The Purpose of Legal Malpractice Insurance
Legal malpractice insurance is a type of professional liability insurance designed to protect attorneys and law firms from risks associated with their practice. It provides a safety net for lawyers who may make mistakes in the course of representing clients. For example, if an attorney misses a filing deadline or makes an error in a client’s case, the resulting legal malpractice claim could result in financial liability for the attorney. With legal malpractice insurance, however, the insurance carrier pays the attorney’s legal fees and other costs associated with defending against the claim. This protection is critical for attorneys, as it enables them to focus on their legal work without having to worry about the potential financial liability of a malpractice claim. Legal malpractice insurance is also important because it can help attorneys avoid disqualification from representing a client in a medical malpractice lawsuit. If an attorney is disqualified from representing a client due to a potential conflict of interest , for example, this can result in a loss of future business and a diminishment of reputation as a lawyer. However, if the attorney has legal malpractice insurance, it can help mitigate these potential losses and reduce the risk of financial harm for the attorney. In general, legal malpractice insurance provides coverage for claims arising from an attorney’s negligence, errors, or omissions in the performance of their legal services. The specific terms and scope of coverage provided by legal malpractice insurance policies can vary significantly from one policy to another, so it is important for attorneys to carefully review and understand the terms of any legal malpractice insurance policy before signing it.
Several Factors Can Affect the Cost of Your Firm’s Legal Malpractice Insurance Premiums
Numerous factors can influence the cost of a policy. The claim history of the firm is one of the most important aspects. If the firm has one claim that is particularly severe, it may be difficult to obtain fully affordable coverage. Minor offenses and a longer history of claims may even be detrimental to coverage. Most lawyers can expect overage for 2-3 prior claims in the past 5-6 years. Emphasis on the current number of lawyers practicing is also a factor. Sometimes a law firm will find itself offered reduced rates due to a new partner that brings in a large amount of business. When a firm offers a type of legal practice that is more likely to see a legal malpractice suit, the carrier may also adjust the cost. According to the data, "Insurance companies recognize the increased risk for certain types of legal services. For example, insurance may be more expensive for a lawyer who does tax work, real estate and bankruptcy work is more likely to be sued than a family or municipal practice, employment law is more likely to be sued for legal malpractice than those practicing real property or probate law, and a litigator is more likely to be sued than a transactional lawyer." According to this very interesting blog at Law.com: "Personal factors can also influence premiums and renewal rates. For instance, insurance is lower for LLPs than sole practitioners, and lower in non-urban states than in urban ones. Similar to other types of insurance, rates are lower for members of the State Bar that renew their policy before an early deadlines, and those that have been with the insurer for an extended period of time." It seems like common sense that the type of law practiced can influence premium amounts. A firm doing patents will likely see lower premiums due to a lower litigation risk.
Across Different Jurisdictions, the Rates of Legal Malpractice Insurance Vary
The average cost range of legal malpractice insurance can vary considerably between jurisdictions. In the United States, according to direct malpractice insurers, primary policies range from about $3,500-$4,500 for solo practitioners in suburban areas (this may be lower in certain states, and higher in others), and from about $4,000-$6,500 in larger cities with higher costs of living and/or where there is a greater risk of claims. However, in Hawaii, the cost range is around $5,000-$11,000. In Alaska, however, the base price for a primary policy is around $7,500.
One of the most expensive states in the US for lawyers to obtain legal malpractic insurance is California, where a 2019 survey of solo practitioners found that the highest rate for a $10,000 limit on the policy was $10,984 (the lowest was $3,785). For larger firms, the cost of legal malpractice insurance spiked to as much as $15,600, with the average ranging between $6,000 and $8,000 each year depending on the size of the law firm and the types of cases handled.
In the UK, the cost of legal malpractice insurance varies between £3000-£7,000 (approximately US$3,900-$9,100). In Europe, it is similar; the average price being €1,500 (roughly US$1,650) in Germany, though it is £4,000 (roughly US$5,200) in the United Kingdom. In Australia, prices for professional indemnity insurance typically range from A$5,500- A$30,000 (approximately, US$3,750-$20,000).
For Asia and Africa, the annual cost for legal malpractice insurance is set at US$4,000 and US$15,000 respectively, for junior and senior lawyers. However, because of the limited amount of insurance companies insuring lawyers for legal malpractice cases, there is no consistency in the pricing.
Firm Size Impacts What Your Law Firm Must Pay for Legal Liability
Firm size is another factor which will play a large part in how much a lawyer will spend on their malpractice insurance. When a firm has a larger number of attorneys and a large number of clients, the premiums for insurance are usually going to be lower than they would be with a smaller firm.
A small law firm which consists of a senior partner and a recent graduate, for example, is going to pay far more for their malpractice insurance than what a firm that is made up of 30 attorneys with many years of experience. The reason for this is because a larger firm with experienced lawyers can afford to hire and have a number of expert attorneys to deal with all of their various clientele.
A $300 per hour attorney in a big firm may only see clients in one particular area of the law, such as corporate law, but it is an area that is generally free of complaints. A $150 an hour attorney in the same field with a small two or three person practice is much riskier to insure.
Likewise, a general practitioner is usually more risky to insure than a specialist. A general practitioner is likely to get involved in practice areas which are more difficult to predict, whereas a specialist is usually in a defined area of the law which has its own distinct risks.
If the law firm has been operating for several years without any claims then they will be much more likely to be insured by the premium for them. In fact, many malpractice insurers offer a five year claims history discount program which is used by many firms who create a line of credit to cover the premium. Thus many lawyers here are able to use a lower premium rate and pay monthly.
It is very important to shop around for the best insurance price. If you have been operating your firm without any claims for several years, you can often negotiate a better price on your premium. Having your attorney help you negotiate a lower premium can be helpful.
Providers and Plans Vary in Their Exposure to Malpractice Risks
A few different organizations offer legal malpractice insurance to attorneys. The American Bar Association (ABA) has a Member Advantage program that offers malpractice insurance at discounted rates to its members. Some states have their own bar association programs. For instance, the Legal Malpractice & Ethics Journal on Legal Malpractice Law provides a list of fourteen states with their corresponding programs. Direct malpractice carriers are those who pay potential policyholders directly rather than via a member organization or association. This is the group of which law firms making more than $5 million in collected fees annually will likely be able to choose from.
Direct malpractice carriers seem to follow the rule about obtaining quotes from three different companies and seeing which offers the most competitive rates. They often advertise that they are the only company that guarantees certain levels of coverage for solo and small firms, do not have sliding scales, and have no caps. Examples of direct carriers include: Arch Insurance Company, Lawyers Professional Liability, ALPS Property & Casualty Insurance Company, Westport Insurance Corporation, and Pace Insurance Company. The most notable benefit of obtaining quotes from multiple direct carriers is that it allows a law firm to evaluate pricing against policy structure, terms, coverage, etc . Notably, most direct carriers only cover attorneys licensed in 50 states as opposed to having limits on where firms are eligible.
However, the fact that a law firm qualifies for a direct carrier does not mean it should obtain coverage from one. Many of those who obtain policies from direct carriers are in the large firm segment, an area where there is substantial competition for coverage beyond price. For example, firms applying for coverage through ALPS will be subjected to thorough evaluations as part of their underwriting process. ALPS goes through a loss prevention process before issuing any quote. If it obtains a lot of applications, policies could be excluded from coverage on a stricter basis than other carriers. In several recent cases, ALPS declined to provide coverage on a new practice because of prior losses. ALPS has also increased its practice limits substantially, doubling limit options within the past year. As a result, obtaining quotes from one or two direct carriers no longer guarantees that you will find the coverage your cycle needs. To find the best fit, reach out to your broker, who will send out applications that highlight a few of the fundamental differences in coverage, and see what you get back. From there, your specific goals and any other particular needs you may have can be balanced against the premiums you are willing to bear.
Cost Saving Tips for Legal Malpractice Insurance
There are multiple steps that lawyers and firms can take to keep the cost of their malpractice insurance in check. For instance, firms that have already scaled back staff and overhead will generally be more attractive to a potential provider than a firm that has maintained or increased its staffing levels and has higher overhead. It may also be helpful to have more experienced lawyers in the firm with reduced levels of malpractice claims against them. Additionally, keeping up with the literature on developments within your practice area, as well as any changes to procedures in your office, may also be a factor in your insurer’s determination. Last, it is likely that any risk management program you have in place addressing transitioning clients, obtaining engagements and disengagements, and managing difficulties with clients will help to keep your costs down to a minimum.
The Impact of Spending Less on Malpractice Insurance
Failing to ensure you have sufficient malpractice insurance to protect yourself and your clients can have severe consequences, ranging from loss of your law license to financial ruin. Failure to purchase malpractice insurance is the felony crime of unauthorized practice of law under statute 10-501. Paying for an insurance policy that is designed for a solo practitioner when you need coverage for a large, multi-attorney law firm or for a particular area of practice may work for a while but can come back to haunt you. For example, if you are only purchasing minimum coverage, you can have catastrophic consequences if you ever have a claim that exceeds that minimum coverage.
Carrying the right amount of insurance is also necessary to protect your clients. If you are found to have breached your fiduciary duty to your clients by failing to carry adequate malpractice insurance , your clients could potentially sue your law firm for malpractice as well. In addition, your law firm’s malpractice insurer would almost certainly deny your claim and then sue you to recover the amount it had to pay to your former clients and to be relieved of its indemnification obligations under the insurance policy.
In such a case, you could be held liable to your law firm’s malpractice insurer for the amount of the claim over the insured limits you carried. The fact that you have a law degree is not sufficient proof that you have the expertise required to practice law in this area; your law firm’s insurer will likely argue you should have known the insurance policy was inadequate and sued to recover your full policy limits from you.
