Attorney malpractice insurance uses a claims-made policy form. This is an important concept when reducing coverage limits. Unlike an occurrence policy form where the policy form used to settle a claim is when the act occurred. With a claims-made form the policy form used to settle the claim is the form inforce at the time the claim is reported (assuming continuous claims made coverage). So, why is this important?
An insured attorney reported that a claim had was against them. The attorney malpractice claim resulted in a loss of over $200,000. Unfortunately, the insured only had a policy limit of $100,000 per claim. The insurer wrote their check for $100,000 and close their claim file. It left the insured to defend themselves and settle the balance owed on any additional amount due.
The insured had been carrying $500,000 liability policy limit but to save money reduced that policy limit the year before the claim was made against the insured. So even though the insured had a $500,000 coverage limit when the claim occurred, the firm now had $100,000 per claim limit. This is because being a claims-made policy, the claim was settled on the policy form under which the claim was made.
By reducing their insurance limits to save a few hundred dollars at renewal, the insured is now faced continuing to provide themselves with a defense and is responsible for possibly over $100,000 of damages.
Just because a law firm’s practice has changed when reducing coverage make sure to consider your past exposure so that you do not face this problem. In determining the policy limits needed make sure to look at your most expensive case and if you were to make a mistake how much could that cost. Insure for the worst-case scenario not an average cost of claims that could be made against you. And with claims-made coverage it is not just your current cases but the cases that you’ve handled in the past that can come back to haunt you.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080