If you tell a thousand lawyers they don’t know what kind of law they practice, one will likely chuckle; the other 999 will grimace, scowl, or maybe bite you. But as a legal malpractice insurance broker who reviews applications every day, I can tell you that many lawyers really don’t know, as these examples attest:
I. The Securities Lawyer Who Should’ve Invested In a Better Job Description
A “Big Law” firm attorney who was opening a solo practice, wrote “100%” next to “Securities Law” on the practice areas grid of his application. However, he answered “not applicable” to the questions on the securities law supplemental application, which ask about capital-raising transactions, mergers and acquisitions, etc., that an attorney has worked on.
As a result, we advised him that it may be possible to reclassify his practice, which would save him money, because securities lawyers pay among the highest legal malpractice insurance premiums. For example, while most lawyers pay between $2,000 and $4,000 for a policy with a $1M limit, we had recently procured coverage for a solo securities lawyer who focuses on debt and equity placements: the best quote for a policy with $1M limit was $6,500. The attorney’s silence upon hearing this suggested that this was much more than he had budgeted.
Fortunately, further discussion revealed that his solo practice would be limited to providing regulatory advice to investment funds. We had him change his practice area on his application to “Other – 100%”, and describe his practice on his firm’s letterhead.
This enabled us to procure a policy for him that had a $1M limit for $5,100.
II. The Debt Collection Law Firm That Owed an Explanation
A debt collection law firm had its malpractice insurance non-renewed due to “high claims frequency”.
A local insurance agent sent its application to several major malpractice insurers, all of whom declined to offer a quote. The agent then told the firm that it would have to obtain coverage in the “hard-to-place-risks” market, where the premiums are 50% – 100% higher.
This led the firm’s founder to send us its application. Its malpractice claims history consisted of four lawsuits and three incidents (potential claims) in the last seven years, for which its insurer’s payout + reserve for future payouts was nearly double the amount the firm had paid in premiums. Malpractice insurers clearly wouldn’t view the firm as a good risk.
However, there was good news amid the bad: the four lawsuits were brought by individual debtors, who sued the firm under the Fair Debt Collection Practices Act (FDCPA), while the three incidents involved commercial debtors, who can’t sue under the FDCPA. Further, the last FDCPA claim had been filed three years ago, and all three incidents involving commercial debtors had occurred since then. This suggested a change in the firm’s practice.
The firm’s founder confirmed that he began de-emphasizing consumer debt collection in favor of commercial debt collection after the last FDCPA claim was filed. Currently, the practice was 80% commercial debt collection v. 20% consumer, the opposite of what it had been three years ago.
In other words, this wasn’t a debt collection firm, but a commercial debt collection firm. It thus had little exposure to FDCPA claims, which are the biggest malpractice risk for debt collection lawyers.
We had the firm fill out the application of the only major legal malpractice insurer that distinguishes between consumer and commercial debt collection, and procured a policy for it that provided the same coverage as its non-renewed policy for a 2% increase in premium.
III. The Business Law Firm That Had No Business Describing Its Practice the Way It Did
A Business Law firm sent us what appeared to be a routine application: its practice was a mix of business entity formation; small, private company purchases/sales; commercial litigation, and general business law, i.e., drafting and negotiating commercial contracts.
Further, it reported no malpractice claims history, no suits against clients for unpaid fees, and acceptable risk management procedures, i.e., regular use of engagement letters, dual-calendar docket control, a conflict-of-interest avoidance system, etc.
Given the firm’s the risk profile, and the fact that its current policy was expensive relative to the coverage it provided, we anticipated that we would be able to procure a policy for it that provided more coverage for a lower premium…until we discovered this sentence on its website: “we’ve handled complex business matters worldwide, and have affiliates in some of the world’s busiest and most exotic locales”.
This was news to us, because according to the firm’s application, the most exotic locale that it practiced law in was Cleveland. Further, the complexity of international law practice can increase a small firm’s malpractice claims risk so much that many insurers will either add a surcharge to the premium or decline to offer a quote.
When we explained this to the firm’s managing partner, he stated that it hadn’t worked on an international matter in several years, and didn’t expect to in the near future, so the statement on its website was similar to “puffery”.
We explained that malpractice insurers would regard any information on the firm’s website as indicative of its current practice, and recommended that it remove any non-current information.
Once this was done, we procured a policy for the firm that provided a 50% increase in policy limits for a 16% lower premium.
Curtis Cooper is a legal malpractice insurance broker, and principal of Lawyers Insurance Group – Broker For Great Law Firms, in Washington, DC, which helps law firms optimize their malpractice coverage. He can be reached at 202-802-6415 or ccooper@lawyersinsurer.com.
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