SUB TITLE WHOOPS—LEGAL MALPRACTICE PREVENTION
BY MICHAEL R. MCCORMICK
Whoops! Imagine being sued or grieved and discovering you don't have insurance to pay your defense or the judgment entered against you. You could lose your savings, your home, and other significant personal assets. You might even have to file for bankruptcy.
Every attorney who practices privately must decide whether to purchase lawyers' professional liability insurance (LPLI), and if so, which policy to buy. But the topic of liability insurance is not taught in law school, and most lawyers know very little about the industry. When presented with options, many lawyers (and certainly young lawyers) don't understand the basic terms of the policy or know anything about the financial status of the company they are buying the policy from. Terms like "claims made and reported" and "exclusions" are foreign phrases. Often, lawyers will simply purchase the absolute cheapest policy they can find. This is a bad business practice, because the cheapest policies usually have inadequate coverage and unfavorable terms for the lawyer.
This article discusses some common issues regarding LPLI.1 It is not intended to discuss insurance law or provide legal advice. Lawyers are advised to consult more in-depth treatises regarding LPLI that may be applicable to their individual situation.2
Should I Buy LPLI?
Practicing law without LPLI is dangerous—akin to not having health insurance, car insurance, or homeowners insurance. The Colorado Rules of Professional Conduct restrict our ability to limit our own liability to our clients. If you believe you have LPLI through your PC or LLC, you are wrong. If you practice without LPLI, then you are putting your home, your automobile, and everything else you have at risk.
According to the Colorado Supreme Court, a staggering 15% of Colorado lawyers in private practice do not carry LPLI. But any attorney, at any time, can be the subject of a large malpractice claim or be forced to respond to an investigation from the Colorado Office of Attorney Regulation Counsel (OARC). As we attorneys know, just the cost of defending against a lawsuit can be several hundred thousand dollars or more, not including the liability for the claim itself. Are you prepared to pay for that out of your own pocket if you do not have LPLI?
CRCP 227(c) requires all attorneys in private practice to disclose whether they carry LPLI. This information is available to the public on the Colorado Supreme Court's website.5 Notably, the Court encourages the public "to discuss the issue of malpractice coverage with [their] lawyer."6 Thus, you should always be prepared to field questions from clients or potential clients about your malpractice insurance. In addition, consider checking the Court's website before referring clients to other attorneys, because it could be deemed malpractice to refer a case to a lawyer who does not carry LPLI.7
Eroding Limits Policies
An "eroding limits" policy means that the amount of liability coverage decreases dollar for dollar as defense costs are incurred; it is said the defense costs are "inside" the policy. For example, if you have SI million in coverage and the attorney fees and costs for defending a claim are $500,000, only $500,000 would remain in liability coverage to pay any settlement on the claim. These policies are cheaper to buy (i.e., the premium is less expensive) because there is less exposure for the insurance company and more exposure for the lawyer. However, they can cause serious coverage problems. For example, if your liability coverage is $100,000 and a $500,000 claim is asserted against you, defense costs will quickly eat up your coverage, with nothing left to cover the $500,000 in potential liability. That means the claimant may eventually pursue your personal assets. Eroding limits policies also invite conflicts with your insurance company. If the claim greatly exceeds coverage, should you and your insurance company emphasize a strong (and expensive) defense? Or. should you do as little as possible to preserve the minimal amount of coverage you do...