Law firms often pay their attorney malpractice insurance in installments by financing with a premium finance company or direct bill payments through the insurer. These are good ways to manage cash flow. Problems happen though when a law firm allows their attorney malpractice insurance to cancel for premium nonpayment. The premium finance company as part of the agreement to finance the policy is given a power of attorney to cancel the coverage for nonpayment. Or if direct bill the insurer also has the right to cancel coverage for premium nonpayment.
Once the finance company or the insurer issues the cancellation notice the insured only has a few days to act, as the nonpayment notice gives the insured, usually 10 days before becoming effective. After that even if the insurer does not send a cancellation acknowledgement, many insurers consider the coverage cancelled on the effective date on the notice. If a claim is reported after the coverage cancellation date your legal malpractice insurer will likely deny the claim.
One of the crazier things is when the law firm uses the pending cancellation notices as a trigger to pay. In addition to racking up late fees, there are ramifications to frequently letting your coverage cancel and then having it reinstated. Most malpractice insurers have a set number of nonpayment cancellations and reinstatements that they will do. This varies widely by insurer from no tolerance to 3 or 4 times to cancel and reinstate. Once the firm reaches that magic number, your insurer may refuse to reinstate. If they refuse to reinstate, you are likely in a backdating situation to try and protect your past acts and with most attorney malpractice policies you may have no ability to purchase an Extended Reporting Period endorsement (ERP).
If you cannot find an insurer that is willing to backdate, which is extremely difficult if you have been cancelled for premium nonpayment, you lose your prior acts coverage. Given that an attorney malpractice insurance policy is claims-made policy this means you are uninsured for past acts. So even if you have paid for coverage for many years, you suddenly are bare. The options to fix are expensive and very limited. You are now stuck in the river without any good way out.
Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080