There is no standardization for Attorney Malpractice Insuring Agreements. The insuring agreement might also be called “Defense and Settlement” or a similar name. This plus the “Additional Coverages” sections gives the policy intent.
Key terms in the insuring agreement:
1. Is the policy a ‘duty to defend’ or ‘reimbursement’ policy? Admitted attorney malpractice insurance policies normally are a ‘duty to defend’ policy.
a. Particularly non-admitted insurers (surplus lines) may be ‘reimbursement’ policies. A reimbursement attorney malpractice policy may be desirable for large law firms and other firms with high deductibles with practice areas that have frequent small claims or incidents that can be settled within the deductible. Reimbursement policies may allow the firm to keep the defense costs and settlement costs inside the deductible which helps the firm maintain lower overall attorney malpractice costs.
b. For typical law firms that are not prepared to foot the bill for a large deductible a ‘duty to defend’ policy makes more sense. With a duty to defend policy the insurer provides a defense up until the time coverage is determined to not exist; or the defense costs exceed the applicable policy limits or the claim is settled. This is an important distinction as with a reimbursement policy the law firm must provide its own defense and foot the bill “up front.” With a reimbursement policy the only costs that will be reimbursed are for those after coverage is determined to exist. For typical firms a duty to defend policy is preferred. With certain insurers, the policy may be a duty to defend, but the additional coverages section(s) may be a reimbursement policy.
2. Is there a ‘consent to settle clause’? The ‘consent to settle’ clause may be found in the insuring agreement or another policy section. If so, is there any penalty for withholding consent (Hammer Clause)? Professional liability insurance policies normally give the insured the right to approve settlement. The insurer and insured may want to settle the matter and move on. But there are occasions where the insured may wish not to settle. If the insured does not want to settle understand the consequences of that decision. A ‘consent to settle clauses’ may state that if the insured does not settle when the insurer could have, any additional expenses for defense and indemnity are the responsibility of the insured (The Hammer Clause). Some ‘consent to settle clauses’ provide for the insured to refuse to settle and force the insurer to continue the defense, until limits are exhausted without additional liability to the insured. Policies may have a mediation of the right to ‘consent to settle.’
3. Are there additional coverages included, either in the insuring agreement or a separate additional coverage section such as disciplinary coverage, regulatory agencies inquiries or loss of earnings payments? It is normally not possible to increasing additional coverage limits. The additional coverages are likely not subject to a deductible. Addition coverages examples are:
a. Disciplinary coverage for regulatory agencies or government entities: Disciplinary coverage is likely defense only coverage. While these limits may seem unimportant, one insurer that has a $100,000 additional disciplinary coverage limit reports that the average disciplinary defense cost is over $25,000. If the policy has a limit of only $10,000 for disciplinary coverage, then it is likely too low. Alternatively, insurers may only offer disciplinary coverage reimbursement of defense costs for “innocent” attorneys. Non-admitted policies pay provide no disciplinary coverage.
b. Another additional coverage is loss of earning for the time spent in assisting the insurer providing a defense for the attorney or firm.
c. Subpoena Assistance is another coverage that might be available helping the insured respond to an information request.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080