Courting business in the lawyers liability niche

THE EVENTS of 9/11 altered life for many in the insurance industry, but it probably changed us more than most. Our office is located just a few blocks from where the World Trade Center stood, so the happenings of that awful day remain vivid for us even four years later.

But 9/11 did more than hit us on an emotional level; it also changed the way we did business. A.P.P.L.E.–the abbreviation stands for A Preferred Professional Liability Enterprise–started life in 1990 as a program administrator and wholesale broker. My business partner, Deborah Gallo DiMarco, and I had careers as professional liability underwriters before starting the business. As program administrators, we held the pen for a number of London markets, including Lloyd's, CNA Re and Zurich U.K. In that capacity, we underwrote submissions from retail agents and brokers for lawyers professional liability insurance, nonprofit D&O and employment practices liability insurance. After 9/11, however, reinsurance for our programs dried up, and we had little choice but to become retail brokers ourselves.

Today we have a staff of 10; five of us, including Debbie and I, are involved in production. We now focus solely on legal malpractice insurance, having about 900 policyholders. They range in size from sole practitioners to firms with 40 to 50 lawyers. We write most of our business in New York and New Jersey, and we are beginning to enter the Pennsylvania market.

Direct mail plays a large role in our prospecting. Since 1990, we've developed and maintained a prospect database compiled from information in the Martindale-Hubble law directories. We also use a mailing-list company that gives us monthly updates of new Yellow Pages listings of law firms or legal services.

We mail applications and cover letters to the prospects in our database at least twice a year. The cover letters mention that we have specialized in lawyers professional liability insurance since 1990 and that we represent numerous markets that can give them alternatives to their current policies, which could mean broader coverage or perhaps a lower premium. (Firms with five or fewer lawyers tend to shop price constantly.) Our mailings have been quite successful. Whereas a typical direct-mail response is 2%, ours has been 6% to 7%.

To promote ourselves to prospects, we advertise in law journals covering our marketing territory. We're also members of the American Bar Association's Standing Committee on Legal Malpractice, which has increased our name recognition. Attending the ABA's semiannual continuing education seminars also helps to keep us on top of emerging trends in legal malpractice claims. While we used to exhibit at bar association conventions, we found that although we gave away a lot of mugs and pens, the events weren't that helpful in getting us leads.

We're not overly concerned about qualifying prospects, because we represent markets that can write just about any lawyer or law firm, including those with such “difficult” practice areas as class-action litigation and intellectual property. We usually can place even prospects with adverse loss experience, although the price may be high and the limits relatively low.

Underwriting

As former underwriters, we pride ourselves on preparing complete submissions. Our goal is to make sure that every submission goes to an appropriate market (based on the prospect's practice areas and claims history) and that it includes everything a market needs to make a decision. As a result, we get quick turnaround, because underwriters know that when they receive a submission from us, it is for a law firm that fits their parameters and that the information is complete.

Part of our process is simply ensuring that prospects have filled out their applications correctly. To cite one elementary problem we often see, a law firm, in providing a breakdown of its revenue by practice areas, may write down figures that don't add up to 100%–as they must if an underwriter is going to be able to rate the application.

Of course, loss runs are extremely important. We need currently valued loss runs going back five years–10 years in some cases. If there have been claims, we get details on what went wrong and what the prospect has done since to prevent a recurrence. Our analysis, for instance, may lead us to conclude that a law firm is too aggressive in collecting fees. Sometimes clients don't pay fees because they are convinced their lawyers haven't represented them well. When they are sued for not paying the fees, they sometimes countersue the law firms, alleging legal malpractice.

We enclose copies of any ads prospects have run in the Yellow Pages or elsewhere. Underwriters examine them not only to ensure that any practice areas mentioned match up with the information on the app but also to make sure law firms are not promising too much. If the ads make over-blown claims about the results the law firm can achieve, it could unduly raise clients' expectations, which could lead to malpractice claims. Letters of engagement and disengagement, which spell out exactly what services a law firm is to provide to a client and when representation begins and ends, also are useful for managing clients' expectations. Increasingly, underwriters require their use.

Risk management

The two leading causes of claims against lawyers are conflicts of interest and breakdowns in diary and docket control systems. In regard to the former, a law firm may have a long-standing relationship with a family business but should always advise family members to seek separate counsel. What may start out as a simple relationship with multiple members of a family can go wrong very quickly when a family feud begins. Real-estate transactions also can give rise to conflicts of interest. For example, a firm introduces one client to another in a real-estate deal and handles the closing. Then something goes wrong, and litigation ensues.

Law firms can enact procedures to minimize the chances such conflicts will arise. One is simply managing the client “intake” process. Before taking on a new client, for instance, a law firm should ensure that it does not already represent someone who may have a conflicting interest. If approached by two individuals who wish to set up a partnership, the law firm should advise one of them to seek separate counsel.

Good procedures also can help ensure that diary, calendar and docket-control systems don't land a law firm in trouble. A prospect I recently visited could have used such procedures. The law firm had one calendar system, and the individual attorneys each had his or her own–and the systems were not integrated. So one partner might know he needed to be at the courthouse in the morning, but no one else would.

Sole practitioners have additional risk management needs. For instance, they should arrange to have another lawyer back them up when they are on vacation or otherwise absent.

Market conditions

We have access to more than 15 markets but place most of our business with about half of them. They include Navigators Pro, Darwin Professional Underwriters, Zurich (which writes the program for the New York State Bar Association), American Safety Insurance, Liberty International Underwriters and Target Insurance Services, which is the program administrator for St. Paul Travelers. Lloyd's is probably our best market for “distressed” law firms. The definition of such a firm is based mainly on its loss ratio and size, with small firms perhaps more likely to fall into that category than large ones. A two-attorney firm that suffered a $1 million loss would be considered “distressed”–although we still likely could arrange coverage for it.

The market for lawyers professional liability insurance has been improving. There's plenty of capacity; arranging limits as high as $20 million for our larger law firms is not out of the question. Rates are softening slightly, not so much from existing markets lowering their prices as from new markets offering more competitive rates to attract business. Deductibles are generally set at $5,000, sometimes $2,500 for small firms.

Coverage can vary significantly from one market to another. While insurers rarely are flexible about what they offer small law firms, larger insureds sometimes can negotiate changes in exclusions or other policy provisions.

To serve their clients properly and avoid wasting everyone's time, agents doing business in this niche should be familiar with their market's products. For instance, the policy offered by one of our markets has a non-negotiable exclusion for action arising from violations of securities laws, making it unfit for some of our clients.

Fraud exclusions can be troublesome. One of our markets, for instance, has such an exclusion barring coverage not only for actual fraudulent, dishonest, criminal or malicious acts, but also for alleged acts. Thus, the carrier does not even provide defense coverage while the matter is being litigated and before fraud or dishonesty, etc., ultimately is proved. When using this market, we get a signed statement from our insureds acknowledging this and other limitations in the policy.

There are many other issues to point out to clients, including whether defense costs are covered in addition to limits, and whether deductibles apply to indemnity only or also to defense. Sometimes these matters are controlled by statute. For instance, in New York, LPL policies with indemnity limits less than $1 million must also offer unlimited defense coverage and a loss-only deductible. For policies with higher limits, the insurer can use up to half of the policy's limit for defense and make half of the insured's deductible applicable to such expenses. (Of course, they also are free to make coverage more generous.) Often, we present two or three proposals to clients, pointing out these and other coverage differences, and let them make the choice.

The presentation

We use our proposals to explain all the major aspects of lawyers professional liability insurance. Among the points we cover are the following:

–The nature of claims-made coverage.
–How defense costs are covered.
–An explanation of extended reporting periods, and the length and cost of their ERP options.
–Any available risk management credits.

We also explain the pros and cons of “lateral hire,” or “career,” coverage, which some markets offer. Such coverage picks up the prior-acts exposures of new attorneys joining an insured law firm. That's obviously a benefit to the new attorney, who otherwise would have to obtain an extended reporting period from his or her previous insurer to cover the exposure. The downside is that lateral hire coverage exposes the law firm's professional liability limits to potential claims in which the law firm played no part.

If a sole practitioner joins a smal law firm and brings his or her clients along, it could make financial sense to offer lateral-hire coverage to the new person. On the other hand, that same law firm should think twice about offering lateral-hire coverage to a new associate who worked in a litigation-prone practice area of a large law firm and doesn't bring along any business.

As part of the presentation, we also provide specimen copies of all policies and forms, so clients know exactly what they are buying. We also disclose the financial ratings given to our proposed insurer(s) by the various rating agencies and explain the importance of working with sound carriers.

Service

When claims arise, our role is largely confined to putting the insured in touch with the right people and making sure the insurer acknowledges the claim. We also get involved when we believe a carrier has denied a claim unjustifiably, or when processing errors arise. For instance, an insurer's billing department recently sent one of our clients an invoice for a defense-cost deductible–but the client had only an indemnity-cost deductible.

In regard to service, we've found it extremely helpful to have a premium finance company available to assist our clients. The demand for premium-financing services doesn't seem to vary much by client size. We've financed premiums ranging from $1,400 to $800,000.

After 15 years of focusing primarily on the lawyers professional liability insurance market, we still find it an interesting, rewarding field. Whether as a program administrator or as a retail broker, I'm sure A.P.P.L.E. will continue to be involved in it for years to come.

Mark Diette is the chairman of A Preferred Professional Liability Enterprise. He entered the insurance business in 1981 as a D&O underwriter. His partner, Deborah Gallo DiMarco, also started in the insurance business as a D&O underwriter. They founded A.P.P.L.E. in 1990.