I usually speak and write about the risks of malpractice claims and how to minimize those risks and avoid the claims. But sometimes managing risks isn’t enough and a lawyer becomes the target of a malpractice claim. That lawyer certainly wants his or her malpractice insurer to provide coverage. To be covered, the claim, or potential for a claim, must be reported in a timely fashion. You might then ask, what does it mean when insurance carriers talk about “timely reporting”?
When we meet with or speak to lawyers, the conversation sometimes turns to reporting potential claims to malpractice insurers. Typical questions include the following:
- “When do I need to report something?”
- “What if I think the problem will be resolved?”
- “The client doesn’t know anything about this, I don’t think it’s a big deal at all, and I don’t think it will result in an actual claim, so do I still need to report it?”
No lawyer wants to be sued and no lawyer wants to have to report a claim or potential claim to his or her carrier. But if there’s one thing worse than getting sued for malpractice, it’s failing to have coverage when it happens. Of course, it isn’t easy acknowledging a potential claim. If you are a solo practitioner, you have to notify your client, who may not be aware of it. If you are an associate, you must tell your boss. If you are a partner, you must tell your colleagues. And of course, you must notify your insurance carrier.
When You Should Report
Joe McCarthy, vice president – underwriting at Wisconsin Lawyers Mutual Insurance Co. (WILMIC), tells policyholders to err on the side of caution and candor. “The claims you are obligated to report include matters in which the client is making the claim, regardless of whether or not you believe the allegation has any merit. Malpractice insurance policies are ‘claims-made’ policies. That means coverage is provided for matters first made against you and reported in writing to the insurance carrier during the policy period. That is important. You have to have a policy in place when you first become aware of the claim or potential claim and report it, regardless of when you did the work.”
Failing to report the problem when you become aware of it can result in the loss of coverage. McCarthy says, “The existence of a claim, which is an allegation of a mistake and a demand for payment, is usually obvious. Lawyers certainly understand those matters need to be reported immediately. For example, when a client alleges that you made a mistake and demands restitution, a claim exists. The compensation sought by a client could range from a return of your fees to a demand for outright payment of financial losses allegedly suffered.”
However, McCarthy says other matters, often referred to as “potential claims,” may be more subtle and you might be either reluctant or unsure about reporting them. “For example, in reviewing a file, you may discover a problem of which no one else is aware. Although you may want to look the other way, you have a duty under the terms of your policy to inform your insurance carrier immediately.”
McCarthy adds, “The typical insurance language says you should report to your carrier ‘when you first become aware of a matter that a reasonably prudent lawyer might expect to be the basis of a claim.’”
Often, lawyers think the allegation is frivolous or they can fix the problem. Therefore, they believe they do not have to report it. McCarthy says that approach is a mistake. “Not reporting a matter during the policy period in which you became aware of it could void coverage. Under most policies, an attempt by a lawyer to unilaterally remedy a problem or simply pretend that it does not exist could jeopardize coverage.”
“If you believe the allegation is frivolous, you still have a duty to report it. As a condition of coverage, you have the duty to report any circumstance that could give rise to a claim, regardless of whether or not you believe the matter is defensible. If the matter is without merit, by reporting it to your insurance carrier you have done your duty and have triggered protection just in case the matter would mushroom into a problem.”
McCarthy says timely reporting has several benefits to both you and your insurance carrier:
- Accurate accounting to the applicable fiscal year, affecting financial statements and rate-making
- Timely reporting to reinsurance carriers (participation by reinsurance carriers varies from one treaty year to another)
- Thorough, complete disclosure builds trust (lawyer and underwriter; underwriter and reinsurance carrier)
- Benefits other policyholders/owners of a mutual insurance company
McCarthy says lawyers sometimes try to repair the problem themselves and believe they do not have to report until they determine whether they have “fixed” the problem. “Taking remedial steps does not relieve you of the duty to notify your insurance carrier. Your attempt to cure the mistake may not be successful. And depending on the time that has elapsed while you are doing that, you may lose your coverage.”
In addition to providing notice during a policy period, McCarthy urges lawyers to answer application questions carefully when applying for insurance coverage. “Our applications ask you if you are aware of any circumstance, act, error or omission that a reasonably prudent lawyer might expect to become the basis of a claim, potential claim or grievance, regardless of its merits. That’s a pretty standard question on all malpractice insurance application forms, and it is important that lawyers answer it as accurately as possible. A material misrepresentation may void coverage.”
McCarthy says that if you state on an application that at the time of your application you think you might have been negligent in the handling of a case or you foresee that a claim may be made against you, most policies will not cover a claim that later arises. Policies will generally cover claims first reported after the policy becomes effective. Previous potential claims would likely be covered by a previous policy, so long as they were reported during that policy period.
There are several ways to minimize the risk of having no coverage. One is to thoroughly review your cases before you apply for insurance. If you discover a potential claim, or circumstances that could give rise to a claim, notify your current carrier immediately. That will ensure coverage even if you disclose it on your application to the new insurer and that insurer excludes it from your next policy.
It is not a bad idea at firms with more than one lawyer to ask each lawyer to fill out a questionnaire or some type of checklist or document stating whether they know of any potential claims.
Factors in Reviewing Claims
One impediment to timely reporting is the fear that reporting everything that could give rise to a claim will negatively affect a lawyer’s insurability and premium. McCarthy says that isn’t necessarily the case at WILMIC. “Lawyers often ask me if their reporting of any matter will automatically tarnish their insurance record. The short answer is ‘no,’ certainly not automatically. As the underwriter, I look beyond the existence of a reported claim and consider a number of factors, weigh them collectively and make a determination, based on circumstances, history, and any other information at my disposal.”
“The typical review of a claim will include consultation with the claims department to help determine if a claim has merit, the degree of negligence, the amount of alleged or actual damages, the circumstances that preceded the claim, the lawyer’s degree of cooperation, and whether the lawyer recognizes some steps he or she can take, if at all possible, to prevent a recurrence.”
McCarthy says lawyers also sometimes believe a costly claim will mean they will automatically be dropped. McCarthy says that is also not necessarily the case at WILMIC. “In addition to reviewing the factors I just mentioned, I will also take into account the lawyer’s previous claim history, both frequency and severity, and the lawyer’s longevity as a policyholder. Those are all important considerations.”
As for a premium increase, McCarthy says that too is not done as a matter of course, but rather after consideration of many factors. “I use information received from the claims department as well as claims history, longevity with us, and the nature of the claims or potential claims and any information that will give me the complete picture of a particular lawyer or law firm. Only after all the factors are considered could premium be affected. WILMIC makes every reasonable effort to avoid premium increases. On the other hand, lawyers with no claims or less costly claims can rightfully expect to pay less premium than a lawyer with a significant claim.”
Lawyers should not fear reporting potential claims or circumstances that may give rise to a malpractice claim. While that is not a pleasant task, it is necessary to ensure and protect the coverage they have paid for with their premiums. The claims-made nature of legal malpractice insurance policies requires that the notice be given in writing at the time you first become aware of a matter that a reasonably prudent lawyer might expect to be the basis of a claim. That will protect your coverage if the matter develops into a claim, and it gives your insurance carrier a chance to work with you on possible repair of the problem, investigate the circumstances thoroughly, and develop defenses to the claim if necessary.
As McCarthy says, “Lawyers may be surprised to learn that many of these matters do not have much, if any, impact on premium. And the risk of losing coverage is just not worth it. It’s better to be safe than sorry.”