The majority of law firms in the U.S. have less than 50 attorneys, and most of those are below 25. So when looking at Lawyers Professional Liability solutions for these firms, what is the optimal solution? When asking yourself this question prior to talking with a law firm prospect or client, you should weigh the market solutions.
There are approximately 30 insurers writing LPL for smaller firms, admitted and non-admitted alike. While price is always a metric to consider, broad coverage and optimal cost benefit in the event of a claim need to be considered. Therefore, looking for a quality admitted insurer with broad wording, offering claim expenses outside the limit and first dollar defense deductible should be a priority.
Key Coverage Musts
Before we explore the benefits of the admitted, CEOL, and FDD policy, let’s look at key coverages that should always be looked for in an LPL policy form:
- Broad Definition of Professional Services – the definition should provide coverage for the insured for services provided on behalf of the law firm in the capacity of legal services (i.e lawyer, arbitrator, mediator, or title agent). The coverage should be broad enough to include all services that a law firm would provide as professionals in the legal field.
- Broad Insured Clause or Definition – the definition should include the law firm and any predecessors in business (past or present partners, officers, directors, stockholders, members, managing members or employees of any person or entity). Furthermore, this should extend to estate, heirs, executors, administrators and legal representatives of any insured in the event of such insured’s death, incapacity, insolvency or bankruptcy.
- Limited Exclusion Clause – the exclusions in the policy should be limited to illegal and fraudulent acts by an insured or acts/situations that would be otherwise be covered under other available insurance coverages (i.e discrimination, sexual harassment, and ERISA exposures, to name a few).
- Relaxed Hammer Clause – over the years as the LPL market has become more competitive, carriers have implemented language to bear a portion (typically 50%) of the costs of the contested claim settlement.
The above are key coverage considerations. When obtaining quotes from insurers, a full policy review and analysis should be done to ensure optimal coverage is being provided.
Admitted vs Non-Admitted
The argument of which is better, admitted or non-admitted, has been going on for ages. For the large law firms that pay six or seven figures in premium, the non-admitted solution is optimal. They have the ability to have bespoke wording to fit their specific firm and risk, while the insurer can charge adequate premium that isn’t tied to a filing with the state. Additionally, it gives an insurer the ability to charge higher rates as deemed adequate after significant growth, M&A, and/or large claim payments.
When it comes to smaller law firms that are usually generic or specific specialists, the admitted solutions are superior. The insurer files the rates with each state or a base rate across all states. This gives a limited range that an insurer can credit or debit any one risk. This limits increases a carrier can put on a law firm at renewal. There are generally no taxes added to the premium (select states do tax the premium). Additionally, a portion of the premium goes to the state guarantee fund which is a pool of funds for policy holders in the event the insurer becomes insolvent. Another benefit is that if the insurer exits the market or decides to non-renew an insured, they must give ample notice. State mandates range from 45-90 days in advance. This gives the broker and law firm time to plan and find an alternative market solution. Lastly, the admitted insurers’ rates in today’s market conditions are very competitive.
Claim Expenses Outside the Limits
Generally speaking insurers offer two types of Claim Expenses Outside the Limits solutions:
- An additional limit for claim expenses (i.e. $5 million limit for damages with an additional $1 million limit for claim expenses)
- A matching limit for damages and claim expenses (i.e. $5 million limit for damages with an additional $5 million limit for claim expenses)
The diamond solution is clearly the matching CEOL. As mentioned previously, the admitted market is charging competitive rates for these solutions. Additionally, the discount to move to claims inside the limits is not large. Therefore, to optimize premium to limit and coverage the matching CEOL option is premier because you have limits for damages and limits for defense costs.
First Dollar Defense or Standard Deductible?
When looking at the deductible for a law firm, there are generally four to choose from:
- Each Claim – the deductible applies to each and every claim with no annual aggregate
- Aggregate – the deductible applies to each and every claim, but has an annual aggregate cap (i.e. $5,000 per claim / $15,000 annual aggregate)
- Single Annual Aggregate – the same as the previous option, but the per claim and aggregate are the same (i.e. $5,000 per claim/$5,000 annual aggregate)
- First Dollar Defense – the deductible only applies to damages, with no deductible for claim expenses
As mentioned above, admitted insurers are offering these deductible policy options at competitive rates. And the increase in premium charged for the FDD option is not significant for most insurers. This option gives the insured comfort that in the event an alleged act, error or omission is made against them, the insurance carrier starts paying for defense immediately at no cost to the firm. The insurers have a panel of counsel experienced in defending LPL maters at pre-determined hourly rates. These rates are usually lower than normal. This should equate to lower defense costs overall which means lower loss ratios (win/win!). Lastly, the firm only pays a deductible if a settlement is reached or the court rules damages against the law firm.
When looking at the smaller law firm market and optimizing the premium, coverage, and limit ratios, the admitted, CEOL and FDD solution should be a priority in your search. Firms that fit these solutions generally have no claims paid or limited payments and have a “traditional” law practice (i.e. no extremely high risk practice areas). When doing your marketing for law firm clients and prospects be sure to utilize your insurance company partners as well as your wholesale broker partner(s) to look at all solutions with an emphasis on admitted, CEOL, and FDD policies.