Growing exposures in the area of cyber liability are creating new pockets of insurance needs within the lawyers’ professional-liability (LPL) market.
A security breach that results in a client’s data being stolen and used in a damaging fashion can lead to third-party liability claims. And beyond that exposure, the theft of information through a hack brings with it other potentially expensive losses.
The law firm may need to hire a forensic IT investigator to determine what went wrong—and then will incur costs related to notifying everyone whose information has been compromised. And if a hacking event causes the law firm to shut down for any period of time, those business-interruption losses would likely not be covered under a standard LPL policy.
Cyber coverage at law firms “is a huge hole right now,” says Jim Rhyner, worldwide specialty E&O product manager and specialty law firm practice leader for the Chubb Group of Insurance Cos. in Warren, N.J. “There’s a lot of education going on in the marketplace right now about what the exposures are and how to protect against them.”
And buyers are beginning to get the message—after all, who better than lawyers to know of the dangers posed by the prickly thicket of laws and regulations related to cyber liability?
“There should be no excuse for not having it,” says Tom Leghorn, a partner with Wilson Elser Moskowitz Edelman & Dicker and chair of the firm’s lawyers-liability practice. “Employment-practices liability was the big issue; now cyber is the current one that can’t be ignored,” says Leghorn, whose New York-based firm is listed by The National Law Journal as one of the country’s Top 50 law firms.
Travelers recently has launched three new standalone products within the LPL market through its First Choice Plus program: “NAISO” (network and information security-offense coverage), crisis-event coverage and subpoena-response coverage, says Dan Reed, second vice president of national professional liability, bond and financial products for Travelers.
NAISO picks up third-party liability for exposures involving technical issues and transmission failures with communication between a law firm and its clients.
Crisis-event coverage addresses a situation where a law firm believes a negative communication on the Internet would cause an adverse effect on the firm’s reputation, resulting in a material loss.
Subpoena-response coverage is triggered when a firm’s former client is involved in litigation, and another law firm needs to be brought in to aid in releasing any client-related documents in its possession.
From a law-firm perspective, subpoena coverage as a standalone is something new, Leghorn says. In the past, a long-standing insurer for a law firm might have included subpoena-coverage costs under the LPL policy because of good will that had been built up with the client.
One challenge for insurers as they look to craft the appropriate coverages is that the field of cyber liability is continually and quickly evolving. Technology—and its attendant exposures—changes at lightning speeds, and case law in this emerging area is still developing at a rapid pace.
For example, clients today have different expectations of their lawyer, often expecting immediate interaction via text messages any time of day or night—a communication approach with its own cyber risks. “If clients think their lawyer isn’t responding quickly enough to them, they begin to get agitated—and that’s the beginning of a relationship getting into the wrong direction,” says Chubb’s Rhyner.
Adds Wayne Carter, executive vice president of Avon, Conn.-based Crump Insurance Services, “It’s hard for underwriters and carriers to design products to address all these liabilities—because they don’t know how they’re going to manifest themselves over time.”
“You think you have a handle on how law firms are going to be sued by their clients, and sometimes you find out there are other ways in which a law firm can be sued,” says Reed. “Information is moving just so much more quickly today.”
Bad Economy, Big Claims
While cyber liability is the hot new concern, employment-practices liability (EPL) remains a major standalone product in LPL, says Michele Wade, executive vice president for Lockton Cos. brokerage in Dallas.
“In this type of economy, EPL is critical due to the unlawful termination lawsuits that are being filed,” she says.
“Whenever it’s a difficult economic time, there’s an increase in claims across the board,” Leghorn says. “There’s always a direct correlation between bad financial times and a spike in LPL claims.”
And not surprising given the collapse of the housing market, Travelers is seeing a lot of real estate-related claims as homeowners struggle with the ramifications of a depressed market.
“In a bad economy, a lot of the transactions law firms are involved in don’t go as hoped, and the lawyers are brought in and called to task if they’ve made any mistakes in those transactions,” Rhyner says.
Another fallout of the weak economy: Lawyers are more frequently forced to sue clients for fees that are owed to them—actions which in turn often lead to LPL countersuits.
Pricing, Competition, Capacity
The LPL market tends to be in constant flux, but while the names of available carriers may change, capacity is rarely an issue: “Carriers are getting out of the market, and new carriers are getting into the market, but the supply of insurance seems big,” Rhyner says.
The LPL industry is “relatively volatile” because there’s always a new player getting in and another leaving, agrees Frederick Fisher, senior vice president of E.L.M. Insurance Brokers in El Segundo, Calif., a subsidiary of Align Financial Group. Some carriers, especially in the major metropolitan areas of California, are pulling away, while others are coming in, Fisher says.
For her part, Lockton’s Wade is seeing more carriers enter the LPL arena. “I’ve seen the competition grow in the last couple of years,” says Wade, whose office writes coverage for 325 law firms, mostly in Texas, in every area of law.
In terms of pricing, the direction rates are headed depends heavily on the exposures of individual accounts, Reed says. “One may see aggressive terms on renewal; others may see flat pricing or an increase,” he says.
“I would say the pricing is firming. But there are still carriers with a lot of bells and whistles and aggressive pricing,” Fisher says.
“It’s going to be a slow grind to get the price up for some of the carriers to where they need to be, at least through 2012,” Carter says. That’s due to industry-wide reserve redundancy, a result of the long tail involved in lawyers’ claims, which can take years before they are settled or adjudicated.
“Many carriers are using those redundant reserves to prop up their operating results,” Carter says. “Until they deplete those redundant reserves, we’ll be in that relatively soft market.”
On a final note, Wade would caution young agents and brokers from looking to the LPL market as a growth opportunity unless they already specialize in this area.
“I don’t believe the market is for the beginner. Right now it’s not for the fainthearted,” she says.