Legal Malpractice Insurance: Claims-Made Coverage, Part 3 of 5: Gaps

Legal Malpractice Insurance Claims-Made Coverage GapsPreviously, we discussed how claims– made policies differ from occurrence policies, and the conditions that must be satisfied to trigger coverage under a claims-made policy, which is what all legal malpractice policies are. 

We also mentioned how attorneys’ lack of understanding of how claims-made cov-erage works can cause a gap in their malpractice insurance, i.e., a denial of coverage for a claim, which would require them to fund their defense of the claim out-of-pocket.

There are two gaps to be aware of: claim-reporting, which we discuss in this post, and  switching legal malpractice insurers, which we’ll discuss today.

Law firms switch insurers often, sometimes because their incumbent insurer provided poor service or mishandled a claim, but usually because the new insurer offered better terms.

This claim scenario will illustrate how a coverage gap is created: the Great law firm bought a legal malpractice policy from Big Insurer effective January 1, 2012 – December 31, 2012, and renewed it for January 1, 2013 – December 31, 2013, and January 1, 2014 – December 31, 2014, but switched to Huge Insurer on January 1, 2015. A Great lawyer represented client Smith from February 15, 2013 – May 1, 2014, but didn’t do a great job: on March 5, 2015, Smith notified the Great firm that he planned to sue it for mal-practice. The firm reported the claim to Big Insurer on March 9, 2015; will Big Insurer provide coverage?

Previously, we presented three conditions that must be met for a claim to trigger cover-age under a claims-made policy.

Let’s apply them to this scenario:

Condition #1: the wrongful act(s) that gave rise to the claim occurred between February 15, 2013 – May 1, 2014, the period of representation, which is after the policy’s retro-active date of January 1, 2012. Pass.
Condition #2: the claim was made on March 5, 2015, which was after the Great firm had terminated its coverage with Big Insurer. Fail.
Condition #3: The Great firm reported the claim to Big Insurer on March 9, 2015, which is after it had terminated its policy. Fail.

Can the Great firm obtain coverage by reporting the claim under the 60-day grace per-iod that most insurers allow after a claims-made policy is terminated? No, because this would’ve allowed it to report this claim by March 2, 2015, but it didn’t report it until March 9, 2015. Fail.

Conclusion: the claim isn’t covered under Great firm’s legal malpractice policy with Big Insurer.

It then reported the claim to its new carrier, Huge Insurer; will it provide coverage? Let’s apply the three-condition test:
Condition #1: the wrongful act(s) that gave rise to the claim occurred between February 15, 2013 – May 1, 2014, the period of representation, which is before the Great firm’s policy’s retroactive date of January 1, 2015, its first date of coverage with Huge Insurer. Fail.

Conclusion: no coverage.

The Great firm thus has no coverage for this claim under either its prior or current pol-icy, so it will have to fund its defense and any monetary settlement out of its and/or its partners’ assets.

Next time, we’ll examine how it could’ve avoided this.

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