Important malpractice insurance policy provisions
- Defense costs outside of policy limit
Sometimes called “eroding” policies, quite a lot of malpractice insurance policies, especially the smaller policies under, say, $250,000, will pay the costs of defending the law firm against a claim out of the policy limit. In other words, there’s a bucket of money—$250,000, for example—and the defense firm’s bills are paid out of that bucket of money. If the $250,000 is used up, then the insured must pay out of pocket either to continue to defend the claim or to settle. You should look carefully at the difference in premium cost to have the defense costs be paid outside of the proposed policy limit.
- Disciplinary defense coverage
Almost all policies now come with some form of defense coverage for the disciplinary process, so if you get a grievance, you should definitely look at your malpractice insurance policy to see how much coverage you have. Typically, the disciplinary defense coverage ranges between $10,000 and $100,000, and usually doesn’t trigger the payment of a deductible.
- Timing of payment of deductible when a claim is made
Obviously it’s important to know how much your deductible is when purchasing malpractice insurance, but equally important to know is when you make the deductible payment. Sometimes it’s at the initial time of the claim being reported, sometimes it isn’t required to be paid until an indemnity payment is made. Another consideration is how it applies—whether it applies to indemnity payments only, or expenses/costs of defense as well.
- Application of the deductible
Another consideration related to the deductible is how many times you have to pay it in a given policy period. For example, how the policy is written could affect whether you have to pay the deductible on three separate claims in the same year, or just the first. If there’s no aggregate cap on the deductible, then you could end up paying it each time a claim is made.
- Choice of counsel
Policies will specify whether the carrier has the right to choose defense counsel for the insured or whether the insured is allowed to do it. Having the option and ability to select your own counsel, even if they are being paid by the carrier, is important, in our opinion. Of course, having a carrier that will work with you on choosing counsel is another way to look at this part of your policy, even if you don’t have the ultimate authority to choose on your own. And it may be less stressful for you to let the carrier help you select someone you both agree has the expertise and experience to handle your claim.
- Consent to settle claims
Similarly, policies may specify that the consent of the insured is required, or that the carrier may make a decision to settle a claim without the consent of the insured, and regardless of the relative strengths or merits of the defenses. Ultimately, a carrier which insists on the right to settle claims without input from the insured is probably a carrier which won’t consent to you choosing your own lawyer and is going to be pain to deal with if you get a claim.
- Extended reporting period (tail coverage)
If you’re leaving the practice of law, have sold your firm, are retiring, or whatever the facts may be, the policy can provide for an extension of time to report a claim. This is an important consideration for those who are retiring, because claims could take years to accrue, and just because you had an insurance policy four years ago doesn’t mean that you have coverage now that you’ve retired. Watch out!
- Prior acts coverage
Whenever you’re joining a new firm or changing insurance carriers, you want to make sure that you have coverage for prior acts (or alternatively, you can purchase an extended reporting period endorsement, see above).