How to Purchase Professional Liability Insurance through an Independent Insurance Broker
By: Jody A. Harris, ARM, RPLU
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Soft market, hard market, soft market, the cycle continues. Regardless of what type of Insurance Marketplace you are currently in, there are things you should know about best practices when purchasing your firm’s Professional Liability Insurance. This article will give you some guidelines in choosing and working with an Independent Insurance Broker and steps to take in the placement of your firm’s coverage.
How to choose a Specialist Broker
First, let’s identify a “Broker”. An Independent Broker represents you the client, not the Insurance Company. An Independent Broker that does not have an exclusive proprietary relationship with Insurance Company will represent your firm to a variety of suitable carriers. There are over 40 Insurance Companies currently writing Lawyers Professional Liability Insurance, and this is coming out of a hard insurance market, where capacity diminished and some carriers discontinued writing Lawyers Professional Liability Insurance altogether. An “Independent” broker is just that, not tied to any relationships with carriers that would influence what markets they send your application to. Your broker should also have experience in placing firms in your area of practice, size of firm and loss experience. These variables call for specific market knowledge.
Your broker should have several years of expertise in Lawyers Professional Liability Insurance, with Lawyers Professional accounting for at least 50% of their personal book of business, and preferably 100%. Ask your broker some coverage questions. See how readily they can answer you. Do they have to get back to you on most of your questions or can
they answer them immediately? Make sure you are dealing with a broker who understands the industry and the Lawyers Professional Liability niche. Ask your broker what other services and personnel will be part of your team on the placement of your coverage. Who will be your advocate in the event of a claim? Will it be the producer on your account or someone devoted to advocacy on behalf of the firm. Who will provide risk management services and what will they be? Risk management services are important in preventing claims that while covered on an insurance policy will still cost you in time spent away from your law practice.
Last, but not least in the broker selection process is whether the person you are working with has the above mentioned experience. In other words, the individual’s experience is more important than the broker’s experience throughout their operation. For example, I work with extremely talented individuals in the property and casualty field. However, if someone asked me to place their Office Package Policy, while licensed to do so, I would not take on the job. It doesn’t matter how much experience an organization has, if the individual is inexperienced.
Request full disclosure of all parties
involved in the placement
Ask your broker if he or she will “personally” place your business with the Insurance Company. Are you talking to the person, who will talk to your underwriter or are you talking to the person, who will talk to the person who talks to your
underwriter? Will your broker place your account directly with the Insurance Company or will they go through an intermediary that you haven’t met? An
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Intermediary could be a Wholesale Broker or a Managing General Agent with an exclusive carrier relationship. If you are comfortable with your broker using an intermediary, ask to speak to them. You should not hesitate to request an introduction to the person placing your firm’s insurance. They may be very knowledgeable or they may not know as much about your firm as they should. At the very least, the intermediary placing your insurance should be devoted to this niche 100%. Broker relationships can get quite complicated. Full disclosure, upon request should be expected. If your coverage is placed with Lloyd’s or if you have excess coverage with Bermuda, there will be a local London or Bermuda Broker who places your coverage, another layer between you and the underwriter. It is also vital that you know the personnel involved at this level. Again, these are individuals who are negotiating your premium with the underwriters, and should be introduced to you. While your independent broker will facilitate many relationships for you, it is clearly to your benefit to be aware of all the players in the placement of your coverage.
Work with one knowledgeable Insurance
Broker
Underwriters spend a substantial amount of time reviewing each submission. The larger and more complex your firm, the longer this process takes. If you are working with a Lawyers Professional Liability Specialist with many years of experience and a comprehensive list of market relationships, there is no need to work with more than one broker. Often times, firms think they will get the best terms if they pit several brokers against each other. While competition is always a good thing, this scenario will make the underwriter doubt their chances of receiving an order when they do not know if they
are working with the broker with the best relationship with your firm.
This situation can get very messy if more than one broker is working in the London marketplace. Lloyd’s syndicates and London companies
generally share risks on a quota-share basis. There are a very limited number of syndicates who will quote Professional Liability Insurance. If there is more than one broker obtaining commitments, the market may be too fragmented to obtain 100% support.
Basically, it is best to select your broker before you select your insurance carrier. When you have finished reading this article you should have a good idea as to whether you are working with a seasoned Lawyers Professional Liability Specialist or
someone who dabbles in this line of coverage at your expense.
The law firm interview
Your broker should have a thorough understanding of your firm. This requires your broker to have enough knowledge to ask the right questions. Your broker should learn enough to explain your firm culture and add an addendum to your application that fully defines your firm. Some sample areas to be explored are:
¾ Firm history
¾ Firm compensation system
¾ Firm structure
¾ Firm hiring practices
¾ Client intake procedures
¾ Docket control
¾ Conflict systems
¾ Loss history
The above is just a small sample of the questions the broker should ask you. They should be able to walk away with a thorough understanding of who
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you are and be able to tell the “firm story” to underwriters.
The application process
The better the job you do on your application, the better response you can expect to receive from your Insurance Underwriter. You want your application to be thorough enough that your underwriter can provide you with a quote, the first time he or she reviews it. Your broker should review a first draft and advise you of any inconsistencies or missing answers to questions. They should anticipate the underwriter’s questions and any responses that will need clarification, so the underwriter will not have to request more information on the first review. If you are obtaining bids on your insurance from other markets, you should not submit your current carrier’s renewal application. A renewal
application only gives the underwriter any changes from the previous year and will not be sufficient for marketing your firm to other carriers. You will need to complete a New Business Application. While the application process can be cumbersome, it is better to do a good job from the start.
My mantra with law firms when it comes to the application is to pay close attention to the question that asks if you have any knowledge of potential claims. I have seen that question cause more problems than any other on the application. Never assume that every attorney in your firm has been forthright in bringing situations to your attention as they occur. Some attorneys may think they can resolve a potential claim on their own, before it becomes a claim and without reporting it to the insurance company. Poll every attorney in the firm and advise them that an incorrect answer to this question could jeopardize coverage under the Professional Liability Policy. Any potential claims must be reported under the current policy before the expiration date. Ask this question twice, first when
you complete the application, which could be as much as ninety days in advance of your expiration, and again, right before you bind coverage.
Look back at least five years and review your loss history. If you had any claims/potential claims request a Loss Run from the carriers involved. Request it at least 90 to 120 days in advance of your expiration date. Some markets will accept a request from your broker, but most will require that the request come from you on your letterhead. A Loss Run will show whether the claim is open or closed, the amount the carrier has paid on indemnity and defense, and the reserve the carrier has set for indemnity and defense. Some carriers will not release reserve information. A new carrier however, will want to see this information.
Therefore, if you cannot obtain it from your carrier, you should have a discussion with your defense counsel and give a paragraph explaining your best estimate of the resolution of the matter.
While not all claims are preventable, it is best to give a good response to the underwriters on those that are. An underwriter will want to see that steps have been taken to prevent future reoccurrences of similar claims. Remember too, that most
underwriters are not attorneys and do not want to wade through complaint papers and pages of correspondence to get to the crux of the matter. Your underwriter will review the claim in a more positive light if he or she can understand what the allegations are in the first place. A paragraph or two explaining the claim allegations is preferred.
Form a relationship with your
Underwriter
Recently, a potential client told me that he asked his broker to speak with the underwriter and the broker told him that it would be “tenuous” to make an introduction. I am not sure what ‘tenuous” meant in this situation, but all sorts of red flags should go up
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if your broker does not want to put you in touch with your underwriter. Underwriters want long term client relationships with you. They put much due diligence in vetting your firm and they prefer not to be the “flavor of the year” for a law firm. Also, if your firm has a claim, it will be
underwriting who will decide if they will non-renew your policy, another good reason to know your underwriter.
The more complex or unique your firm situation, the more you should meet personally with the underwriters determining your premium. A greater comfort level will usually be obtained. A
conference call or better yet, a personal visit can be far more effective than anything you can put on your application.
When you do get that meeting with the underwriter, focus less on your success as a firm and more on the steps you have taken to be proactive in avoiding claims. Remember that while a successful firm is less likely to have disgruntled clients, the
underwriter is really interested in why you are less likely to have a legal malpractice claim, due to good risk management or avoidance.
What does an underwriter look for in a
law firm?
The answer to the above question will vary based on the size of your firm, your firm’s area of practice, clientele and loss experience.
The larger your firm, the more underwriters will want to see that all offices comply with the same administrative practices. Too often, firms with many offices operate as separate firms. Control of good risk management practices throughout branch offices, such as consistent docket control and conflict search systems, will be vital.
As regards your area of practice, underwriting parameters for individual carriers will first determine whether they are willing to write your firm. High risk areas of practice can be limited to maximum allowable percentages. Underwriters consider Intellectual Property, Securities, Plaintiff, Class Action, Mass Tort and Financial Institution work as some of the highest risk areas of practice. You will be asked to complete application
supplements for these areas of practice. In fact you can generally assume that anywhere throughout the application process where you are asked to
complete a supplemental application, the
underwriters consider that area of practice or issue to be of higher risk. A whole chapter could be written on various areas of practice and the different viewpoints of company underwriters. Suffice it to say, that most underwriter opinions have been formed by loss experience. For example, a recent trend has been to avoid firms who have done or does tax shelter work. Well publicized claims in this area have led to a fear of severe losses. A firm’s clientele can be indicative of the severity of potential losses. For example, if your firm works with middle market clients versus Fortune 500 companies, your potential for severe losses will be less. While I am not suggesting that any firm change their client base for their insurance, it is always good to understand the underwriters view point when negotiating your premium.
As to loss history, a firm with a few potential claims reported that do not result in actual claims will not be negatively affected by those potential claim reports. However, if a firm reports several potential claims, company underwriters may presume that your chances of having an actual claim will be far greater. Underwriters are looking for trends in losses that will establish whether your firm is likely to negatively impact their bottom line. One large claim, or “shock” loss, should not indicate a trend,
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especially with proactive measures taken to prevent a similar occurrence.
The quotation process
Your broker should keep you apprised of his or her progress as responses from markets come in. You should not be surprised shortly before the policy expiration with bad news about declinations or increased premiums and restricted terms.
Also, bear in mind that most states have limitations on increases in premium and changes in terms that an admitted carrier can make at renewal, unless they give you prior written notice. If you have not received such notice, your broker should question the carrier.
After you submit the application, the broker should be advised of any additions or deletions of attorneys prior to the expiration date, as well as any other changes that would make the application inaccurate. The application becomes part of the policy and is a warranty of your representations to the carrier.
The proposal
Your broker’s proposal should be detailed. At a minimum it should include the following items:
¾ A.M. Best Rating of Insurance Carrier, including financial size
¾ Full disclosure of all sources of income the broker may be receiving for the placement of your insurance.
¾ Any service fees charged
¾ Is the market admitted or non-admitted? If non-admitted, surplus lines taxes and stamping fees should be disclosed.
¾ Market review of all markets approached and their responses.
¾ Quotation expiration date
¾ Limit – Claim expense inside or outside the limit of liability
¾ Deductible – Per claim or annual aggregate, loss & defense or loss only
¾ All terms and conditions
¾ Prior acts coverage date
¾ Extended Reporting Period terms
¾ Charges for attorneys added during the policy year and reporting requirements
¾ Sample Specimen Policy and copies of all endorsements to policy
¾ All subjectivities needed prior to binding coverage
¾ Broker’s service team
¾ Policy comparison upon request
¾ Premium financing options available
Read the specimen policy and endorsements. They are not that hard to digest. Be aware that there are differences between policies and some of them may be significant for your firm. At the bare minimum, understand the exclusions. If you have questions, ask your broker to explain.
What you should know about your
insurance carrier
Your insurance should not be treated as a commodity. While premium certainly is an important factor in your selection of a carrier, you should also ask the questions below. Here’s a checklist for review of your insurance carrier:
¾ A.M. Best Rating?
¾ Admitted or Non-Admitted Carrier?
¾ How much net risk do they retain and how much do they reinsure?
¾ Number of years providing Professional Liability Insurance for law firms?
¾ Claim paying reputation?
Remember that if the financial stability of your insurer changes or if they decide to stop writing Lawyers Professional Liability Insurance entirely, it will affect your firm significantly in two ways.
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First you may not be able to easily obtain prior acts coverage on a replacement policy if your current carrier’s financial strength diminishes. A new carrier may be fearful that a firm will withhold potential claim reports until they are insured by a secure carrier. Also, if your carrier stops writing Lawyers Professional Insurance and you have reported a claim or potential claim, consider that you will be working with a carrier who does not have an ongoing interest in this class of business.
What you should know about the
reinsurance on your policy
What is reinsurance and why should I know about it? Reinsurance is the reinsuring of risks through the purchase of Insurance by Insurance Companies. A contract of reinsurance is a contract under which one insurer agrees to indemnify another with respect to actual loss sustained under the latter’s policy or policies of insurance. Reinsurance allows the original insurer to assume risks in such a way that they can stabilize the results of their book of business.
There are two types of reinsurance, Facultative and Treaty. Facultative Reinsurance is purchased on a case by case basis. It can have a significant effect on the cost of your insurance premium. For example, your insurance company may only offer limits higher than $5 Million with the purchase of Facultative Reinsurance. This means they must purchase reinsurance for higher limits and those costs will become part of your premium. Treaty reinsurance covers an entire portfolio or book of business underwritten by an insurance company. A reinsurance treaty is an obligatory reinsurance agreement whereby the ceding company is required to cede and the reinsurer is required to accept a specified share of all risks to be reinsured. These obligations are fully spelled out in the treaty wording which has been agreed upon
ahead of time. The renegotiation of a reinsurance contract may affect the cost of individual premiums for all policyholders within the book of business reinsured. The purchase of reinsurance by your insurer affects the cost of your insurance and can let significantly affect the stability and security of your insurer. If your carrier’s reinsurer were to become insolvent and not able to perform their contractual obligations in responding to losses, it will affect the financial security of the insurance carrier. The net retention of risk by insurance carriers can vary greatly. For example, on a $5 Million limit, some carriers may retain the entire limit and be obligated to pay the entire loss on a claim. While others, for example, may only retain $250,000 on every loss and reinsure all losses excess of $250,000 with one or more reinsurers. It is important to obtain as much information as possible about the net risk retained and amount reinsured by your carrier.
Policy Review
Before you receive your policy, you should review it for accuracy. Your broker should have reviewed your policy prior to sending it to you, so with a good broker any errors should already be in the process of being corrected. It is not unusual to find errors on policies, so it is not a bad idea to double check it against your proposal and your binder to confirm that it is accurate.
I would also advise sending a copy of the policy to all of the attorneys in the firm for their review. I suspect that many firms put the policy away in a file drawer and hope they don’t have to take it out again until next year. Why not have all the attorneys in the firm review the policy, so they are aware of what is and is not covered?
Throughout the Policy Year
The broker should advise you on whether additions and removal of attorneys from the attorney schedule
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need to be reported and when. Some carriers will require that they are and require that a form be completed. Some will make premium adjustments within the first thirty days of a policy period. Be aware of what the requirements are on your policy and let your office administrator know of these obligations.
I recommend taking proactive steps when hiring attorneys to assure that you are not unintentionally hiring someone who will negatively affect your loss experience and ability to obtain Professional
Liability Insurance. First, request that they answer some questions as to the Professional Liability Coverage at their prior firm. If an attorney is bringing work with them from a firm that had inadequate coverage, there is the possibility that they could be bringing a potential claim with them too. All policies cover the work of attorneys
previously employed by the firm, but there are some firms who carry limits that are too low or no
coverage at all.
Second, ask any potential new employees or partners about their previous loss experience, including disciplinary complaints in the last five years. When you complete the question on the application regarding any claims against attorneys in the firm, the underwriters also want to know about claims at previous firms. Individual attorneys are underwritten as well as the firm itself.
Third, it would not be excessive to do a background check on all new members of your firm.
Unfortunately, addiction problems are not unusual. If an attorney suffers from an impairment that would affect their professional ability to be
competent, it could result in more legal malpractice claims for your firm. A background check can sometimes uncover such issues.
You should also ask those attorneys leaving your firm to respond in writing if they are aware of any
potential claims. Otherwise, it will be difficult to answer that question when it comes time to complete next year’s renewal application. I recommend asking all attorneys to respond to whether they are aware of potential claims, every quarter. If you only ask that question when it comes time to complete your insurance application, attorneys may not remember that threatening letter they received from their client and even if they do, it may be too late for an insurance carrier to provide an early resolution to a matter. Late reporting of a claim/potential claim will jeopardize your coverage.
Conclusion
There are many steps to be taken in providing a secure future for your firm with the acquisition of proper Professional Liability Coverage. These steps take some time, but in the long run will be well worth the effort put forth, resulting in a better relationship with your Insurance Carrier and a better Insurance Program for your firm.
