Renewal jungle: Trends in the US professional liability insurance market

For most mid-sized US law firms, their experience of professional liability insurance over the past four to five years has done nothing to dispel the confusion surrounding premiums and coverage. While the marketplace has been soft for some, for others the ability to get and keep solid coverage with prior acts and a reasonable deductible has been a very difficult proposition.

The confusion over the issue of lawyers' professional ?liability insurance includes coverage questions, rate structure/rationale and, of course, premiums. However, even among insurance brokers, underwriters and law firm advisers, there ?is confusion (and consternation) involved in appraising the ?current market environment.

In prior times, for the majority of law firms, procuring professional liability coverage involved a quick phone call to their broker, stating that the firm had no claims, that there were perhaps a few more lawyers than the previous year, but that nothing else was very different. It's just not that simple anymore.

The past four years have brought about a tsunami of change. A large number of law firms that were practising in 2008 are not around anymore. Firms specialising in real estate transactions or public offerings are just a shadow of their former selves (although, fortunately, both sectors are making a comeback).

For a very large number of law firms, it is simply not business ?as usual; the number of lawyers in the firm has gone up or gone down precipitously and/or the practice areas for which the firm ?was known previously have changed considerably (either by ?addition or subtraction).

That's just the tip of the iceberg, however. The real question today is whether a mid-sized law firm with some claims is able to determine whether or not it's going to be able to continue its present coverage or if it will have to go shopping for a new insurer.

Coverage challenges

Not only has the insurance market changed, but so have the players in that market. When there is plenty of capital, there is a tendency for new insurers to ante up capital and to begin to write coverage for lawyers. Because they don't necessarily have a historic baseline of claims evaluations from which to make a decision, they have a tendency to write coverage very inexpensively. This, in turn, affects all of the other insurers in the market and creates the kind of instability and confusion with which we are beset today.

There are some insurers that present a constant line of ?coverage for lawyers; year after year they can be depended upon to offer coverage based upon realistic rates and to maintain that coverage with the same law firms. With the accession of new insurance entities (or those coming back into the marketplace), relationships between an insurer and a law firm can, however, ?take a beating when there is the opportunity to acquire coverage ?at a far lower premium. A law firm may want to keep its existing insurer relationship but, when $100,000 or $200,000 is at stake, ?it becomes a very delicate decision to make.

Added to this environment is the fact that, for some insurers that enter the market when it is 'soft', once they experience claims from their assureds' (which are a natural consequence of writing insurance in the first place), they have a tendency to withdraw from the market. This then leaves a vacuum behind for those firms which have had some claims and now find themselves as virtual pariahs, with their choice of coverage and premium extraordinarily limited.

The truth is that the insurance market now shows a definite leaning toward the schizophrenic: law firms that have not experienced claims find the market absolutely soft, but those that have had claims find the market unimaginably hard. Anecdotal examples abound of mid-sized law firms that have experienced claims and then found it difficult to find new coverage because ?they have been non-renewed.

When a firm is non-renewed (in a non-surplus lines context) the insurer is obligated to offer a reason for the non-renewal. Ninety-nine per cent of the time, the reason stated is 'excessive claims'. (There is also, of course, constructive non-renewal, where the insurer offers far less coverage for a far higher premium).

Once a firm is non-renewed, many if not most of the markets ?in which a broker would ordinarily seek coverage for their ?assured, are simply closed to the firm. Many insurers will, as ?a matter of policy, simply refuse to quote a law firm that has ?been non-renewed.

Others might say that they will quote, but their terms are so onerous that they might as well not bother, as the amount of insurance made available is a fraction of what the firm carried ?before and, in many cases, there is no 'prior acts' coverage. ?(Current insurance policies are all on a 'claims made' basis, meaning that they cover only the acts of commission or omission experienced when the specific policy is in force.) There is no coverage for acts that occurred prior to the policy taking effect, unless that coverage is specifically provided.

The non-renewal places a law firm in a deep hole from which is difficult to extricate itself. Some of the firms that disappeared in the past four years did so because they could no longer acquire professional liability coverage. It's not unheard of in the industry.

However, in some instances, the number of claims as well as the severity of those claims has been fairly limited. This is interesting because, while some of the firms with a limited claims exposure are being non-renewed, there is an abundance of firms with a far worse claims experience which are retaining their coverage. Even more interesting is that, in many cases, this is the same (domestic) insurer making choices which would appear to a rational person as being without rhyme or reason. One presumes that these are situations in which the central corporation has made the decision for 'policy' reasons, but that is unclear as well.

Through the jungle

So, what can a law firm which finds itself in these circumstances do? That's a tough question which should have been addressed before the claims occurred or afterward, as a means of remediation.

The insurance application for many firms (some quite large) is frequently handled by a non-lawyer assistant or administrative staffer instead of a partner, because the firm has failed to comprehend its significance. The partners themselves often know nothing about the application, so whatever happens to be reported is done by the staff person, with the signature (sometimes) by a partner who has paid little attention to what is going to the underwriter.

This is a missed opportunity to report clearly and with an argument in favour of the firm, whatever claims the firm may have experienced. Many times the application is not even typed but is filed out in long hand. Since the application is actually a marketing tool for the firm to acquire coverage on the best terms available, the failure to provide an application that is managed by a partner, is professionally drawn (as would be any other document which leaves the firm) and makes the best case it can for the firm in its clarity and completeness is an unfortunate failure on the part of the firm to present itself in the best light.

The choice of broker is extraordinarily important. It might surprise some to know that a great many law firm partners choose a professional liability insurance broker without care or consideration for its track record, experience in this reasonably arcane arena and/or knowledge of the firm itself.

It is important that the firm chooses a broker that has all of these aforementioned qualities and, certainly, has experience with the 'surplus lines' environment. Simplistically put, this refers to insurers which have not registered coverage and premiums with the insurance department of a particular state, but which offer coverage when three or more 'registered' insurers have declined. Lloyd's ?of London is a surplus lines underwriter, for example.

A broker that has experience and the right connections in the industry to access all of the possible providers often makes the difference between a law firm that has experienced claims acquiring coverage or going without coverage; a death knell to most law firms.

If there are significant claims concerns, then the firm should ?take steps to ameliorate its actions by making hard decisions on its own or acquiring outside help (again, remediation). An external review of the firm may demonstrate to underwriters that the firm is serious about operating in a more risk-adverse manner and provide ?a rationale that the experienced broker can then use to acquire better coverage, even with the necessity of a higher premium.

Pre-emptive action

The current professional liability insurance environment may be a challenging experience, but it is the responsibility of the individual firm and its broker to recognise the signs that might make the market hard or soft and to determine ahead of time the proclivity of the current insurer. The firm will then have time to make the necessary contingency plan and avoid placing itself in a position where there is little by way of choice in acquiring appropriate coverage. Failure to take the necessary steps in this process, to wait until the inevitable hammer comes down, puts the firm in a precarious circumstance where remedies may be unavailable.

Thomas Berman of Berman & Associates has been advising law firms on practice management and professional liability issues ?for over 20 years (www.bermanassociates.net)