When determining the appropriate amount of professional liability insurance coverage, law firms should consider several key factors to ensure adequate protection against potential claims. Here's a general overview of factors to consider:
Firm Size and Structure
The number of attorneys and support staff can influence the likelihood and potential cost of claims. Larger firms with more personnel may face increased exposure and thus may require higher coverage limits. A reasonable question would be to ask what size of claim would significantly impair the law firm’s ability to function.
Areas of Practice
Certain legal specialties carry higher risk profiles. For instance, practices involving securities, mergers and acquisitions, or intellectual property may be more prone to complex and costly claims. Firms should assess the inherent risks associated with their specific practice areas, in particular taking into consideration the severity of potential claims.
Geographic Location
The jurisdiction in which a firm operates can impact both the likelihood of claims and the cost of defense. Some regions may have higher litigation rates or more plaintiff-friendly environments, necessitating higher coverage limits.
Client Base and Revenue
Serving high-net-worth clients or handling large financial transactions can increase potential liability. Firms should evaluate the financial stakes involved in their typical client engagements when determining coverage needs, as well as considering the largest deal size being handled in the office.
Assets of Law Firm Partners
Lawyers that have accumulated large personal assets over the years should consider higher limits because if the firm’s limit are exhausted by the payment of a large claim or a series of smaller claims during a particular policy year, then the lawyers personal assets may be at risk. Typically, lawyers with personal assets of $5 million should consider having the firm carry an equivalent amount in limits.
Defense Costs
It's crucial to understand whether defense costs are included within the policy limits or covered in addition to them. Policies where defense costs erode the coverage limit may necessitate consideration of higher limits to ensure sufficient protection.
Contractual Requirements
Some clients or engagements may stipulate minimum insurance requirements. Firms should review contractual obligations to ensure compliance with specified coverage limits.
Regulatory and Industry Standards
Certain jurisdictions or legal associations may mandate minimum professional liability coverage. Firms should verify and adhere to any such requirements applicable to their operations. For example, in Illinois, law firms organized as a limited liability entity must maintain "minimum insurance" for professional liability, which is defined by Supreme Court Rule 722. The minimum amounts are $100,000 per claim and $250,000 annual aggregate, multiplied by the number of lawyers in the firm, up to a maximum of $5,000,000 per claim and $10,000,000 annual aggregate.
It is advisable for law firms to consult with experienced insurance brokers or risk management professionals who can provide tailored advice based on the firm's specific risk profile and operational characteristics. Regularly reviewing and adjusting coverage limits in response to changes in the firm's size, practice areas, or claim history is also a prudent strategy. Often a primary insurance carrier will not provide higher limits even if the insured is willing to pay additional premium. In such case, the law firm should seek to obtain an excess professional liability policy on a “full follow form” basis to ensure it has the limits necessary.
If you need assistance in connecting with a qualified insurance advisor or have further questions about professional liability coverage, feel free to ask.