in1995.

For the first few years, the partnersfocused on building their small practice. By2000, the lawyers had amassed a small for-tune in assets and maintained a thrivingpractice. Able and Crane thus determined atthe end of 2000 that it was time to purchasemalpractice insurance. A&C bought PolicyNo. AC-01, with a policy period of Jan. 1,2001, to Jan. 1, 2002, and a $100,000 perclaim policy limit. Because this was the lawfirm’s first-ever claims-made policy, A&C’sretroactive or loss inclusion date was Jan. 1,2001, the same as the inception date of thisfirst policy.

In June 2001, A&C received a letterfrom a fellow attorney, which claimed thatin October 2000, Able missed a former per-sonal injury client’s statute of limitations.A&C promptly reported the claim to itsLPL carrier, which promptly denied cover-age for the claim because even though theclaim was made and reported during theAC-01 policy period, the error was madebefore the firm’s retroactive date of Jan. 1,2001. Stated another way, the mistakeoccurred when there was no claims-madepolicy in place.

As shown in Table 1, A&C P.C. renewedits coverage in 2002, 2003 and 2004 andwas issued consecutive claims-made policies

with limits as stated. In February 2004, thelaw firm was sued by the estate of a clientfor whom Crane drafted a Last Will &Testament in March 2001. When A&Creported this claim, it received confirmationthat the lawsuit was covered by Policy No.AC-04, with limits up to $1 million,because the claim was made and reportedduring the AC-04 policy period and theerror was made after the law firm’s Jan. 1,2001, retroactive date.

It is through the retroactive or lossinclusion date that a claims-made policyprovides coverage for prior acts. As long asA&C timely renews its insurance coverageand maintains consecutive policies withoutany gaps in coverage, it can avail itself ofprotection against claims arising out oferrors made all the way back to Jan. 1,2001, the date it first maintained “continu-ous claims-made coverage.” If, however,A&C for some reason fails to renew its cov-erage, it will irretrievably lose that lossinclusion date.

Assume, for example, that A&C receiveda claim in October 2005 and only then dis-covered that it forgot to pay its 2005 policypremium. This new claim will not be cov-ered because there was no claims-made pol-icy in place when it was made against thefirm and reported to the carrier. And whenA&C buys a new policy effective Nov. 1,2005, its new retroactive date will be Nov.1, 2005, not Jan. 1, 2001, as it had before.A&C will have a gap from Jan. 1, 2005 toNov. 1, 2005 (see Table 2).

An error made during that gap will notbe covered under Policy AC-04, whichexpired on Jan. 1, 2005. It will not be cov-

1995-2000

TABLE 1 – Able & Crane P.C. Insurance History

RETROACTIVE DATE

COVERAGE AMOUNT

BARE(no liability insurance)

AC-01

$100,000 $100,000 $250,000 $1 million

AC-02 AC-03 AC-04

2001 2002 2003 2004

1-1-20011-1-2001

1-1-20011-1-2001

1995-2000

RETROACTIVE DATE

COVEREAGE AMOUNT

BARE AC-01$100,000 $100,000 $250,000 $1 million Gap $1 million

AC-02 AC-03 AC-04 Bare AC-06

2001 2002 2003 2004 1/1-11/1/2005

11/1/05-11/1/06

1-1-20011-1-2001

1-1-20011-1-2001

11-1-2005

TABLE 2 — The Effect of a Gap in Coverage

w w w. m y a z b a r. o r g 23S E P T E M B E R 2 0 0 6 A R I Z O N A AT T O R N E Y

simple; lawyerschange firms, lawfirms dissolve,merge or morphinto differententities, and

lawyers leave and return to private practice.It is therefore vital that lawyers develop, fortheir own protection, a basic understandingof how legal malpractice insurance works.Partners and associates alike should knowwhether and to what extent they are pro-tected by LPL insurance. This knowledge isespecially crucial when you change firms,take a leave of absence, or move into or outof private practice from other sectors.

Shopping for and Purchasing LegalMalpractice Insurance

Insurance Carrier NomenclatureThe many companies that write LPL poli-cies vary, among other things, in organiza-tional structure and ownership. Many ofthese differences have little practical impor-tance for LPL consumers. There are some

differences, howev-er, that lawyersshould be aware ofand consider whenlooking to acquireLPL coverage. Thesignificant differ-ences relate to how(and by whom) thecarriers are regulatedand what happens ifthey dissolve orbecome insolvent.

Admitted vs. Non-Admitted Carriers.These terms refer tothe extent to whichan insurance carrier

is regulated by and authorized to conductbusiness in a certain state. Arizona, like allother states, has a governmental depart-ment charged with overseeing and regulat-ing insurance business conducted withinthat state. An admitted insurance carrier isfully regulated by the Arizona Departmentof Insurance (DOI) and is fully authorizedto write certain types of insurance policieswithin this state. Like other states, Arizonaalso maintains a guarantee fund designed toprovide a certain level of protection for

Arizona consumers in the event an admit-ted carrier becomes insolvent. Admittedcarriers are required to participate in theguarantee fund by paying into it a certainportion of premiums generated in thisstate. If an admitted insurer becomes insol-vent, the fund takes over and covers thatcarrier’s claims, up to a certain amount ofper-claim limit. Currently, the guaranteefund provides a per-claim limit of$100,000.

Non-admitted insurance companies arenot fully licensed and regulated here butare still permitted by the DOI to write cer-tain types of policies within the state. Non-admitted carriers are sometimes called “sur-plus” carriers, which refers not to theamount of coverage but to the type ofinsurance they are permitted to write. Non-admitted or surplus carriers do not partici-pate in the guarantee fund, and the DOIcan control them to a lesser extent than itcan for admitted carriers. For example, if anadmitted insurer violates DOI regulationsor falls below a required level of capitaliza-tion, the DOI can suspend its authority,revoke its license or move to place the car-rier into receivership. The same is not truefor non-admitted or surplus lines carriers.

Risk Retention Groups. Another type ofentity offering LPL coverage is a risk reten-tion group. Risk retention groups areunique in that their existence is authorizedby federal law, whereas other insurancecompanies are generally authorized andregulated exclusively by state law. Riskretention groups are not fully regulated bythe DOI and are even less subject to thestate’s control and oversight than non-admitted carriers. Most important, RRGsmay not participate in the state guaranteefund. It may therefore be prudent beforepurchasing a policy from an RRG to verifyits industry rating and financial history.

Mutual vs. Stock. Finally, an insurancecompany may be referred to as a “mutual”or a “stock” company. As a practical matterit makes little difference, but a mutualinsurance company is owned by all its poli-cyholders collectively, whereas a stockinsurer is owned (like any corporation) byits shareholders. Mutual carriers sometimespay dividends to their policyholders, butthe dividend amount is usually negligible,

ered by the new policy, even if it is reportedafter Nov. 1, 2005, because the error wasmade before the firm’s new retroactive date.

That brings us to the concept of an“extended reporting period,” or whatlawyers commonly refer to as a “tail poli-cy.” Tail coverage is one of the ways thatthe LPL marketplace addresses whatwould otherwise be a harsh application ofclaims-made liability insurance. The termis a misnomer, because tail coverage is notactually an insurance policy but rather anagreement with the carrier that permits thepolicyholder to continue reporting claimsafter a policy expires. By purchasing a tailyou merely extend the period of time with-in which claims may be reported. A taildoes not change the policyholder’s lossinclusion date or the applicable limits anddeductible.

To illustrate, imag-ine that our mythicallawyers at A&C decideto donate two years oftheir time to buildinghomes for charity. FromNov. 1, 2006 until Nov.1, 2008, the lawyers willnot be practicing law;therefore A&C has noneed for ongoing cover-age. Nonetheless, thelaw firm does not wantto lose the ability toreport claims arising outof mistakes made beforetheir sojourn into chari-ty. As the law firm’sPolicy No. AC-06 expires on its own terms,Able purchases a two-year ExtendedReporting Period, effective the same date.When the law firm is sued in March 2007for an error made in December 2005, thelaw firm can report the claim under the tailand have it covered, subject to the limitsand deductible of the expired AC-06 policy(see Table 3).

These simple examples are designed toillustrate basic concepts in claims-made cov-erage. Modern law practice is rarely this

COVERAGE AMOUNT $0

Bare AC-06 Extended ReportingEndorsement (Tail)

1/1-11/1/2005

11/1/05-11/1/06

11/1/06-11/1/08

TABLE 3 – The Effect of Tail Coverage

$1 million limit under AC-06

There is nomagic formula

designed to helplawyers choose

the “correct”policy limit or

deductible.

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and the policyholder’s ownershipinterest disappears when the insurance

policy terminates.

Buying Malpractice InsuranceThe LPL insurance market generally followsthe cycle of the property and casualty insur-ance market; it is described as a “hard” mar-ket when premiums are higher, coverage ismore narrow and insurance carriers are ableto select more attractive risk profiles fortheir books of business. A “soft” marketdescribes the part of the cycle when policy-holders are easily able to obtain coverage,policies provide “bells and whistles” tomake them more attractive and carriers aremore flexible and competitive when pricingcoverage.

Whatever the location of the LPL mar-ketplace on the hard–soft continuum,lawyers and law firms have the option, whenpurchasing coverage, of doing so directlyfrom the carrier or going through an insur-ance broker or agent. Both options haveadvantages and disadvantages, and themethod one chooses seems to be a functionof time and personal preference.

Direct Purchasing. In today’s marketplaceit is relatively easy to locate, learn about andcommunicate directly with the variousinsurance carriers that offer legal malpracticeinsurance. The Internet is useful for thispurpose and many LPL insurers permitlawyers and law firms to submit applications,obtain quotes and even purchase policiesonline. By purchasing directly, a lawyer alsocan avoid the added cost of a commission,which a carrier pays to a broker or agent forplacing its policy. In a hard market charac-terized by higher premiums, buying directlymight save premium dollars.

Another advantage is that buying a poli-cy directly from the carrier exposes a poten-tial policyholder to the company’s customerservice practices before buying its productor experiencing a claim. If you are applyingfor coverage directly, take advantage of thisopportunity by inquiring about the compa-ny’s structure, ownership and insurance orfinancial industry ratings. It is also wise toask whether the carrier employs in-houseclaims attorneys or uses outside adjustmentagencies to handle its claims.

Insurance Brokers and Agents. Purchasingcoverage directly may save premium dollars,but getting the most out of that processrequires a great deal of time and effort suchthat using a professional is a better option.

Insurance brokers are professionalslicensed to assist consumers in locating andpurchasing insurance coverage. Generallyspeaking, insurance brokers have knowl-edge of and access to several different carri-ers, whereas unless they are “independent,”insurance agents typically represent one par-ticular insurance carrier. Insurance agentsusually do not represent the insurance con-sumer, but rather they are agents of theinsurance company or companies whoseproducts they offer.

Because they have access to several dif-ferent carriers, insurance brokers can helpyou shop around for the best coverage andthe best premiums. They can help you applyfor coverage, compare policies and obtaincompeting quotes. An experienced profes-sional can also help a law firm address a neg-ative claims history or risky practice profile,which is especially useful in a hard market.The expertise provided by an experienced

Definition of “Professional Services”: Do any of the defini-tions exclude activities particular to your practice? Is one morerestrictive or expansive than the others?

Definition of “Insured”: Does the insuring clause or defini-tions section exclude independent contractors? What does thelanguage say regarding new hires? Some policies automaticallycover new hires until the next policy period without additionalpremium charges.

Disciplinary Proceedings: Typically, disciplinary proceedingsdo not fall within the definition of covered claims or are specif-ically excluded from coverage. However, many carriers nowoffer an expense allowance for defense of disciplinary or otheradministrative proceedings.

Participation in Choosing Defense Counsel: Some policiesrequire an insured to accept the lawyer chosen by the carrier, orrequire you to select defense counsel from the carrier’s pre-approved panel. Other carriers are more flexible on this impor-tant feature.

Settlement Rights/Consent Clause: All LPL policies grantthe carrier the right to settle but have some version of a consentclause. The harshest (to the consumer) is a “hammer clause.” Ifa policyholder withholds consent to settle, a hammer clause lim-

its the carrier’s exposure to the amount it could have settledfor, but for the policyholder’s refusal to consent. In otherwords, by refusing to settle, the insured assumes the risk ofuncovered exposure if a verdict exceeds the amount the carriercould have settled for.

Exclusions: Although different LPL policies are usually con-sistent in what they exclude from coverage, it is still importantto scan the exclusions and identify any important clauses beforecommitting to a particular policy.

ADR: Some carriers reduce the policyholder’s deductible if theinsured agrees to mediation and mediation resolves the claim.

Trial Expense Allowance: Does the policy provide an expenseallowance that pays the insured lawyer for days he or she isrequired to attend depositions or trial?

Extended Reporting Periods/Tail Cover: While all claims-made carriers provide from some extended reported period,some offer free tail periods on a lawyer’s disability or retirementfrom the practice. Legal malpractice carriers vary greatly intheir treatment of availability, cost and duration of extendedreporting endorsements, so this is one concept new policy-holders should be aware of when shopping for malpracticeinsurance.

CHOOSING AMONG POLICIESBefore committing your premium dollars to a specific insurance carrier or policy, it is useful to compare the

important features that might make one of those policies more desirable to you than another. The following items can be usedas a checklist to help you identify key provisions and compare the policies under consideration.

w w w. m y a z b a r. o r g26 A R I Z O N A AT T O R N E Y S E P T E M B E R 2 0 0 6

broker may therefore result in yourselection of better coverage at a more

competitive premium than you would oth-erwise obtain directly. Most important, aknowledgeable broker or agent will have afull understanding of how claims-made cov-erage works and can help you identify thecarrier and policy most suited to your par-ticular risk profile.

Choosing Appropriate Limitsand Deductibles

Unfortunately there is no magic formuladesigned to help lawyers choose the “cor-rect” policy limit or deductible. An insur-ance policy, after all, is little more than acontract for the transfer of risk; the morerisk transferred, the more costly the con-tract. There are, however, three primaryconsiderations when choosing limits:1. What is the most likely size (in dollars)

of any particular risk?2. What is the risk of multiple claims in a

single policy period?3. How much risk can you afford to

retain by way of a deductible or self-insured retention?The first consideration refers to the

“per-claim” policy limit. A law firm shouldfactor into this choice the amount of pro-tection it wants to provide for its assets andthe relative dollar value of the cases it han-dles.

The second consideration pertains tohow much “aggregate” coverage a lawyerchooses to buy. The aggregate limit refersto the maximum amount the carrier will payfor multiple claims made under that partic-ular policy. Most LPL carriers offer splitlimits—that is, a greater amount of “aggre-gate” limit than the “per-claim” limit. Youmight therefore choose limits of $1 millionper claim, $1 million aggregate, or a splitlimit of $1 million per claim, $3 millionaggregate.

The final factor—choosing adeductible—deserves greater discussion. Apolicyholder’s deductible is the amount thepolicyholder is required to pay (i.e., the riskthe insured retains) before the carrier’s obli-gation to pay kicks in. Because there areimportant differences among carriers and

policies in treatment andapplication of thedeductible, it is essentialto know how thedeductible works under aparticular policy andwhen the deductible obli-gation is triggered. Youmay be able to purchase apolicy that applies yourdeductible to indemnitypayments only. In thatcase, your deductible obli-gation will only be trig-gered in the event of a set-tlement or adverse judg-ment against you.

One of the mostimportant and valuableaspects of LPL insuranceis that it provides not onlyindemnification for, butalso defense of, malprac-tice claims. According todata compiled by theAmerican Bar Association StandingCommittee on Lawyers’ ProfessionalLiability, published in the PROFILE OF

LEGAL MALPRACTICE CLAIMS 1996–1999,an overwhelming 74 percent of legal mal-practice claims files were closed without anyindemnity payment. The StandingCommittee collects and publishes dataevery five years from several malpractice car-riers who participate voluntarily in thestudy. Because so many legal malpracticeclaims are successfully defended, whetheryour deductible applies to defense expensesis an extremely important consideration.

It is also important to know whether thepolicy limits you purchase are in additionto, or exclusive of, your deductible. Forexample, with a $100,000 per-claim policylimit, the carrier may be required to pay$95,000 after your $5,000 deductible issatisfied, or it might be obligated to pay$100,000 after your $5,000 deductible issatisfied. The answer to this importantquestion is usually found in the insuringclause or definitions section of your policy.

Finally, it is absolutely essential to know,before choosing policy limits and purchas-

ing a policy, whether there is an allowancefor defense costs outside (in addition to) thepolicy limit, or if defense expenses areincluded within the policy limit. Mostlawyers are familiar with the concept of self-consuming or “burning limits” policies.With self-consuming policy limits, theamount your carrier spends defending aclaim reduces, on a dollar-for-dollar basis,the limits available to pay for any verdict orsettlement. Some carriers offer both typesof policy, and some carriers offer a separateexpense allowance outside the policy limits.

To summarize, before committing to apolicy, you should know the answer to thefollowing questions:1. Do defense expenses reduce the

amount available for indemnification,or is there a separate expense allowance(i.e., is this a burning limits policy)?

2. Does the carrier offer an “indemnity-only” deductible, so that defenseexpenses will not trigger yourdeductible obligation?

3. Is your policy limit in addition to ordoes it include the deductible (i.e.,how much coverage are you buying)?

WHAT YOU MIGHT PAY FOR YOUR POLICYTRENDS IN PROFESSIONAL LIABILITY INSURANCEHOT-BUTTON PRACTICE AREAS THAT ARE A RED FLAG FOR CARRIERS

RESOURCESSeveral excellent resources are available to provide

information on the many differences among LPL policiesand the carriers who write them.

One of the most exhaustive references is LEGAL

MALPRACTICE: THE LAW OFFICE GUIDE TO

PURCHASING LEGAL MALPRACTICE INSURANCE. TheLAW OFFICE GUIDE includes a detailed comparison ofLPL carriers and policies and constitutes a compre-hensive guide for purchasing LPL coverage. It is com-piled and updated annually by Editor-In-Chief RonMallen in conjunction with other lawyers at Hinshaw& Culbertson LLP and is published by ThomsonWest. Its cost is $73.50 (http://west.thomson.com).

In addition, the ABA Law Practice ManagementSection in 2004 published THE ESSENTIAL

FORMBOOK—COMPREHENSIVE MANAGEMENT TOOLS

FOR LAWYERS, VOL. IV, authored by Gary A.Munneke and Anthony E. Davis, which explains inmuch more expansive fashion the concepts intro-duced in this article. The FORMBOOK costs $199.95(www.abanet.org/abastore).

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