Growing exposures in the area ofcyber liability are creating new pockets of insurance needs withinthe lawyers' professional-liability (LPL) market.

A security breach that results in a client's data being stolenand used in a damaging fashion can lead to third-party liabilityclaims. And beyond that exposure, the theft of information througha hack brings with it other potentially expensive losses.

The law firm may need to hire a forensic IT investigator todetermine what went wrong—and then will incur costs related tonotifying everyone whose information has been compromised. And if ahacking event causes the law firm to shut down for any period oftime, those business-interruption losses would likely not becovered under a standard LPL policy.

Cyber coverage at law firms “is a huge hole right now,” says JimRhyner, worldwide specialty E&O product manager and specialtylaw firm practice leader for the Chubb Group of Insurance Cos. inWarren, N.J. “There's a lot of education going on in themarketplace right now about what the exposures are and how toprotect against them.”

And buyers are beginning to get the message—after all, whobetter than lawyers to know of the dangers posed by the pricklythicket 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 andchair of the firm's lawyers-liability practice.“Employment-practices liability was the big issue; now cyber is thecurrent one that can't be ignored,” says Leghorn, whose NewYork-based firm is listed by The National Law Journal asone of the country's Top 50 law firms.

Carriers' Coverages

Travelers recently has launched three new standalone productswithin the LPL market through its First Choice Plus program:“NAISO” (network and information security-offense coverage),crisis-event coverage and subpoena-response coverage, says DanReed, second vice president of national professional liability,bond and financial products for Travelers.

NAISO picks up third-party liability for exposures involvingtechnical issues and transmission failures with communicationbetween a law firm and its clients.

Crisis-event coverage addresses a situation where a law firmbelieves a negative communication on the Internet would cause anadverse effect on the firm's reputation, resulting in a materialloss.

Subpoena-response coverage is triggered when a firm's formerclient is involved in litigation, and another law firm needs to bebrought in to aid in releasing any client-related documents in itspossession.

From a law-firm perspective, subpoena coverage as a standaloneis something new, Leghorn says. In the past, a long-standinginsurer for a law firm might have included subpoena-coverage costsunder the LPL policy because of good will that had been built upwith the client.

One challenge for insurers as they look to craft the appropriatecoverages is that the field of cyber liability is continually andquickly evolving. Technology—and its attendant exposures—changes atlightning speeds, and case law in this emerging area is stilldeveloping at a rapid pace.

For example, clients today have different expectations of theirlawyer, often expecting immediate interaction via text messages anytime of day or night—a communication approach with its own cyberrisks. “If clients think their lawyer isn't responding quicklyenough to them, they begin to get agitated—and that's the beginningof a relationship getting into the wrong direction,” says Chubb'sRhyner.

Adds Wayne Carter, executive vice president of Avon, Conn.-basedCrump Insurance Services, “It's hard for underwriters and carriersto design products to address all these liabilities—because theydon't know how they're going to manifest themselves over time.”

“You think you have a handle onhow law firms are going to be sued by their clients, and sometimesyou find out there are other ways in which a law firm can be sued,”says Reed. “Information is moving just so much more quicklytoday.”

Bad Economy, Big Claims

While cyber liability is the hot new concern,employment-practices liability (EPL) remains a major standaloneproduct in LPL, says Michele Wade, executive vice president forLockton Cos. brokerage in Dallas.

“In this type of economy, EPL is critical due to the unlawfultermination lawsuits that are being filed,” she says.

“Whenever it's a difficult economic time, there's an increase inclaims across the board,” Leghorn says. “There's always a directcorrelation between bad financial times and a spike in LPLclaims.”

And not surprising given the collapse of the housing market,Travelers is seeing a lot of real estate-related claims ashomeowners struggle with the ramifications of a depressedmarket.

“In a bad economy, a lot of the transactions law firms areinvolved in don't go as hoped, and the lawyers are brought in andcalled to task if they've made any mistakes in those transactions,”Rhyner says.

Another fallout of the weak economy: Lawyers are more frequentlyforced to sue clients for fees that are owed to them—actions whichin turn often lead to LPL countersuits.

Pricing, Competition, Capacity

The LPL market tends to be in constant flux, but while the namesof available carriers may change, capacity is rarely an issue:“Carriers are getting out of the market, and new carriers aregetting into the market, but the supply of insurance seems big,”Rhyner says.

The LPL industry is “relatively volatile” because there's alwaysa new player getting in and another leaving, agrees FrederickFisher, senior vice president of E.L.M. Insurance Brokers in ElSegundo, Calif., a subsidiary of Align Financial Group. Somecarriers, 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 theLPL arena. “I've seen the competition grow in the last couple ofyears,” 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 dependsheavily on the exposures of individual accounts, Reed says. “Onemay see aggressive terms on renewal; others may see flat pricing oran increase,” he says.

“I would say the pricing is firming. But there are stillcarriers 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 ofthe carriers to where they need to be, at least through 2012,”Carter says. That's due to industry-wide reserve redundancy, aresult of the long tail involved in lawyers' claims, which can takeyears before they are settled or adjudicated.

“Many carriers are using those redundant reserves to prop uptheir operating results,” Carter says. “Until they deplete thoseredundant reserves, we'll be in that relatively soft market.”

On a final note, Wade would caution young agents and brokersfrom looking to the LPL market as a growth opportunity unless theyalready specialize in this area.

“I don't believe the market is for the beginner. Right now it'snot for the fainthearted,” she says.