There are certain attorney malpractice insurance policies carrying large liability limits and large deductibles that allow larger law firms to manage certain claims below their retention (deductible). For the other 99% of law firms this is not the case.
Law firms are reluctant to report small malpractice claims, feeling that with a small legal malpractice claim the firm can cover it themselves. This strategy does help the firm’s insurance history thus keeping their attorney malpractice insurance premiums low. But this strategy can cause a law firm to lose their malpractice coverage.
Non-reporting of attorney malpractice claims likely violates the policy conditions. This violation can have consequences.
The following is typical wording of requirements in an attorney malpractice insurance policy for reporting claims:
7.1. NOTICE OF CLAIM
In the event of a claim, the Insured must immediately give notice to the Company of the claim or other communication received by the Insured or his or her authorized representative. If the Insured receives information of specific circumstances involving a particular person or entity that could reasonably be expected to result in a claim, the Insured shall notify the Company as soon as practicable with the available information.
The policy language clearly states that you must report malpractice claims. Even if you chose to ignore this condition, insurer’s renewal applications ask:
12. During the current policy year, have any claims or suits been made against the firm, its predecessor firms, or any of the lawyers proposed for this insurance that have not been previously reported to this Company
The renewal application requires a signature by an authorized firm representative attesting to its accuracy.
Once through the renewal cycle you have now lied about claims reporting. Claims non-reporting puts the firm in material breach of the policy contract.
If later the non-reported malpractice claim turns out to be something that was not ‘small’ and the law firm now turns it in, the claim will get declined. More problems are in store for the law firm.
If an unrelated malpractice claim is subsequently turned in and the insurer finds out that the firm did not disclose the 1st claim, the malpractice insurer can use this as justification to decline coverage on the 2nd claim. Given the circumstances, it is likely that the insurer will non-renew the attorney malpractice insurance or worse, the insurer may rescind coverage entirely.
A nonrenewal notice for non-reporting claims guarantees the law firm is going to surplus lines. The firm can count on premiums being much higher for years to come. But it can get worse.
If coverage is rescinded, there is now no coverage, and the firm suddenly has no past acts coverage. Attorney malpractice insurance is a claims-made policy. The coverage inforce at the time a claim is made is the policy that answers and the insurer that covers the claim. With claims-made coverage, the other coverage condition is the act needs to have occurred after the prior acts date. With no prior acts coverage claims made against the firm have no coverage. If the firm does obtain a new attorney malpractice insurance policy, the new policy likely has no prior acts coverage and is pricy. The firm’s prior acts coverage is permanently gone.
If in doubt report.
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Lee Norcross, MBA, CPCU, CPIA
Managing Director, CEO
(616) 940-1101 Ext. 7080