Attorney malpractice insurance uses a claims-made policy form. This is an important concept when considering 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 reports that a claim was made 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 closed 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 a $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 act occurred, the firm’s claims-made limit is now $100,000 per claim. With claims-made coverage, the claim is settled using the policy form when the claim was reported.
By reducing their insurance limits to save a couple hundred dollars at renewal, the insured is now faced continuing to provide themselves with a defense and is responsible for any damages over $100,000.
Just because a law firm’s practice has changed, when reducing coverage make sure to consider your past exposures. In determining the policy limits needed consider your most expensive case and if you were to make a mistake how much that case could that cost. Insure for the worst-case scenario not an average cost of exposures. And with claims-made coverage past acts can come back to haunt.
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Lee Norcross, MBA, CPCU, CPIA
Managing Director, CEO
(616) 940-1101 Ext. 7080