What is Lawyers Professional Liability (LPL) Insurance?

In the legal profession, it is often referred to as legal malpractice insurance. I will use both terms interchangeably throughout this article. LPL insurance insures a law firm and its employees for acts, errors and omissions committed in the provision of legal services. The policy places a duty to defend and duty to indemnify upon the carrier if and when an insured under the policy has a claim asserted against them that is not excluded under the provisions of the policy.

The duty to defend and the duty to indemnify are separate duties. For example, if an insured attorney is sued for several causes of action, some of which are covered under the policy and some of which are excluded, the duty to defend will obligate the carrier to provide a defense to all claims. In short, if there is at least one covered claim being asserted against an insured, the insurance carrier must defend all claims until the covered claim is resolved. The duty to defend is “In for one, in for all.”

If the suit goes to trial and there is a verdict that awards the plaintiff damages based upon a claim that is excluded under the policy and not based upon any covered claim, then the carrier has no duty to indemnify the loss. In this example, the insurance company had a duty to defend, but ultimately there was no duty to indemnify as the verdict was based upon only an excluded claim.

Depleting Limits of Liability.

Unlike other types of insurance, such as an automobile insurance policy or a title insurance policy, almost all legal malpractice policies have depleting limits of liability as defense costs are incurred. You may have heard these types of policies also called eroding policies, wasting policies, self-reducing or self-liquidating policies. It means that as the carrier pays for the defense of a claim, the coverage limit for the claim will be reduced by the amounts paid for the defense. For instance, if a law firm or an attorney has a LPL insurance policy with a $100,000 coverage limit and the insurance company spends $50,000 on the defense, this will leave $50,000 to pay for any settlement, adverse judgment, or future defense costs including appellate costs.

Claims-made policy.

LPL insurance policies are “claims made” or also sometimes referred to as “claims made and reported” policies. This means in order to have coverage for a claim under the policy, the claim must be asserted by the claimant against the insured attorney and the insured attorney must report the claim during an active policy period. Active policy periods run one year and the policy must be renewed annually. If a claim is asserted against an attorney after the expiration of the policy and the attorney did not renew the policy, the claim will not be covered even if the error occurred during the time the attorney was insured. Additionally, the alleged error or omission must have occurred while the attorney was insured. This differs from occurrence policies which will provide coverage for an incident that occurred during the policy period regardless of when the claim is reported, even if the claim is reported after the policy is canceled.

Retroactive Date.

The retroactive date, sometimes shortened to the “retro” date, which is stated in the declarations page of the policy, is the date the policy begins providing coverage. For example, an attorney obtains their first policy with a carrier on January 1, 2020, then they will have insurance coverage from January 1, 2020 at 12:01am - January 1, 2021 at 12:01am. The attorney renewed and maintained coverage each year thereafter and the active policy period of the current year is January 1, 2022 - January 1, 2023 with a retroactive date of January 1, 2020 when the attorney first became insured. A claim is asserted against the attorney during the current active policy year and it is regarding an alleged error that occured on May 9, 2020. Because the retroactive date is January 1, 2020 and the alleged error occurred after the retroactive date, the attorney would be covered for the claim even though the current policy period started on January 1, 2022. If the claim was for an alleged error that occurred on December 31, 2019, there would be no coverage as the alleged error occurred prior to the retroactive date.

Must or Should I have legal malpractice insurance?

There are only two states, Oregon and Idaho, that require an attorney to carry legal malpractice insurance. Some states have a mandatory disclosure requirement if the attorney does not carry insurance or disclosure is required if the attorney does not carry a minimum threshold amount of insurance, usually $100,000. Texas does not require attorneys to carry legal malpractice insurance. However, if a law firm is set up as an LLP, the LLP laws of Texas require $100,000 of insurance or that amount set aside to cover judgments.

Despite no requirement in Texas to carry legal malpractice insurance, many do, and it is strongly recommended to do so. There are some types of insurance that are purchased to protect the insured of the insurance, such as health insurance or comprehensive auto insurance. There are other types of insurance purchased to protect others such as life insurance or a lender’s policy of title insurance. While most attorneys purchase legal malpractice insurance to protect themselves, there is an argument that it just as importantly serves as protection for the client and is the reason two states require it and other states have disclosure requirements or are considering it to be a requirement.

Imagine the scenario where a conscientious attorney inadvertently makes a mistake that results in a loss for a client. It happens more often than you might think and it can happen to even the best attorneys. It may even be a situation where the attorney was unaware of an oversight by a staff member in their office that resulted in the loss to the client, but ultimately, the blame will fall on the attorney or the law firm generally. In these situations, the attorney very much wants to remedy the situation and “make it right” for the client. However, with no ability to cure the error, the only remedy may be to compensate the client for the monetary loss - a loss which the attorney or the firm does not have the funds available to pay. In these instances, there is no animosity between the client and the lawyer, but there is a monetary loss that one party cannot afford to lose and the other party cannot afford to pay. This is where legal malpractice insurance steps in to protect the client from a loss that is not otherwise recoverable because their lawyer does not have the personal funds to make the client whole.

It is important for lawyers in considering whether or not to purchase LPL insurance, to also consider the interest of their clients. Unless the attorney is independently wealthy and could write a check for losses they cause, there is an argument that purchasing insurance is a form of ethically looking out for the best interests of the client. Some attorneys will also learn that if they are seeking to develop a practice with large institutional clients, those savvy commercial clients will require the attorney to have insurance. Many referral services will require lawyers to have insurance if the lawyer is to be listed on the referral service. Additionally, if you are an attorney who refers cases to other attorneys, but keeps an interest in the case, would it not be prudent to require the attorney to whom the case is being referred to carry legal malpractice insurance of their own? After all, if there is a malpractice suit brought, it is an assurance that both the referring attorney and the referred attorney will be named as defendants in the litigation.

I have sometimes heard attorneys state they do not want to have malpractice insurance because they believe it opens them up to claims. In practicality, because there is no disclosure requirement in Texas, most clients do not know whether or not an attorney is insured. Additionally, people often presume that even if an attorney is not insured, the attorney likely has at least some assets that can be reached. If a client believes they have been monetarily damaged by an act, error or omission by that attorney, whether or not the attorney has insurance will not deter an upset client in trying to seek redress against the attorney.

This is not to say, however, that after the policy is disclosed during the discovery process, the opposing counsel will not seek the policy limits as damages or inflate damages to consume as much of the limits of liability as possible. Based upon this possibility, some attorneys might assert that having insurance increases the size of the claim, and therefore, it is better to not have insurance. While the demand does sometimes get inflated based upon the amount of available coverage, it does not negate the important purpose of the policy to provide an attorney a defense which is no small expense the attorney would otherwise be paying themselves if they did not have insurance. Arguably, the defense provided under a policy is even more valuable than the indemnity of a loss as anytime an attorney is sued for malpractice there will be defense costs incurred, but not necessarily a loss payment. Some claims are meritless and can be disposed of by summary disposition. Others are defensible, but defending those claims is often very expensive due to the need for expert testimony regarding standard of care by an attorney.

There are some attorneys who may not believe they need legal malpractice insurance because they are litigators and could defend themselves against any type of lawsuit if they are sued. First, I have never met an attorney who practices in the area of professional liability who did not have insurance themselves. So the attorneys who believe they can defend themselves may be great litigators in their particular area of law, but are generally not knowledgeable about the pitfalls and intricacies of defending professional liability claims. Second, it is accepted conventional wisdom that it is a bad idea for a person to represent themselves in court as a pro se litigant which has given rise to the old saying “that a person who represents themself in court has a fool for a client.”

How much insurance do I need?

If you have determined that you, and perhaps for the interest of your clients, would benefit from having legal malpractice insurance, your next question may focus around the amount of coverage needed. There are a number of factors that should be considered in determining how much coverage to obtain. This would include the volume of work the attorney handles, the types of cases and the potential amount of damages based upon the value of the matters the attorney advises upon. Additionally, because LPL insurance policies have self-reducing limits, it is important to consider the anticipated cost of defense should a claim arise.

The higher the volume of work a law firm handles, may give rise to the possibility of more than one claim being asserted against the firm. In these cases, not only will the law firm or attorney look at the per claim limit, they will also want to consider the aggregate limit in the policy for all claims in a policy period. For example if the policy provides for a $500,000/$1M limit of liability, it means that each unrelated claim asserted against the insured will have a limit of liability of $500,000. However, if multiple unrelated claims are asserted, the policy limits would be exhausted when the $1M is spent on all claims together.

Maintaining coverage.

It is very important to maintain coverage to preserve the retroactive date so the attorney does not have periods of non-coverage or gaps in coverage. If an attorney does not allow a policy to lapse, the retroactive date may be preserved even when an attorney changes carriers. However, the preservation of the retroactive date is not automatic and an attorney needs to make sure when changing carriers that they request the retroactive date be carried over. The effect of a gap in coverage can be detrimental.
For example, an attorney maintains coverage for several years only to allow it to lapse or intentionally cancels the insurance. The attorney then later decides to obtain insurance again. However, due to the gap in coverage, the attorney will no longer have his prior retroactive date and it will start over based upon the most recent acquired policy. This means if a claim is asserted against the attorney for an alleged error or omission that occurred while he had the previous policy, he will not be covered for the claim because his current policy does not have a retroactive date to cover prior acts.

Tail Policies.

Another way for attorneys to protect themselves when they retire or cancel their malpractice insurance policy, is to purchase a tail policy. A tail policy provides for an extended reporting period so if a claim is asserted against the attorney after the expiration of the last active policy, the attorney will still have available coverage for alleged errors or omissions that occurred all the way back to the retroactive date stated in the last policy.

This can also help attorneys who are transitioning from one firm to another. For example, if an attorney is dissolving a firm to move to another firm, the new firm will likely have its own policy to cover the attorney for errors or omissions while the attorney is employed at the new firm. However, the new firm’s LPL policy is not going to provide coverage for errors or omissions that occurred while the attorney was at the prior firm. Because there is often a delay before a claim is asserted, it becomes important that an attorney continue to have the ability to report claims even after dissolving the prior practice.

The most common tail policies are either for two years or four years based upon the statute of limitations to bring a legal malpractice claim or a breach of fiduciary duty claim.

Other types of coverage.

While a legal malpractice insurance policy will provide coverage to an attorney for most claims, it is not all encompassing. Additionally, the types of coverage offered in a legal malpractice claim will differ from carrier to carrier as well as the individual products offered by each carrier. There are a number of factors that an attorney might want to consider in determining which policy would be best suited for their needs. For example, in addition to coverage for claims based upon legal malpractice, does the attorney desire coverage for defense of disciplinary actions, also called grievance complaints that may be filed with the State Bar? Some, but not all, policies provide grievance defense coverage.

Another type of coverage that has become increasingly of interest to attorneys is cyber insurance. There are some LPL insurance policies that will provide some limited cyber coverage against first party claims. However, if cyber threats are of greater concern, an attorney should investigate purchasing a stand-alone cyber insurance policy to cover matters not covered in the limited cyber coverage that may be provided under their LPL insurance policy.

Many attorneys will also do trustee, receiver or estate administration work. This type of service does not necessarily require a law degree as it is often administrative work related to the collection and disbursement of monies. If the work being performed is not legal work, then an attorney may want to think about looking at other products such as a bond that specifically covers the attorney’s work as a trustee or administrator. Remember, the legal malpractice insurance policy is there to insure an attorney for that attorney’s legal services. It does not necessarily provide coverage for everything an attorney does merely because the attorney has a law license.

Use the LPL insurance carrier as a resource.

Most insurance carriers have a risk management department or someone an insured can contact to inquire about best practices. This serves as a benefit to the insured attorney as well as the carrier in avoiding future claims. Do not be shy about contacting your carrier to inquire about how to handle a difficult client or situation. The contact at the LPL insurance carrier is likely also an attorney and has seen numerous similar situations and can provide ideas or counsel on how to deal with the matter. If the situation is complicated and serious enough, an insured attorney might be surprised to find that the carrier is willing to hire an attorney to assist the insured to prevent a claim from being asserted.

Also check with the carrier about their offerings for complimentary continuing legal education courses or articles. The carrier can be a great resource for attorney’s need to complete CLE credits to comply with State Bar requirements. Additionally, the carrier may even offer policy premium discounts if an insured completes a certain amount of ongoing CLE provided by the carrier.
As an insured attorney, the premiums paid to the LPL insurance carrier, can not only provide valuable insurance for when a claim is asserted, but it also gives an attorney access to a resource of services and CLE products at no additional cost that the attorney may otherwise have to pay for elsewhere.