By Gallagher Sharp LLPHow Terms Other Than Premium Amounts and Policy Limits Can Impact Coverage
When choosing or renewing professional liability insurance coverage, certain considerations are always front of mind—the amount of coverage provided, the premium to be paid, and any deductible the insured firm/lawyer may owe for a covered loss. But policies differ in other significant ways that lawyers often do not appreciate unless and until they are facing a claim for legal malpractice. From the prospective of a lawyer who focuses on defending attorneys against claims of professional negligence and ethical misconduct, here are a few ways your policy’s terms can impact your coverage that can be discussed with your broker or insurer.
Whether Defense Costs Decrease Your Amount of Coverage
With a “declining limits” or “eroding limits” policy, every dollar incurred in defense costs (i.e., attorney fees, expert expenses, etc.) reduces the amount of coverage available to ultimately defend, satisfy, or settle a claim. This can become significant, for example, if the amount of coverage does not far exceed a claim’s potential exposure, or if significant work is needed to properly defend a claim—either because of the complex nature of the underlying representation, or the overly-aggressive pursuit of the claim by plaintiff’s counsel. In either instance, a declining limits policy can impact strategic decisions about how to respond to and defend a claim; an insured who may otherwise desire to zealously defend against a matter may nevertheless need to consider early resolution options to protect against the risk of being under-insured as the case progresses. Lawyers with a declining limits policy should consider whether their policy limit is sufficient (or should be increased) to cover both the likely exposure of a claim related to their practice and the costs of defending such a claim. Alternatively, lawyers can request a policy providing that defense costs fall outside the policy limits so that the amount of coverage is not affected by the defense costs that are incurred.
Whether You Have Grievance Coverage and Subpoena Response Coverage
The old adage that a lawyer who represents themselves has a fool for client is often equally applicable to grievance proceedings. Not only does a grievance implicate potential attorney discipline and reputational harm, grievances that are not dismissed early in the investigation stage can also be time consuming and costly to defend. Many polices now include supplemental coverage for grievance defense counsel at little or no additional charge, although the amount of coverage can vary widely. Having sufficient coverage for qualified ethics counsel to represent you in the event of a grievance is, in my opinion, a no brainer. Policies may also include supplemental coverage for responding to subpoenas issued to the attorney, whether for documents or deposition testimony.
Your Options for Defense Counsel
While sizable polices issued to large law firms generally permit their insureds to select their own defense counsel within reason, PL polices issued to small and midsized firms generally provide that the insurer has the right to choose the defense counsel who will represent an insured lawyer relative to a claim. Some polices additionally state that the insured may request a particular attorney from the insurer’s approved list—a list that can vary significantly between insurers for a variety of reasons (including defense counsel’s hourly rates). As lawyers know all too well, the quality of legal representation can make all the difference in the outcome of a matter. It is therefore important to know which attorneys your insurer does (or does not) have on their approved list, and whether you will have access to representation by a lawyer who focuses (rather than dabbles) on defending professional liability claims.
Whether The Policy Includes a “Hammer Clause”
Virtually all PL policies include a “consent to settle” provision stating the insurer cannot pay to settle a claim unless the insured lawyer consents to the settlement. Among other things, the term addresses the potential friction between a lawyer who may feel the claim is meritless and should be defended, and an insurer who can weigh the relative expense of an early settlement to that of protracted litigation. But polices often also include what is colloquially referred to as a “hammer clause”—a provision stating that if the claimant has made a settlement demand the insurer is willing to pay, but the insured lawyer will not consent to that settlement, then the insurer’s limit of liability will no longer exceed the amount for which the claim could have been settled. In my experience these provisions do not come into play often, but lawyers should be aware of whether their policies include such a term.
While policy premiums and limits of liability are always important, lawyers should stay apprised of how other terms in their professional liability policies impact their coverage, and whether adjustments are warranted.
Contact Shane Lawson with any questions.