Lawyers need insurance too: legal malpractice insurance
By Charles Coffey and Deanna Brady, The Bar Plan Mutual Insurance Company
This is the first article of a three-part series from The Bar Plan Mutual Insurance Company. The second part will be published Dec. 29 and the third part Jan. 12, 2022. In the series, the authors will describe the common types of insurance that lawyers and law firms should consider purchasing. The coverages included in this series are by no means an exhaustive list but are intended to provide you with a starting point to determine the coverages that are necessary for you and/or your firm.
Legal malpractice claims arise from a lawyer’s actions or omissions falling below the standard of care when providing legal services to a client. So, how necessary is it to get Lawyers’ Professional Liability “LPL” Insurance – a.k.a. legal malpractice insurance? I would argue it’s essential based on the risk shown by recent data.
The Missouri Department of Commerce & Insurance publishes a Legal Malpractice Insurance Report once a year and it recently released the 2020 report. In 2020, 138 legal malpractice claims were closed, with 63 resulting in payments totaling $11.6 million. The average payment for a successful claim was $184,606.
Nearly 97% of paid claims involved lawyers who had been practicing for 10 years or more. The areas of practice that saw the most claims were bodily injury/property damage – plaintiff; estate, trust, and probate; family law; bodily injury/property damage – defendant; and collection and bankruptcy.
Deanna Brady, senior claims counsel at The Bar Plan, previously wrote an article that summarized some of the factors to look for when purchasing an LPL policy. She emphasized that when making the decision on the amount of policy limits for legal malpractice insurance, there are many factors to consider, including the:
- potential exposure based upon the types of cases,
- cost of defense of a legal malpractice claim,
- jurisdiction in which a claim could be brought, and
- nature and extent of both business and personal assets as they could potentially be subject to collection under a judgment if the lawyer is underinsured.
“High risk” areas of practice
When considering lawyers’ professional liability insurance, certain areas of practice – such as trusts and estates, plaintiff’s personal injury, securities, and intellectual property – may carry a higher risk in terms of the likelihood of a legal malpractice claim or the cost to defend or resolve the claim. Many lawyers believe the risk of claims being filed against them is minimal. However, mistakes happen. Some may find themselves in a situation where they are liable for not only their own mistakes, but also mistakes by a partner, associate, paralegal, or legal assistant within their firms.
In addition to evaluating potential exposure based on the types of current cases your or your law firm handles, lawyers should also consider past cases – this is especially true for those that practice in trusts and estates. It may be that the lawyer no longer represents large estates. Therefore, he or she may believe lower limits of liability are now appropriate. However, trusts and estates pose more risks for legal malpractice claims as non-client beneficiaries may have standing to sue. Additionally, the statute of limitations may not begin until the death of the client and the alleged negligence is discovered. As most lawyers’ professional liability policies are claims-made and reported policies, lawyers could be exposed to potential liability from estate planning conducted decades in the past. If the estate was a large estate, the lawyer may not be adequately insured to pay the client or the third-party beneficiary completely or defend the merits of the claim based upon current limits of liability.
The cost to defend – even in other jurisdictions
When choosing policy limits, a lawyer should be concerned about the potential damages that may stem from a potential lawsuit, as well as the cost to defend the lawsuit. Most legal malpractice insurance policies, unless a separate defense expense limit is purchased, are eroding policies. These policies are also referred to as wasting or “pac-man” policies because the limits of liability are reduced by the cost for defense and any expenses incurred.
The defense expenses are paid first, which reduces the amount available to pay any potential damages. If the policy limits are exhausted by the defense costs, the insurance carrier may have no further duty to defend an insured lawyer, and there will be no limits remaining to pay on any judgment or settlement later reached. When this occurs, the insured lawyer’s business and personal assets could potentially be subject to collection under a judgment. If limits of liability are very low, it is possible that the costs of defense would exceed the policy limits; thus, making it very difficult for the lawyer to defend their actions.
It is also possible for a lawsuit to be filed in another, more costly jurisdiction, than the jurisdiction in which the lawyer practices. While the insured lawyer’s policy limits may be adequate to properly defend a claim and/or make an indemnity payment in the lawyer’s practicing jurisdiction, the same may not be said for the foreign jurisdiction.
If lawyers who share an office look like a firm to potential clients, it is possible for the negligence of one of the lawyers to be imputed to others who share the office. While steps should be taken to avoid any confusion, be aware of the potential damages that may stem from the liability of the other lawyers in the office. While one lawyer may practice in an area of law that poses low risk for legal malpractice claims, the same may not be said for other lawyers who share the office. If a claim is made against one for the negligence of another in an office-sharing group, lawyers may find they do not have adequate coverage to defend the claim or to make an indemnity payment.
A common misconception about legal malpractice claims is that having more insurance coverage would invite larger claims. However, if the limits of liability are low, an opposing lawyer may use that to their advantage and make an inflated opening demand to leverage their client for maximum recovery. While it is difficult to plan for this type of tactic, it is easier to defend the claim on its merits if sufficient limits of liability are in place.
While the lawyer and the insurance carrier want to compensate the claimant for the malpractice, given the low limits, the lawyer may not have the opportunity to dispute the damages or the merits of the underlying case. The lawyer may find themselves in a situation where a decision is made to pay the policy limits to the claimant rather than argue over damages and reduce the available limits for a potential judgment or settlement. Having adequate policy limits ensures that the insured lawyer can properly defend or settle a claim on its merits and not based on the amount of policy limits available.
Finally, when contemplating your limits of liability, consider all potential exposure based on your clients and the costs of defense for a legal malpractice claim. Being adequately insured affords lawyers the opportunity to make clients whole should a mistake occur, as well as defend themselves and their actions – especially when liability is questionable.
The Missouri Bar has scores of resources for members looking to protect a practice. Members can learn more about the insurance options available from Missouri Bar member benefit providers here. The Bar Plan is a proud Missouri Bar member benefit provider and the only endorsed carrier of Professional Liability Insurance for The Missouri Bar.