LPL Opportunities in a Soft Market

Ahh yes, the soft market. Everybody's favorite topic. You know the drill: Carriers slashing premiums to maintain market share. Fierce broker competition for new business and even fiercer competition on renewals. And retailers and wholesalers earning less money while working harder than ever.

So is there an imminent end to this wicked environment? Some underwriters and retailers say they see the market turning. However, given my daily involvement in the lawyers' professional liability (LPL) arena, I don't see the marketplace significantly hardening in the near term. But current conditions are creating real opportunities for those of us selling LPL. Many carriers now offer attorneys coverage enhancements that were previously unavailable, cost prohibitive or only given to the big law firms.

Once the market hardens, some of these opportunities may not be as readily available or affordable. So now's the time for carriers, wholesalers and retailers, working in tandem, to create lasting advantages for themselves and the law firms they represent.

Get What You Pay For

There is a tendency—especially given the recent economic downturn—for attorneys to focus more on price than coverage. Obviously, we must put a competitive LPL product on the table for their consideration. Cheap pricing abounds in this marketplace. But once the issue of cost has been addressed, the substance of the policy is what determines the winner. This is critical to understand because there is not much uniformity or consistency between LPL policies. Many carriers use their own forms, creating unique policy provisions, conditions, endorsements and exclusions. The devil is more often in the details, not the dollars.

Related: Read the article “Real Estate Attorney Malpractice Claims Rising” by Mark E. Ruquet.

As an example, there is no standard definition of “professional services.” It is the rendering or failure to render such “services” that will give rise to a claim against a law firm. Thus, great care must be taken to propose a policy in which the professional services definition encompasses the full scope of a law firm's practice. Carriers today are more willing to tailor various policy definitions to fit the nuances of law firms.

In meetings with law firms large and small, I have watched agents resolve major coverage concerns that had otherwise been sources of pain to the law firms—only to have the managing partner purchase deficient coverage elsewhere because another LPL product was less expensive.

The message here is that we must become advisors, advocates for our attorney clients. While they may know their businesses, they also may understand little of ours and how this market can benefit them.

Key Enhancements to Ask For

The willingness in the marketplace to provide policy enhancements is very real. Those enhancements fall into several categories. While too numerous to delineate in this article, here are some of the more important benefits to request.

1. Defense and settlement: Many LPL policies have a duty to defend the law firm in the event of a claim, even if the claim appears groundless or without merit. But all too frequently that duty to defend also gives the carrier the “right” to designate defense counsel. While there is nothing wrong with this process, many carriers now extend to firms the option to select their defense counsel. This has the immediate impact of increasing the firm's comfort level, giving them more of a say in the process and outcome of the claim. The freedom to work with familiar and competent defense counsel is invaluable. Carriers who have the ability to offer this coverage, often referred to as “choice of counsel” or “mutual choice of counsel,” may charge a small additional premium or may simply add it upon request
2. Consent to settle provision: Once a claim begins to mature, a carrier may at some point suggest settlement rather than outright litigation. The potential problem arises when the law firm and carrier disagree over the amount of the settlement or whether the case should be settled at all. Typically, if the law firm spurns the carrier's settlement offer and, at some later date, settles the claim for more than what the carrier originally authorized, the law firm will be on the hook for 100 percent of the difference between the actual settlement cost and what the carrier had earlier proposed.

   In an effort to minimize this financial hit to the law firm, many carriers are amending their consent to settle language. Not only will the carrier pay its initial authorized amount, but it also will contribute as much as 50 percent of the settlement amount in excess of the original figure. This beneficial change gives the law firm more courage to pursue the claim on its own without completely losing significant contribution from their LPL insurer.

3. Reducing the deductible via mediation and ADR: As a way to encourage attorneys to participate in alternative dispute resolution (ADR) such as mediation, many carriers offer deductible credits once a matter has been settled in this manner. That is, the carrier often will reduce the firm's deductible obligation by up to 50 percent, so a firm with a $25,000 deductible will only be out-of-pocket $12,500. Some insurance companies offering such enhanced language in their policies are IronShore, OneBeacon, Liberty and CNA. This is yet another way to garner greater value while paying less.
4. Common exclusions to be eliminated: Exclusions take away coverage. And while not all claims are or should be insurable, certain troublesome exclusions can frequently be removed today by simply requesting the insurer to do so. Ensure that claims are covered broadly to avoid unnecessary declinations. Many of today's policies have securities and patent exclusions built in. Granted, these can often be removed via endorsement. But if a firm practices securities work and the exclusion exists, a securities claim could be denied.

Related: Read Jennifer Dumont's article “Risky Business.”

I recently took over an LPL policy for an SEC firm and quickly discovered it had been placed with a carrier for 2 years whose policy contained an extremely broad SEC exclusion. The firm had purchased a cheap policy that afforded zero coverage for the type of work they perform.

Although many insurance carriers have a duty to defend, there is one category of damages that is routinely excluded under LPL policies: punitive damages. Punitive damages are uninsurable in many states, including California. But if a firm is sued in a jurisdiction where punitives are insurable as a matter of law, failure to delete this exclusion could be financially ruinous to a firm. The firm would face potentially massive out-of-pocket exposure. States change and amend their laws so it is vital to recognize that punitive damages may one day be insurable in your state. Better to have the exclusion removed just in case coverage is needed.

If a claim actually makes its way to the litigation stage, the law firm's attorneys may be required to spend considerable time in the courtroom and away from their daily practice of law. This inconvenience creates lost billing opportunities and could impact law firm revenues. Today, carriers can help mitigate this financial loss. Many policies include expense reimbursement of up to $500 per insured for each day he or she must appear in court. It is another way carriers are attempting to sweeten the pot for firms.

In the event that a law firm dissolves, merges with another firm or is acquired, the LPL policy must have a mechanism to protect the firm from claims that may arise in the future based upon work performed in the past (also known as prior acts). In response to this exposure, most policies offer the option of purchasing an extended reporting period (ERP). This benefit gives the law firm, for a price, the right to report future claims against the most recent LPL policy. ERP is commonly referred to as ” tail” coverage.

Related: Read “Changing legal landscape increases risk” by Dan Reed.

The longer the ERP option period, the better. When the market was harder, carriers were generally reluctant to offer ERP options longer than 3 years because they wanted to limit their exposure to future claims. Today, however, many insurers are willing to offer “tail” options for periods extending well beyond 3 years. In fact, an unlimited tail option is now quite common, enabling coverage to extend into the future with no sunset. The costs for these lengthier ERP options also have declined significantly. Moreover, some carriers are even willing to provide an individual unlimited tail to an attorney retiring from the firm, a benefit that often costs nothing.

Other Initiatives

Carriers are continuing to enhance the value proposition for their LPL clients by providing a variety of services for free or for a nominal charge. Risk management, monthly topical newsletters, webinars, toll-free hotlines and other benefits are readily available from carriers in an ongoing effort to better inform lawyer clients, to better retain those lawyer clients, and to better bulletproof those lawyer clients.

Competition within the LPL marketplace will continue for some time, creating better products and favorable pricing. If it wasn't for the soft market and the resulting competition for business, many of these bells and whistles might not be so readily available. Times may be challenging, but that challenge can be a great opportunity rather than an insurmountable problem. Embrace the soft market. The long-term impact on your business and that of your law firm clients will be invaluable.