Vol. 75, No. 9, September 2002

Test Your Legal Malpractice IQ

by Ann Massie Nelson

Few policyholders read their insurance policies - until the day they need them. Don't wait until you have a legal malpractice claim to discover what your policy covers. Answer these 12 true-false questions to test your knowledge about lawyers professional liability insurance.

Ask yourself, true or false?

Q.1 - If the value of a claim is less than my deductible, I don't need to report it to my lawyers professional liability insurer.

Q.2 - A retroactive date on my policy means I do not have protection for all of my past legal work.

Q.3 - When I retire, I can purchase "tail" insurance to cover all my years in practice.

Q.4 - Most malpractice claims arise from situations in which the lawyer didn't know the law.

Q.5 - The costs of defending a claim are included within my limits of liability.

Q.6 - New lawyers report more claims than experienced lawyers.

Q.7 - I am not liable for work performed by my former law partners.

Q.8 - My professional liability insurance policy will cover my activities as a director or officer of a corporation or organization.

Q.9 - Lawyers professional liability insurance does not cover legal work I do for a business that my family or I own.

Q.10 - Pro bono legal work is excluded under my lawyers professional liability insurance policy.

Q.11 - I can expect three malpractice claims during my career.

Q.12 - Most malpractice claims against lawyers are resolved without paying indemnity.

How did you do?

A.1 False. A claim that starts small may grow into a more expensive and complex claim than you anticipated. If you fail to report a claim when you first become aware of it, you could forfeit your insurance coverage.

Why? Lawyers professional liability insurance policies are "claims-made" policies. Claims-made insurance covers you for claims made against you and reported to your insurance carrier during the policy period, according to Melvin G. McCartney, president and chief executive officer of Wisconsin Lawyers Mutual Insurance Co. (WILMIC).

"If the claim is made against you within the current policy period and you do not report the claim to your carrier until a year or two later, you may not have coverage," McCartney says. "To assure coverage, report the claim immediately to your insurance carrier, even if you think the claim is frivolous or the demand is within your deductible amount."

A.2 True. A retroactive date for the law firm or for any individual lawyer in the firm means there is no coverage for legal work performed prior to that date. The premium may be lower to reflect the reduced exposure.

A.3 True. However, "tail" insurance is not sold as a separate policy. "Tail" is an epithet for an extended reporting period endorsement. A tail can be added (that is, endorsed) to your current policy to extend the time you have to report an error or omission in legal services you performed in the past. You must have an insurance policy in effect when you want to purchase an extended reporting period endorsement.

Bear in mind that the "tail" endorsement does not restore the original limits of liability; multiple claims will reduce the aggregate limit.

A.4 False. Administrative errors are the source of about 40 percent of legal malpractice claims. The most common error? Missed deadlines. Failure to know the law is the second most common error.

A.5 True. Some professional liability policies feature defense costs outside of limits (typically for additional premium); however, standard policies deduct loss adjustment expenses from the total limits available. From the insurer's perspective, this practice encourages conservative use of defense dollars. It also means that long, protracted litigation will reduce the amount available to pay the loss, should the claimant succeed.

A.6 False. Lawyers who have been in practice 10 years or more report more frequent and more expensive claims than their junior colleagues. One reason is easily explained. Professional liability insurance commonly includes coverage for "prior acts," that is, legal work performed prior to the current policy's inception. Mid-career lawyers have more prior acts on which a claim might be made. Furthermore, the value of the underlying cases they handle is likely to be higher.

"Mid-career attorneys also face more demands on their professional and personal time," McCartney says. "When your work plate is full and you are asked to handle one more emergency, chances rise that something will slip through the cracks."

A.7 False. You could be liable if the work was performed while you were a partner at the firm. If you leave one firm to join another, you need to look at both firms' policies. Ideally, your new firm's policy will cover your prior acts and the vicarious liability you bring with you as a partner or officer of your former firm.

If your new firm's insurance carrier restricts coverage to work performed at the new firm, you will need to cross your fingers and hope that the old firm maintains insurance coverage or, if the firm dissolves, purchases an extended reporting period endorsement, also known as "tail" insurance.

A.8 False. Your lawyers professional liability insurance was not intended to encompass the liability of corporations or nonprofit organizations where you or members of your firm serve on the board of directors.

If a claim for negligence arises and your activities as a board member are indistinguishable from your professional services as a lawyer, you risk a coverage dispute between the directors and officers (D&O) liability insurer (assuming the organization carries D&O insurance) and your lawyers professional liability insurer. The smart thing to do is choose one position or the other - not both.

A.9 True. Lawyers professional liability insurance typically excludes coverage for legal work you do on behalf of a business you or a member of your family owns. WILMIC's test for business ownership is more than 10 percent interest owned or controlled by you or a family member.

A.10 False. Compensation is not a criterion for liability, McCartney says. If you breach your duty to someone with whom you have an attorney-client relationship, your professional liability insurance should protect you, regardless of whether the client is a paying one or not.

A.11 True. National statistics show that a lawyer will receive, on average, three malpractice claims during the course of 40 years in practice.

A.12 True. However, success often comes with a price tag. Defending legal malpractice claims can cost thousands - sometimes hundreds of thousands - of dollars. Hidden costs include lost productivity, emotional turmoil, and harm to your professional reputation. "We have paid more than $100,000 to defend a policyholder who was found not liable," McCartney says.

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