In this article we will discuss Lawyers Insurance, also known as Errors and Omissions and Professional Liability .

What is Professional Liability Insurance?

Lawyers Insurance, Errors & Omissions, and Professional Liability all mean the same thing. This type of insurance protects a law firm in the event an attorney (or other employee) makes an error, omission or oversight that causes harm to their client. It pays for the firm’s legal defense, as well as the settlement or judgement made against the firm, up to the policy limit.

In other words, this is Mistake Insurance. If an attorney makes a professional error, Professional Liability should be there to absorb most if not all of the financial liability.

This insurance is also so much more than that! A Professional Liability policy also protects the firm from frivolous lawsuits. So if a particularly litigious client files a groundless lawsuit against his own lawyer, this insurance will pay the lawyer’s defense costs, even if the lawyer made no error whatsoever.

In that sense, Professional Liability insurance is really Lawsuit Insurance. If anyone sues the law firm and claims the firm committed a wrongful act, the insurance company will have a duty to investigate the situation, defend the law firm, and pay damages if necessary. It pays whether the firm committed an error or not.

Many additional types of coverage can appear in a well-constructed Professional Liability policy, but lawsuit protection is the foundation of the whole policy. This pillar is what provides piece of mind to a legal practice. If a lawyer makes an honest mistake while working with a client, the lawyer doesn’t have to fear that the ensuing litigation will lead to bankruptcy for her firm. If a lawyer advises a client to settle but later the client has a change of heart and decides to sue his attorney, Professional Liability insurance is there to defend the attorney so he can continue working for his other clients. If done correctly, a professional liability policy allows a firm of attorneys to practice their craft without distraction, since a large portion of their liability has been absorbed by an insurance carrier.

The insurance contract itself must be crystal clear on this point. Here is a sample clause from a real Professional Liability policy:

Notice how the policy states that the carrier will pay “all damages” that the firm becomes “legally obligated to pay”, up to the “limits of liability”. As with any contract, the definitions of the words themselves affect the whole meaning of the document. This is why it is crucial to work with an experienced broker who understands the complexities of Professional Liability insurance. An attorney’s broker should know what to look for in the policy so he can determine which quotes contain the most favorable policy language, and clearly explain to his client (the attorney) the pros and cons of the policy language.

We will explore policy language more a bit later in the article. For now, let’s talk about why attorneys need Professional Liability, while other types of businesses might not need it.

Why do Lawyers need Professional Liability Insurance?

Lawyers, similar to accountants, doctors, financial advisors and the like, make their living by providing legal advice and related services to their clientele. Throughout the course of providing this service, lawyers will make statements, decisions and recommendations that their clients will rely upon, regarding matters of serious importance to them, financial or otherwise. 

While most lawyers have a well-honed understanding of the law and take care not to make errors or overstep their authority, every time a client relies upon and acts upon legal advice there is potential liability for the attorney who gave the advice. This is compounded by the possibility of a lawyer making honest mistakes or errors as a result of the pressures that everyone faces: deadlines, demanding clients, sensitive situations, unrelated stress.

When a client relies on legal advice, they expect things to play out according to that advice. As we all know, things do not always turn out as planned. Even if an attorney does his job right, his client could still lose time and/or money, or suffer mental anguish. This can often lead to a written demand for compensation alleging any number of things. Attorneys are already familiar with this reality, since this is the every day risk of practicing law.

This risk of lawsuit creates a unique insurance need. Many other types of businesses don’t need Professional Liability insurance at all. For example, a deli or an electrician both need a completely different kind of insurance. What they need is insurance to protect them in case they accidentally injure someone physically (such as if a customer slips on the deli’s wet floor, or the electrician’s tools fall and injure someone), or in case they damage someone’s property (such as if the electrician accidentally starts a fire in a client’s home). These protections are provided by a standard General Liability policy .

Most attorneys, on the other hand, have almost no risk of causing physical injury or property damage over the course of their daily activities. The risks attorneys take on by practicing their profession are of a very different flavor than the risks absorbed by deli owners. If an attorney’s client sues the attorney for giving poor advice, their General Liability policy would not pay a dime. This is why a General Liability policy is never sufficient protection for a legal practice. Clearly an entirely different type of insurance is needed to properly cover these types of claims. That’s exactly what Professional Liability insurance does.

Even the language used to describe a typical claim reveals that lawyers need a unique insurance product. “My lawyer gave me poor advice” is a much more abstract claim than “my electrician burned down my house”. It is harder to define, more likely to carry some nuance. Therefore the policy language in a Professional Liability policy needs to account for that ambiguity, and clearly define the situations where the policy is obligated to pay.

The policy must be written in such a way that it systematically absorbs all the liability risks associated with running a legal practice, so a boilerplate (AKA “miscellaneous” professional liability) policy won’t suffice either. The broker must make sure that the entire operations of the legal practice are protected with specifically tailored policy language. The ultimate goal is to have a policy that is so much in the attorney’s favor, that the insurance company will be obligated to pay any covered claim (we will discuss “misc.” policies in more detail later in the article).

The bottom line is that lawyers need a unique type of insurance. They also need an experienced broker to act as a guide to the policy language. If you run a legal practice, make sure to choose a broker who cares more about diligence than about closing a deal at all costs. A good broker will shop around to lots of carriers, then offer the law firm a clear comparison of the quotes. The broker and law firm may discuss price, coverage, and policy language before coming to a decision, and the broker’s primary objective should be to make sure the law firm gets the most favorable policy language possible. Then at renewal, the broker should shop around all over again, to make sure the law firm’s price is always competitive and the coverage is always the best available.

If your broker doesn’t meet that standard, contact us today to get a full shop-out of your Professional Liability policy.

Learn from our Experience:

This section is an FAQ/Glossary of the most important considerations and details when it comes to Lawyers Professional Liability insurance. If your question isn’t answered here, please let us know so we can address your specific inquiry and update this living document.

• What are the legal requirements regarding Professional Liability insurance in CA?

The State Bar of California does not require attorneys licensed in California to carry Professional Liability insurance. However, attorneys without this insurance are required to disclose this fact to clients for whom legal representation will exceed four hours (source).

For this reason and the arguments laid out previously, the vast majority of practicing attorneys carry some form of Professional Liability insurance.

• If I have a hold harmless/indemnification agreement in my client engagement contract, do I still need Professional Liability insurance?

This is a bit of a trick question, because attorneys cannot have indemnity or hold harmless language in their engagement agreements, as prohibited under the California Rules of Professional Conduct (CRPC 1.8.8). But for professionals who can legally use hold harmless agreements, here is some useful information:

While a hold harmless agreement can be helpful, it is not a substitute for having insurance to handle your legal defense and any resulting settlement. Even with such hold harmless agreements in place, a claim against you may still force you to pay attorney fees, lose income while you appear in court, or at worst pay damages anyhow. Insurance exists to cover all these costs.

We typically advise that you consult with a business attorney who specializes in client engagement contracts, to ensure that your contract “dovetails” with the language in your Professional Liability insurance policy. 

• What do Claims Made Coverage and Retroactive Date mean?

Most Professional Liability policies provide coverage on a claims made basis, meaning that the policy covers the work that you are doing now, as well as work that you completed in the past. If a client from years ago comes back claiming you made an error on an old case, a well-constructed claims made policy can cover that old work. If done correctly, this type of policy can protect an attorney for work he did all the way back to the beginning of his career.

While criminal and civil laws often come with statutes of limitations, insurance does not. Carriers are allowed to set their own terms and come to their own agreements with insured parties. In other words, if you need a new Professional Liability policy, and you need that policy to cover work from many years ago, the policy can be designed to provide your firm with the decades of protection you require.

How far back in the past will your claims made policy cover you? That is determined by your retroactive date.

Your retroactive date is the earliest date that work you performed for a client must have occurred in order to be covered by your Professional Liability policy. That means a recently filed claim involving work you did years ago will only be covered if the work was originally done after your retroactive date. 

So imagine it’s the year 2020, and you have a retroactive date of 1/1/2015. Your current policy term is 1/1/2020 to 1/1/2021. Say you did work for a client in 2016, but they didn’t notice your error until August 2020, which is when they file the claim. Though the date of the claim is Aug. 2020, your actual error occurred back in 2016. The retroactive date therefore encompasses the date of the error, so the new policy will cover this new claim. 

HOWEVER, if you lose your retroactive date (for example if an inexperienced broker switched you to a new carrier without making sure the new carrier continued or “picked up” your retroactive date), then your new retroactive date is now the date of inception of the new policy: 1/1/20. This means that NO CARRIER will cover your firm for mistakes or wrongful acts committed before that date. (As an aside, if your broker makes such an error and that error causes you financial harm, you may be entitled to file a claim against your broker’s Professional Liability policy.)

If you’ve only ever had one policy in place your entire career, this is a non-issue since your policy has covered you the whole time. However when you switch to a new carrier, it is crucial that they pick up your retroactive date from the expiring policy, so that mistakes or “wrongful acts” from years ago will be covered by the new policy. Your broker must advocate for you with the carrier, and check carefully to make sure the insurance quotes have an acceptable retroactive date.

If you break off from a law firm and form a new one, this will have retroactive date implications as well. Your new firm’s insurance policy may have a fairly recent retroactive date, and therefore would not cover any of your work from your previous firm. So what is to be done about past clients? What happens if a client from the old firm comes back with a claim against you? If these questions apply to you, start this conversation with your broker, and make sure the answers are satisfactory. If your broker doesn’t know how to deal with these situations, reach out to us for help.

The longer your legal career the greater your liability. Clients from decades back could show up with frivolous (or not frivolous) lawsuits at any time. Make sure your Professional Liability policy has the right retroactive date, and make sure you hold on to that retroactive date for as long as possible.

• Self Insured Retention (SIR) vs. Deductible; First Dollar Defense

The main difference between Self Insured Retention (SIR) and a Deductible is who pays first. If you have a deductible in your policy, that means the immediate burden of payment is on the insurance company. In the event of a covered claim, they must pay defense costs, damages, and claim expenses up-front; then later they will bill you for your deductible. An SIR, on the other hand, puts the immediate burden of payment on your firm. The SIR must be paid completely, before the insurance company will pay anything.

Example: if you have a deductible of $15,000, then during your claim the insurance company will start covering expenses immediately, then later bill your firm for $15,000. If instead you have a Self Insured Retention of $15,000, then you will still need to incur those expenses up front, and only then will insurance begin paying expenses.

Many policies that contain a deductible will also contain a “First Dollar Defense” clause. This means the deductible only applies to damages, settlements, and judgments – NOT to claim expenses. This generally means that if your claim is resolved without a settlement or judgment, then you will not have to pay a deductible.

Make sure to ask your broker to explain whether your policy has a deductible, Self Insured Retention, or First Dollar Defense.

• Who gets to choose defense counsel? What if I want to represent myself or pick my own defense?

The short answer is that it depends on your policy. Typically this is found in the “Defense of Claims” section of your Professional Liability insurance contract. Here “we” refers to the insurance company: 

In this case the policy does not provide for selection of your own counsel, though it does make it clear that the carrier cannot settle on your behalf without your written consent. Not every Professional Liability policy is worded like this; the language can vary wildly policy to policy. If it is important that you have the right to appoint your own counsel, or you want a low Self Insured Retention, or you need insurance to cover you for work you did ten years ago, these items can all be negotiated with the insurance company at the client’s request. A good broker must advocate for his client, and seek the most favorable terms possible.

• The Hammer Clause: will you be forced to settle when you don’t wish to?

A Hammer Clause is a provision that states that if the insurance carrier wants to settle your case, but you do not agree with the recommended figure, the insurer will not be liable for any additional money above what they already offered in their recommended settlement, should your refusal to settle lead to a higher judgement against you.

A strict Hammer Clause means the carrier really won’t pay anything beyond what they originally offered, whereas a more relaxed Hammer Clause might agree to pay 50% of additional damages after you refused the settlement.

Here is an example of a more relaxed Hammer Clause from a Professional Liability policy:

In this case the insurance company will pay the full settlement they initially offered, followed by 50% of any additional expenses above and beyond the settlement offer. Make sure your broker checks the Hammer Clause in your policy. This clause directly affects the options available to you in the event of a claim. If your broker has no idea what a Hammer Clause is, please reach out for a free break-down of what’s in your current policy.

• How much Professional Liability insurance does a lawyer need?

This is a relatively complex question that should be assessed on a case-by-case basis. Here are some general questions to ponder as you decide how much insurance to buy:

• Consider the nature and extent of both your business and personal assets, both of which are potentially subject to collection in the event of a judgement against you. Your limit of liability should at least cover your assets.
• What is the net worth of your average sized client? What is the value of the services you are providing to them? If you were to make a critical professional error on your largest account, what is the most money you (or your firm) might realistically be liable to pay? Make sure your insurance at least protects you from mistakes you might make on an average sized client, and at best protects you from mistakes on your largest.
• Very low limits of liability in your policy, such as $100,000 per claim, can be swiftly depleted – with defense costs alone – before you even get to a settlement. Consider the cost of legal representation in your area.

• “Of Counsel” status with another firm – am I covered?

Coverage will be determined by the specific policy language. Some less expensive policies will exclude such coverage explicitly. Here is an example of the language that would confer coverage while acting as “of counsel” with another firm:

Such language is most often found in the “definitions” section of your Professional Liability policy. 

• Switching Professional Liability insurance with an ongoing or potential claim – what you need to know.

First, you must give your current Professional Liability insurer immediate notice of any evidence you have of a pending claim. Most policies will refuse to cover any pending claim if you wait more than 60 days to give notice:

If you are currently going through the claims process, most other insurance companies will request that you wait for the process to conclude before you switch to a new insurance contract. The amount of money spent during a claim on your behalf, as well as the nature of the claim both have a direct impact on the price and availability of Professional Liability insurance for your firm.

• The danger of “miscellaneous” professional liability for lawyers.

Some lower quality Professional Liability insurance contracts called “miscellaneous” professional liability exist in the market and it’s important to be aware of why these products are inferior to lawyer-specific Professional Liability coverage.

Miscellaneous professional liability is meant to provide coverage for certain types of professionals who don’t fit into standard business classifications used by insurance companies. However law firms are a clearly defined business classification, so a law firm should never wind up with a “misc.” policy. Only a very inexperienced broker would offer one of these boilerplate policies to a law firm.

The main downside to these products are that they often lack definitions for important terms, and often come with broad exclusions that cancel out much of the coverage. For example they may include exclusions for “professional advice” or other general terms that are not defined in the contract. This creates a type of “gray area” in the policy, where the insurance company can define their terms after a claim in such a way as to facilitate denial of the claim. A law firm who thought they had insurance then learns that their carrier will not be covering their most recent claim, due to a vague exclusion in the policy that the broker never explained. Nobody who purchases insurance hopes to engage in a legal dispute with their insurance company or their broker: this is not the point of insurance. Clear and specific policy language in the law firm’s favor will prevent these sorts of nightmare scenarios, but a law firm isn’t likely to find that kind of favorable language in a “misc.” policy.

Here is an example of such a gray area in a “miscellaneous” professional liability policy for an industrial designer who specializes in designing wearable electronics for Silicon Valley tech companies:

In this case, the terms “architect” and “engineer” are not defined anywhere in the contract! What is to stop the insurance carrier from simply alleging that this firm’s “industrial design” work is either “architecture” or “engineering”, and use that interpretation to deny a large claim? It goes without saying that this is bad insurance. A carrier should never be allowed this kind of vague wiggle room in a contract.

A “misc.” policy can cause just as much mischief for a law firm just as it can for an industrial designer. If the policy uses vague language to exclude various facets of a law firm’s operations, the law firm is basically paying a premium for a junk policy.

If your firm has a miscellaneous professional liability policy, reach out for a free synopsis of your current coverage (or lack thereof).

Other Types of Insurance a Law Firm should Consider:

• Cyber Liability – for those that work with Personally Identifiable Information (PII); Trade Secrets or Intellectual Property (IP).
  • Cyber liability coverage covers the legal and regulatory expense of a computer breach that causes your firm to lose clients’ sensitive data. This is especially important if you work with PII, Trade Secrets or IP.
• Employer Practices Liability – for firms with employees.
  • This covers any allegations of wrongful conduct as an employer, including harassment, wrongful termination, failure to promote, discrimination and more. If you have employees this is a coverage worth considering. 
• General Liability – for firms that see clients in personor keep a rented office.
  • This covers bodily injury and property damage for which the firm is liable. It is usually required by the firm’s commercial landlord, and otherwise only worth considering for an office with a decent amount of foot traffic.

In Conclusion: Make Sure your Broker is a Professional Liability Specialist

An insurance broker who specializes in Lawyers Professional Liability provides two main services:

1. Reading the insurance contract language very carefully and explaining all provisions and exclusions to the firm in a concise and focused manner. This ensures that the firm will be aware of what is covered and what is not, so that they can make informed decisions.
2. Shopping around for new Professional Liability quotes every year, to make sure the firm is always getting the best possible deal when it comes to both price and coverage. The marketplace for Lawyers Professional Liability is dynamic and ever changing. We shop our clients every year and share the results with them, so they can be confident they are getting the best price and service available.

If you are a new law firm seeking insurance advice, we are happy to share our expertise. If you are an established law firm, but you get the impression your broker isn’t a specialist in Lawyers Professional Liability ; or if he offers you the same policy year after year while the price steadily rises, showing no evidence of a shop-out; or every time you call with a question you get routed to a customer service representative who doesn’t know the details of your policy – give us a call so you can get the service you deserve.