Risky Behavior Aggravates Insurance Crisis
LACBA Update, August 2002
By Diane L. Karpman, former chair, LACBA Professional Responsibility & Ethics Committee. Karpman of Karpman & Associates in Los Angeles represents attorneys in disciplinary matters and is an expert consultant and witness on legal ethics issues. The opinions expressed are her own. She can be reached at Karpethics@aol.com. Karpman wishes to thank Sylvia Tagle, vice president, Aon Direct Insurance Administrators, and Ronda Cesarani, vice president, Aon Direct Insurance Administrators, for their help in the preparation of this article.
Get ready for a humongous increase in your premium for malpractice coverage -- Outraged lawyers report 300%! A two-person tax firm with no claims history or disciplinary background was quoted $75,000 for one year. Some lawyers say they can't locate carriers at any price; this may indicate the genius of an "assigned risk" pool. The causes for this insurance crisis are varied, but it's likely a combination of factors.
Assorted negative factors, including the disastrous impact of September 11, 2001, have caused many carriers' investments to tank. Others say that California has the most litigious clients in the world, driving up rates, which are affected by the high cost of defense. Insurance mavens maintain that after a decade of soft market conditions, things have changed. This is particularly true because many carriers have left the state, and those that remain can dictate the terms of their policies.
Attorney conduct is directly governed by the Rules of Professional Conduct and the Business and Professions Code. Those regulations and statutes are clear and obvious. However, there is another subtle governance indirectly imposed on lawyers by insurance carriers --"exclusions" for certain types of risky conduct (for example, owning too much of a client's company, or representing a company while concurrently serving on its Board of Directors).
Some areas of practice are inherently riskier than others. According to the American Bar Association's 1996-1999 survey, plaintiffs' personal injury, real estate, and family law are the areas with the greatest number of claims. In addition to taking pharmaceutical products to alleviate suffering, personal injury clients often experience chronic pain and could be disabled; therefore, they may have a greater propensity for being...a little upset. Often, family law clients aren't happy about the opportunity to participate in the family law process.
The size of a lawyer's practice also makes a difference. Larger practices generally have more support staff to cover the workload, lowering the risk of mistakes and resulting in fewer claims. According to statistics provided by Aon Direct Insurance Administrators, solo practitioners account for more than 55 percent of their claims. Small firms of fewer than five lawyers account for more than 26 percent of claims. Often, large firms have the capital to handle claims on a more casual basis, as opposed to litigation.
In today's hard market, it's both the frequency of the claims and the severity of claims that make an impact upon carriers. In fact, claims against lawyers involved in patent law are of such a magnitude that many carriers refuse to write any policies for that area of practice.
Since the carriers are in the driver's seat, you need to comparison shop and dicker for the precise type of coverage you want. Anticipate higher deductibles than in the past for the same policy limits. Incidentally, since policies are on a "claims-made" basis, tail coverage is essential. An increasingly frequent scenario when there are claims issues or risky areas of practice, new carriers won't pick up a firm's prior acts, which forces the firm to purchase tail coverage off the old policy to protect its past in addition to purchasing a new policy for work going forward. Depending upon the type of law you practice, a claim could occur years after you retire to become a soccer mom or a guru in the Himalayas. A long-forgotten case engendering a malpractice claim can truly impair your ability to find Nirvana in addition to hampering your travel plans via astral projection.
A critical aspect in your ability to negotiate for terms involves your claims history and State Bar complaints. A prior claim follows you for approximately five years until it drops off the radar and no longer impairs your insurability. The bottom line is that you can no longer afford any claim because it creates a claims history. Not only are carriers in the driver's seat, but clients are next to them in the front riding "shot gun". Whatever the leverage you once had with client complaints or fee disagreements has been shaved to a microscopically thin reed. Don't ever sue clients for fees -- It's the best way to ruin your insurability because they will cross-complaint like a boomerang, creating a claims history.
Other risky behavior includes aggressive lawyering -- Malicious prosecution accounted for 11.7% of the claims received by Aon. Another sizeable area of client complaint involves the negligent handling of discovery. Pleadings and evidence in litigation account for more than 10 percent of all claims.
Although it may facially appear that you are riding in a limo with a staff person in the front, the current climate is more akin to driving a bus on a bumpy road with too many pot holes, flat tires, and other mishaps -- Be careful!