I know, you saw the words “malpractice policy” in the title of this article, and your first instinct was to quickly turn the page. I understand. Malpractice insurance does not head up your list of priorities and is not the most exciting part of your practice. But if you’ve read this far, then at least you resisted the impulse to ignore the topic.
Although not the most exciting aspects of your job, avoiding and insuring against malpractice certainly can help you sleep at night and give you some peace of mind. They also can protect you and your clients. If there’s one thing that’s worse than getting sued for malpractice, it’s failing to have coverage when it happens.
I have written before about malpractice protection, when to report a claim, and what types of problems you should report. But it’s a good time for a refresher, because I frequently run into Wisconsin attorneys who have questions about malpractice policies. Below is a short review of what to do to keep yourself protected.
Report Claims in a Timely Manner
No lawyer wants to be the object of a malpractice claim, and no lawyer wants to have to report a claim or potential claim to his or her carrier. But failing to report a claim or potential claim might mean no coverage, and that is much worse. The claims-made nature of legal malpractice insurance policies requires that the notice be given in writing when you first become aware of a matter that a reasonably prudent lawyer might expect to be the basis of a claim.
Timely Reporting a Dispute Benefits All Parties
Coverage disputes are not common. And malpractice carriers do not look forward to them. They can be time consuming and costly for everyone involved. That said, the following scenario is an example of what can happen when a matter is not timely reported.
A lawyer gets a letter from a client saying the client believes he lost recent litigation because the lawyer didn’t call certain witnesses during the trial. The letter says the client should have been advised to settle the litigation when he had the chance; the client demands $25,000 and that the lawyer return the fees paid to take the case to trial. The lawyer decides not to answer the letter, knowing the client is kind of a hothead and wanting to wait for the client to settle down. Weeks turn into several months, and the lawyer hears nothing more.
The lawyer decides to purchase professional liability insurance with a new company. He completes the application, not even thinking about the former client, who has now been silent more than a year. Several months after the new policy was issued, the lawyer is served with a summons and complaint, demanding $100,000 and a return of fees as a result of the mishandling of the trial and bad advice regarding settlement. The lawyer sends the complaint to his new insurance company, which issues a reservation-of-rights letter stating there is no coverage based on the fact that the lawyer knew about the problem before completing the application for insurance, did not call out the problem on the application, and that the claim should be covered by the lawyer’s previous insurer.
The lawyer then gives notice to his previous insurer, which says the matter is not covered because it is late-reported. A reservation-of-rights letter is issued by this company, too, and a lawyer is retained to defend the insured as to the merits of the former client’s suit, while the company attempts to answer the coverage question. The company also retains a lawyer to represent only the company on the coverage issues. The company moves to intervene in the litigation, stay the case, and have the court determine coverage. Meanwhile, a principal witness for the lawyer dies.
A scheduling order will be set on the coverage issues and typically the plaintiff’s case is stayed while this happens. Once the court determines which policy – or that neither policy – applies to the case, and the time for appeal of that decision has passed, the plaintiff’s original case can proceed. The court’s decision is binding on the insurance companies, the lawyer, and the plaintiff, who is foreclosed from making any direct claim against the insurers the court decided do not provide coverage for the claim.
During the process, while the case is stayed, the parties (sometimes including the insurance company) discuss settlement or agree to mediate the entire matter. With some cooperation and discussion, a matter may be able to be resolved in full. But under these facts, the expectation would be that the lawyer bears the majority of the burden.
All this takes much time, effort, cost, and energy that could have been avoided had the lawyer sent the initial client letter to his then-insurance company.
So when should you report a claim or a potential claim? Joe McCarthy, vice president – underwriting at Wisconsin Lawyers Mutual Insurance Co. (WILMIC), says he tells policyholders to err on the side of caution.
“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.”
Other matters, often referred to as “potential claims,” may be more subtle, and you might be either reluctant or unsure whether to report them. McCarthy says, “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.’”
Don’t Keep the Matter to Yourself With the Hope of “Fixing” It
Often, lawyers think a malpractice allegation is frivolous or they can fix the problem. Therefore, they believe they do not have to report it. McCarthy says this 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.”
According to McCarthy, “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 which 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.”
Timely reporting has benefits for both you and your insurance carrier. WILMIC’s claims attorneys often help lawyers mitigate damages. Early reporting can help in the defense of a claim or a potential claim. In addition, thorough, complete disclosure builds trust between you and your carrier.
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.”
Report Potential Claims in Addition to Actual Claims
This area sometimes trips up lawyers. That’s understandable. Many lawyers say they don’t know what a “potential claim” is. Missing a deadline and failing to include a necessary provision in a contract are pretty obvious mistakes. But sometimes, an error is not as apparent. The definition of a potential claim in WILMIC’s policy is “when you first become aware of facts or circumstances regarding an act, error or omission … that a reasonably prudent lawyer would expect to be or to become a basis for a claim, regardless of whether you believe such a claim will be made.”
In other words, McCarthy says, it doesn’t matter whether you think you made a mistake or not. “If there are circumstances in which you realize a client could bring a claim, you should report it. It may not turn out to be anything, but reporting it will at least trigger your coverage in the event that a claim arises.”
Carefully Answer Policy Application Questions
When applying for insurance coverage, make sure your responses are accurate and precise. McCarthy says, “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.”
Review Your Cases Before You Apply for Insurance
One way to reduce the risk of having no coverage is the following: 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.
McCarthy adds, “If there are multiple lawyers at your firm, it is not a bad idea to ask each lawyer to fill out a questionnaire or some type of checklist or document stating whether they know of any potential claims.”
Do Not Let Fear of Increasing Premiums Stop You From Reporting Matters
A question malpractice insurers hear frequently is, “Won’t my premiums go up every time I report a matter to you?” McCarthy says that is not necessarily the case at WILMIC. “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 their insurer will automatically drop them. McCarthy says that also is 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 would be done not as a matter of course but only 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. WILMIC makes every reasonable effort to avoid premium increases.”
A claim is never a pleasant experience for lawyers, even one that doesn’t have merit. However, reporting to your carrier is necessary to ensure and protect the coverage you have paid for with your premiums. Reporting 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, investigating the circumstances thoroughly, and developing 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. Never having a claim or potential claim threaten your practice is the best peace of mind, of course. But the best protection, in event of an error, is early detection and reporting. The risk of losing coverage is just not worth it. It’s better to be safe than sorry.”