Legal Malpractice Insurance Types of Insurers

Legal Malpractice Insurance Types of Insurers: two types of insurers underwrite legal malpractice insurance: standard and non-standard. This post will explain the difference, and how it affects the premium that attorneys pay and the coverage that they receive.

Legal Malpractice Insurance Types of Insurers: Standard Market Insurers

Standard market insurers are admitted in each state in which they underwrite coverage, which means that they’re licensed and regulated by the state’s insurance department.

Regulation entails reviewing each insurer’s initial policy wording and rates, and any subsequent proposed changes, to ensure that they comply with the state’s insurance laws and regulations. The primary objectives are to prevent insurers from selling policies with ephemeral coverage and charging unfair rates.

The standard market insurers are national insurers, like CNA, AIG (American International Group), Zurich, AXA, Westport, and Everest, and regional insurers, like Hudson, General Star, AmGUARD, Hanover, Wesco, and Med Marc.

Most attorneys obtain their coverage in the standard market for their entire career, often from one or more of the insurers mentioned above.

Legal Malpractice Insurance Types of Insurers: Non-Standard Insurers

Non-standard insurers are neither licensed nor regulated by the insurance department of the states in which they underwrite coverage. This may sound ‘scary’, but these insurers play an important role in the insurance market.

The regulation of standard market insurers provides vital consumer protection, and serves as a powerful check on an industry that has a sordid history of taking advantage of consumers. However, by limiting the rates that insurers can charge and the premium increases that they can impose, regulators also limit their ability to charge an appropriate premium to accounts that are higher-risk to incur a malpractice claim.

Among law firms, ‘higher-risk’ accounts are firms whose primary practice area is patent, securities, or class action law or a few other obscure practice areas. These practice areas have historically generated claims that cost the most to defend and accounted for the highest settlements or verdicts.

Other high-risk accounts, are firms that have recently incurred a malpractice claim and/or disciplinary punishment, or have a history of such incidents.

The standard market insurers as a rule, will decline to quote these accounts. They would thus be forced to go without coverage, but can avoid this, by shopping in the non-standard market. Since non-standard insurers’ rates and policy language aren’t regulated, they can charge an adequate premium, and are thus willing to cover ‘high-risk’ accounts.

The non-standard market, is thus analogous to the assigned risk pool that some states have for drivers who can’t obtain coverage from regulated insurers like Allstate or State Farm, because they’re either in a high-risk group, i.e., males aged 18 – 25, or have a poor driving record.

Legal Malpractice Insurance Types of Insurers: Checks and Balances

Buying coverage from an unregulated insurer may sound ‘scary’: what’s to stop it from charging outrageously high premiums or ephemeral coverage?

The answer is ‘competition’. Premium volume in the non-standard insurance market has grown at a much higher annual rate than in the standard insurance market for at least the last decade, and this growth has attracted insurers, including some standard market insurers, who are eager to expand. By offering adequate coverage for a premium that accurately reflects the risk, they can accomplish this, while providing protection to the firms they insure.

Further, while state regulators don’t directly regulate non-standard insurers, they aren’t powerless. Virtually every state has a ‘diligent search’ rule, whereby an insurance broker can’t place a firm’s coverage with a non-standard insurer, unless it has first failed to place it in the standard market, as evidenced by at least three standard market insurers declining to offer a quote.

These factors notwithstanding, there’s no avoiding the fact that rates are generally 50% – 100% higher in the non-standard market vs. the standard market, and while the coverage is adequate, non-standard insurers don’t offer some of the ‘bells and whistles’ that standard markets do in their policy.

Legal Malpractice Insurance Types of Insurers: Conclusion

We recently placed coverage with a non-standard insurer, for a start-up plaintiffs class action firm, whose application was declined by all of the major standard market insurers. The firm’s founder asked “is it bad to have an unregulated insurer as our carrier? Are there any risks”? Here is our reply:
“Until 25 or so years ago, the answer to your questions would have been “yes”,  because the non-standard market was the ‘wild west’ of insurance, populated by small, poorly-capitalized insurers.
But that ended after several high-profile insolvencies. Since then, the ‘weak hands’ have either gone out of business or been purchased by national, standard market insurers, looking to expand their business. They injected capital and expertise into the non-standard insurers that they bought, and the market is now much larger and more stable than it was in the past. And there hasn’t been an insolvency since 1998.
Your insurer, Lloyd’s of London, has long been the largest non-standard insurer in the world, and has been operating for more than 300 years, so it’s time and battle-tested.
And given the rapid growth of the non-standard market in recent years, any stigma that used to be associated with it, has long faded. Today, those insurers are as professionally managed as any standard market insurer. 

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