An American Bar Assn. study of legal malpractice found that claims against lawyers surged 36 percent between 2004 and 2007 when compared with the prior 3-year period. Many experts believe that the state of the economy during the past couple of years has only made the situation worse.
But what does this increase in attorney malpractice claims have to do with agents and brokers?
Understanding liability is a basic legal skill, and lawyers have significant expertise in analyzing liability exposures and understanding legal trends. However, when it comes to their own professions, lawyers may not always be as well versed in the developing professional liability exposures they may be facing while practicing law. This is where the agent or broker can step in. By helping lawyers better understand these emerging issues and how to best protect themselves, an agent can guide lawyers toward better insurance choices and thereby become a valued partner for legal professionals.
Three trends and key coverages
The legal profession continues to experience significant changes driven by intense competition, business pressures within the current economy and newer approaches to practicing law. These changes can be grouped into major trends that appear to be generating new professional liability exposures. Three of these trends are set forth below, along with some of the newest insurance coverages designed to address these potential liabilities.
As the legal system and law firms continue moving into the electronic age, they are now fully embracing the newer technologies, such as electronic filing (e-filing), mobile technology, storing client data digitally, and communicating with court systems and opposing counsel and clients in an electronic format.
However, along with these new communications advances come new technology exposures, also known as cyber liability. For example, in a case from 2006, a law firm sued a large information technology company, alleging that one of the company’s employees invaded the law firm’s database and appropriated confidential information about firm clients. The firm apparently believed it had to bring suit to protect itself from potential liability to other firm clients. This type of lawsuit serves as an indicator of emerging liabilities.
Legal professionals may want to consider cyber liability insurance coverage that protects them in 3 key areas:
- Inadvertent transmission of a computer virus that causes damages to the recipient
- Failure to meet a commitment to provide access or to prevent access to the firm’s network
- Violation of privacy laws through the disclosure of confidential information.
In each of these areas, a firm may incur unexpected costs to resolve these problems, be hit with regulatory fines, or even be required to pay damages to other affected parties who relied on the firm to conduct their cyber activities. Finally, lawyers have a special fiduciary obligation to protect the privacy and confidential information of their clients. With all of these potential exposures, law firms would be well served to consider appropriate insurance protection in these areas.
According to the Bureau of Labor Statistics, more than 25,000 legal services jobs have been lost since the beginning of this recession. Additionally, according to an estimate from the Layoff Tracker, a joint venture by the law blogs Above the Law and Law Shucks, more than 5,000 lawyers have lost their jobs during this same time frame at the nation’s largest law firms.
As these lawyers, formerly employed by large firms, have moved into new associations with mid-size or smaller firms, or even on their own, the ripple effects from their displacements are being felt throughout the entire profession. Additionally, the newly downsized larger law firms are reorganizing to handle their work differently, and small and mid-size law firms are gearing up to compete with them, sometimes using more independent contractors and “of counsel” arrangements. A number of firms have merged with or acquired former competitors, while others have broken into smaller practices. It all adds up to a significant amount of movement and disruption in the marketplace.
These changes can create possible liabilities that need to be carefully addressed. For example, when one firm merges with another to form a new entity, coverage for each preceding firm becomes very important. Agents should examine whether the new policy provides adequate predecessor firm coverage, or whether tail or ERP coverage should be purchased from either terminating policy. Additionally, if an acquisition of a firm is made while an existing policy is in effect, adequate coverage must be arranged as this may be considered a material change in exposure or create other potential coverage gaps if the existing policy doesn’t provide coverage for mid-term acquisitions.
Finally, when a law firm breaks up–or if one insurance policy is terminating and another is being purchased that excludes coverage for the dissolved firm–it is important to consider tail or ERP coverage, which addresses liabilities that can emerge from past cases and actions. Many of these types of organizational change coverages have specific time limits or require affirmative elections and additional premiums to put the appropriate coverage in place, so law firms will need counsel from their agents to make sure they have the appropriate protection.
With economic pressures pushing law firms into new areas to raise their firm profiles or generate needed revenue, firms may need support from their insurers in ways they had not considered in the past. This may include taking advantage of risk management expertise, pre-claim mitigation advice and coverages not included in traditional legal policies. For example, firms may want to address:
o Publishing liability if the firm is producing books, articles and treatises. Lawyers professional liability policies often limit covered professional services to the practice of law, and if such writings are not considered part of legal practice, these activities may be excluded from coverage under a traditional LPL policy. If these activities happen to result in a lawsuit alleging defamation, plagiarism or the unauthorized use of someone’s name, likeness or intellectual property, there may be an uncovered exposure, unless publishing liability coverage has been added.
o Reputation management. The 24-hour news cycle and intense competition within the popular media have created significant demand for anything and everything controversial. Beyond reporting case law and legal decisions, there is now a specific media segment dedicated to reporting on lawyers and law firms. A law firm may want to ensure it is covered for the expenses of defending itself if a crisis emerges that could have a materially adverse effect on the firm’s reputation.
o Lost work time and defense costs. Clients are more willing to bring complaints to be addressed by legal oversight bodies, or even bring malpractice claims as a response to a fee collection lawsuit. Protection against loss of earnings related to responding to these complaints or claims, and reimbursement of defense costs in responding to disciplinary proceedings, can be an important financial consideration.
In addition to helping legal professionals understand the insurance implications of these trends, agents and brokers also will want to ensure their customers avoid two common pitfalls.
The first is when a firm switches from one insurance carrier to another and becomes subject to a “prior knowledge” exclusion that affirms the firm is not aware of any potential claims. This language should be examined carefully, because it may be narrowly defined or be very broad. Under a broad exclusion, a firm where even one person is later found to have knowledge that was not disclosed may be inadvertently exposed to a costly coverage gap. Some policies apply this exclusion to each subsequent renewal, creating potential coverage gaps for known claims or potential claims reported even a single day into the next renewal.
The second potential pitfall involves the degree of variation or the lack of standardization of language employed by legal professional liability insurance carriers. With a slight change of phrasing or sentence construction, what was covered under a prior policy may completely be excluded under the replacement policy. When changing carriers, both coverage grants and the list of exclusions in the new policy must be examined very carefully. Simply presuming that one policy will provide identical coverage to a prior one may cause regret and recriminations later.
Lawyers may be learned professionals who deal with liability every day, but when it comes to understanding their own potential exposures, they can benefit from a knowledgeable agent or broker. By keeping the major trends and common pitfalls in mind, agents can better serve their law firm customers, and create a deeper, more valued advisory relationship for these clients.