As attorneys, you understand liability, but how well do you understand the types of insurance that mitigate common liabilities? Understanding the basics of risk management and insurance is critical for you to manage your firm effectively.
According to a July 2016 report in the Insurance Journal, the frequency and severity of malpractice claims have risen over the past two years, as have the number of losses reported under cyber and management liability insurance policies. Given the heightened confidentiality requirements in the legal field, law firms face an increased level of risk and should review their risk management and insurance programs annually.
As a starting point, this article outlines some of the common types of commercial property and casualty insurance policies that law firms should consider and review with their broker or risk management advisor.
Professional liability, or malpractice insurance, is arguably the most important risk management and insurance discipline for a law firm, as it provides protection for “wrongful acts” in the provision of a legal services. Typically, this type of policy is written on a “claims-made” basis, meaning that the policy will only cover claims made during a specific period (after the established retroactive date and before the extended reporting period). Claim avoidance and mitigation practices are at the core of an effective and efficient professional risk management strategy.
Every firm should review the terms and conditions of their policy to determine whether defense costs are subject to the limits available within the policy. If you are a young lawyer, or a lawyer transferring firms, be sure to pay particular attention to how far back your policy covers your prior work. If you have a gap or lose your initial retroactive date, most insurance carriers will not extend coverage. Other items that should be evaluated include policy retentions or deductibles, retroactive dates, knowledge dates, and additional premiums for extended reporting periods. This policy should also be customized with appropriate forms and endorsements to align with your business plan or anticipated events, such as new attorneys, retiring attorneys, mergers and acquisitions.
Workers’ compensation provides coverage for injuries within the course and scope of employment and is often required by state law. Given the office environment, the risks are perceived to be relatively low; however, a busy attorney, paralegal or staff member faces many risks, such as those incurred while traveling to and from client meetings. It is important not to underestimate the value of these insurance benefits, including indemnity and medical coverage. Your advisor should provide guidance on how to reduce the cost of workers’ compensation insurance with state-specific cost containment programs.
Commercial Package or Business Owner Policies
Commercial package policies typically provide coverage for property, loss of income and general liability. This policy will typically enable you to comply with basic lease terms and conditions, such as naming the property owner as an additional insured and other “insurance requirements.” Other coverages can be added to the package policy. For example, “hired and non-owned” automobile liability and physical damage coverage can be added so that the firm has primary or contingent insurance for rented or non-owned vehicles. You should always consider purchasing an umbrella excess policy, which often provides excess employers, automobile and general liability limits to protect your firm in the event of a catastrophic incident.
Management liability is probably the second largest exposure for a law firm after professional liability. This category of insurance often includes Directors and Officers (D&O), Employment Practices Liability (EPLI), Crime, Kidnap and Ransom, and Fiduciary insurance — all of which can be critical if you have employees, offer retirement benefits or have multiple partners. If you are a Limited Liability Partnership (LLP), pay special attention to your D&O policy, as there can be key exclusions for junior partners. Coverage forms vary widely; however, a knowledgeable risk management professional can explain the differences in the forms and the relative value of these differences.
Law firms are a target for hackers looking to find a trove of data about your clients, specifically personally identifiable information (PII) and other potentially sensitive information. Most professionals are focused on data breach coverage, but firms should also evaluate their potential reputational harm, fines and penalties, and extortion liability. There are many names for cyber insurance products. Your risk advisor should be able to review the potentially critical first- and third-party coverages, such as network security liability, media liability, regulatory defense, crisis management, funds transfer, and extortion and business interruption coverage. Be sure to review your vendor contracts and internal risk control policies about handing client information. Cyber liability, commercial package and crime policies may needlessly duplicate coverage. As an example, computer fraud and funds transfer fraud may be covered on all three policies, thereby resulting in an inefficient program design.
Disability, Key Person and Life Insurance
While often considered more as an individual or group benefit, law firms should also look at their potential risks associated with the disability or death of a key member of the firm. The temporary or permanent loss of a partner or associate will likely have a significant impact on the firm. These risks can be mitigated for the individual and the firm with disability and life insurance. D
John Davidson is a leading voice in the risk management and insurance community of Colorado, as well as a regular advisor with a focus on professional firms in the Denver metro area. Currently the vice president of sales and operations at TriMountain Corporation, his area of focus includes working with medical doctors and legal professionals. He can be reached at email@example.com.