Important Coverage Features of Lawyers' Malpractice Insurance

Various bases for malpractice actions against attorneys are available including: (1) negligence or legal malpractice, (2) breach of fiduciary duty, (3) violations of state or federal statutes, (4) common law fraud, or (5) breach of contract. Both suits by clients and suits by non-clients may be permissible.

Lawyers' Malpractice Insurance policies (also known as lawyers' professional liability policies) are not all created equal. There is no standard policy form for legal malpractice insurance. Therefore, important policy provisions can vary substantially from one insurance company to another. When comparing the policies offered by different insurers, you should pay special attention to the following policy provisions:

• Electronic Media Coverage

Most law firms use electronic media to conduct business. This coverage can respond for misdirection of email or other media such as intranet, extranet or internet connection, or loss of client information transmitted via electronic media, or unintentional spread of a computer virus into or enabling a denial of service attack on a third party computer or network, or unintentional unauthorized access, or personal injury arising from the use of electronic media such as a web site or social media.

• First Party Cyber Liability Coverage

Some insurers will reimburse the insured for up to $25,000 for the cost of hiring a third party to mitigate the potential of legal liability claims arising from any security breach that results in the loss or theft of confidential client information.

• Deceptive Trade Practices Acts (DTPA) Coverage

In some jurisdictions DTPA coverage is important. Lawyers may still be liable for certain actions under DTPA type statutes. Misrepresentations by an attorney are still actionable under some DTPA statutes. Note some legal malpractice policies do not cover all DTPA damages such as the multiplied portion of treble damages.

• Punitive and Exemplary Damages Coverage

Many legal malpractice policies specifically exclude punitive and exemplary damages. It would be preferable to have a policy that would provide coverage where permitted by law.

• Innocent Partner Protection

Criminal, dishonest or fraudulent acts by a lawyer are excluded from coverage by all policies. Via an exception to the exclusion any other innocent lawyer insured under the policy that neither participated nor acquiesced in such acts may benefit from coverage.

• Deductibles - Per Claim v. Aggregate and First Dollar Defense or Loss Only

With a "per claim" deductible, each claim against you during a policy year subjects you to a new deductible. Some policies have "aggregate" deductibles so an insured would not be charged more than one deductible per policy year. Another feature available is first dollar defense within the deductible.

• Alternative Dispute Resolution (ADR)

Some insurers will waive a percent of the deductible (e.g., 50%) or may even waive the entire deductible if ADR is used to settle a claim.

• Hammer Clause

A "hammer clause" provides if the insurance company wants to settle a claim but the insured does not consent to the settlement, then the policy will only pay the amount for which the insurance company could have settled the claim. In effect, coverage for the claim is reduced to the settlement demand. It would be preferable to have more favorable consent to settle provision.

• Loss of Earnings

Time spent defending a malpractice claim means a loss of revenue to you. Some legal malpractice policies may provide you with expense reimbursement/trial attendance coverage in the $500-$750 range for each day you are out of the office for trial, mediation, arbitration or your own deposition in defending a claim under the policy.

• Disciplinary Proceedings

Some legal malpractice policies will allow coverage for up to $25,000 or $50,000 for defense costs incurred to respond to disciplinary proceedings. This may be an additional limit and not subject to the deductible.

• Other Coverage Options

Some other coverage options available may include:

1. Predecessor firm coverage

2. Career coverage

3. Lateral hire coverage

4. Extended reporting periods (ERPs) for non-practicing, retirement or disability

Since legal malpractice insurance policies are not the same, it is important to have a knowledgeable, independent insurance agent to help you obtain competitive quotes. Broadness of coverage, premium cost, financial solvency and service levels should be the main criteria for your decision making.

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Can I Be Sued For More Without Adequate Coverage?

The most common questions related to coverage concerns what happens when there is not enough of it. Many individuals and small companies wonder if the claim amount in a lawsuit will be higher with inadequate coverage. The simple answer to the question is no, the individual or company cannot be further obligated simply because they did not have enough coverage to cover their potential legal responsibility. Nevertheless, the financial responsibility for the under-covered will be significantly greater than for the individual or company who has the necessary coverage.

Why a Policy Fails

A term like inadequate coverage can have a rather broad meaning. Sometimes an individual or company will expose themselves to risk in an effort to save money up front. The idea is essentially a gamble on the future to save money now. Individuals and companies also have inadequate coverage at times not because they chose to expose themselves but because the policy fails them in some way. Typically, a policy fails because the policyholder and policy owner did not properly assess the industry. Either the policy did not have enough coverage, or it did not have coverage for a particular component of the claim.

Umbrella Coverage

Sometimes a policy fails in a way that is unpredictable. Markets change, and it is impossible for a policymaker to account for all possibilities. In light of this, companies have an option called umbrella coverage. Dollar for dollar, an umbrella policy is more expensive than a standard policy. On the other hand, the umbrella aspect will not let a policy fail due to a lack of robustness. However, umbrella policies can still fail because the financial responsibility is greater than the policy limit.

Owner Coverage

There are some scenarios where financial responsibility can extend beyond the company to the individuals that own it. The risk here is that with inadequate coverage, the individual is essentially sued directly. Owner coverage is a type of umbrella policy, also called a catchall policy, which protects the individual in the event that the financial obligation extends that far. Catchall coverage is only as robust as the policies it is linked to, so it requires a strong protection plan in place in order to be effective.

Types of Responsibility

Financial responsibility for a company or individual is not a simple matter, and it usually consists of many different facets. Beyond the basic responsibility coverage and the owner coverage, there is coverage for property-related damages, damages caused by products and services, errors and omissions, and policies for automobiles that the company uses. Typically, all of these policies are bound under a single master umbrella policy.

Income Protection

A claim can hit a company so hard that it has difficulty maintaining its current profit level, which can result in loss of income for the owner and others. This happens often when there is insufficient coverage, but it can also happen with proper coverage if the claim is particularly large and severe. So income protection is another form of coverage that protects one or more individuals' incomes, which can give those people and perhaps the company an opportunity to get back on its feet.

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