Rising insurance costs for doctors have grabbed recent headlines, but malpractice insurance rates have been escalating for Massachusetts lawyers as well. While there is no question that attorneys are seeing their insurance rates go up, there is debate as to the cause.
All parties are playing the blame game, with attorneys pointing fingers at the insurance companies and insurers blaming the increases on poor lawyering.
But, according to Terence J. Welsh, president of the Massachusetts Bar Association Insurance Agency, the critical factors are the terrorist attacks of Sept. 11, 2001, and the recent downturn in the stock market. The industry was hit hard and had to make up the losses somewhere.
"The investment income the insurance companies rely on is down substantially," said Welsh. "Less investment income means they have to charge more for their premiums."
In addition, years of underpricing have taken their toll.
"For almost 10 years, insurance companies were operating in a soft market," Welsh said. "They were not paying attention to underwriting. They were just looking at the market share so they could gain more premiums so they could make more investment income.
"When Sept. 11 happened, there was a switch overnight to a hard market, that is, prices going up dramatically, and availability of coverage going down rapidly. There was a massive retrenching of insurance business."
In the Massachusetts lawyers professional liability marketplace, no less than eight carriers have withdrawn from the market, including some that have gone bankrupt. Others have severely restricted their underwriting and in many cases have increased prices upwards of 25 percent.
Risky business
According to MBA Insurance Agency statistics, one out of three attorneys will be sued for malpractice in their lifetime. But, as Welsh pointed out, there is a distinction between being sued for malpractice and actually having committing malpractice.
The majority of dollars are spent to defend claims where the attorneys are found not to have done anything wrong. The minority of dollars paid out compensate for actual malpractice. That statistic "is a credit to the quality of lawyers and the training and help the bar association gives them," said Welsh. "We have very good lawyers in this state."
The number one reason cited for making a malpractice claim is truly preventable: the failure to file documents in a timely manner. This error accounts for almost 25 percent of all dollars spent and almost 20 percent of all claims. Other leading grounds for alleging malpractice include failure to advise; improper strategy, advice or drafting; unethical conduct; inadequate title search; failure to follow instructions; inadequate investigation; and conflict of interest.
Based on frequency and severity of claims, the top five practice areas accounting for 61 percent of all claims and 72 percent of all dollars spent are personal injury, residential real estate, domestic relations, probate and corporate real estate.
According to the MBA Insurance Agency, although they are not currently listed on the "top-five" charts, intellectual property, SEC work and class actions are worrying insurance agencies right now. Although there have not have been as many claims made in these areas, insurance companies are projecting losses based on society and business trends. Due to the sheer volume of discovery and client communication needed in intellectual property and class actions, the cost to settle is huge.
"It does not take a lot of claims to make the top-10 list; it only takes one big one to be a multimillion dollar claim just in expenses," said Welsh.
Insurance profile
Surprisingly, Massachusetts attorneys are not legally required to carry malpractice insurance. However, the Board of Bar Overseers (BBO) is in the process of sending the courts a recommendation that attorneys should have to disclose to clients if they do not carry at least $250,500 in legal malpractice insurance.
According to Daniel C. Crane, Bar Counsel for the BBO, this is the same amount the MBA's Lawyer Referral Service requires for its member attorneys.
"There are a growing number of states that have adopted such rules or have them under consideration. A proposal is percolating up through the ABA as well," Crane said.
Even without legal requirements, the marketplace often dictates the amount of coverage an attorney chooses to carry. New attorneys taking public defender cases may carry lower limits, such as $100,000 per claim and $300,000 for policy total for year. However, in real estate, a bank may require its attorney to carry $1 million in coverage.
"Attorneys need to be very marketable to new client, and an attorney with $5 million in liability coverage will be more attractive than an attorney only carrying $1 million," noted Welsh.
And it's not the newer attorneys who are most likely to be sued. Ten years of practice provides a greater opportunity for someone to allege an attorney made an error or omission than if an attorney has been practicing just three years.
Risk management
| Top 5 claims by area of practice (1995-2002) |
|
| |
Frequency |
Severity |
| Personal Injury Plaintiff |
19% |
21% |
| Real Estate - Residential |
17% |
13% |
| Domestic Relations |
9% |
13% |
| Estate/Probate/Trust |
8% |
11% |
| Real Estate - Commercial |
8% |
14% |
| |
61% |
72% |
| Others worth noting |
| Criminal |
4% |
3% |
| Comm. Litigation/Plaintiff |
4% |
5% |
| Estate Planning |
4% |
8% |
| Abstracting/Title |
3% |
3% |
| Personal Injury Defendant |
3% |
3% |
| |
18% |
22% |
| |
79% |
94% |
| (Statistics provided by MBA Insurance Agency) |
To better protect themselves from malpractice claims, Welsh recommended attorneys adopt a few simple risk-management procedures.
After following a standardized client intake policy and a thorough conflict-of-interests check, attorneys should be sure their engagement letter clearly states what each party's responsibilities are and what the attorney will be charging.
"The quickest way to get a malpractice claim is to sue a client for fees owed after losing a case," said Welsh.
In addition, he stressed client relations and communication. "Do you call them on regular basis, not just when you send the bill? How often in process do you adjust their expectations?
"People with megabucks mentality, their expectations are unreasonable compared to what a good attorney can deliver," he said.
Welsh recommended making sure the client understands and has reasonable expectations of what the outcome of their claim can be.
In addition, examine the calendar and docket procedures. Is it for litigation matters only? Consider adding corporate clients' annual meetings, UCC registrations and outstanding judgments. Furthermore, make sure there are backup procedures in place if the primary docketing clerk is sick or absent.
Another practice to examine is office sharing.
"John Q Public may think he's dealing with a big firm, but is really dealing with a solo practitioner sharing an office. You may not get hit with the insurance claim, but you have to spend time and money defending yourself," warned Welsh.
Another risk area Welsh cautioned against is negligent referrals.
"If you refer to someone who can't do the job, you get hauled in, too. It costs money to get out. Know who you're referring people to."
Finally, practitioners should review their policies to make sure they understand their coverage, Welsh said. Most legal malpractice insurance policies in Massachusetts are written on a "claims made" basis, as opposed to "occurrence" basis policies such as those commonly written for automobile, homeowners and general liability insurance. A claims-made policy only provides coverage for claims reported during the policy term. An attorney who ceases practicing law but wants past errors or omissions to be covered must continue to purchase claims-made malpractice even after he or she stops practicing law.
And under a standard claims-made policy, the insured attorney is obligated to give written notice to the malpractice insurer as soon as practical after the insured attorney becomes aware of any act or omission that could reasonably be expected to form the basis of a claim. It is important for an attorney who receives notice of a malpractice claim to notify the malpractice insurer as soon as possible, because the insurer could deny coverage due to late notice.
Although an insurer must demonstrate it suffered prejudice from the late notice before it can deny coverage under an occurrence-type policy, it appears an insurer need not demonstrate such prejudice under a claims-made policy, Welsh said. Most policies require that the insured promptly give the insurer written notice of any potential claim.
Finally, Welsh noted, "if you find a good company, stay with the good company - even when prices go up a little each year. If you find wide fluctuations in prices, chances are company isn't going to be around too long. They are fooling around with the market."
The MBA Insurance Agency provides members with access to exclusive insurance programs designed and negotiated annually by the MBA's own insurance committee. It builds coverage specifically tailored for lawyers who practice in Massachusetts. For more information, go to http://www.massbarinsurance.com.