The cost of malpractice insurance is an issue for every lawyer.
Annual malpractice premiums cost thousands of dollars, often straining the ability of small firms and sole practitioners to purchase when premiums approach 10 percent or more of their income on a product they likely will never need.
Now, a new issue has made malpractice insurance even more troublesome: the attempt of some carriers to exclude fee suits from policy coverage.
Let’s begin at the beginning of most malpractice actions: the initial engagement. An engagement agreement should be a two-way street. The lawyer promises to understand the needs and wants of the client, represent the client to address challenges facing those needs and wants (whether involving litigation or a transaction), and provide that representation competently.
The client promises to tell the truth to the lawyer, provide information and documents relative to the matter when the lawyer asks for them, and pay the fee as billed in accordance with the arrangement.
What are the worst consequences of failure to honor the respective promises? For the lawyer, it is a malpractice suit and possibly a disciplinary proceeding. For the client, it’s withdrawal by the lawyer (unless on the eve of trial or without adequate notice that would prejudice the client) or a suit over non-payment of the fee.
Some malpractice insurance carriers, however, are now lining up with clients, saying that if the lawyer sues for fees and the client cross-complains, countersues for negligence or files a disciplinary complaint with the state bar, the carrier will not cover the lawyer’s defense costs or pay any judgment against the attorney. The effect is to deny the lawyer the ability to collect the fee when the client fails to pay.
Why pay malpractice insurance premiums for coverage you will not receive when you need it most?
Fee-suit exclusions appear to be a veiled attempt by insurance companies to raise premiums without notice to the lawyer. And the attorney generally isn’t even aware of the exclusion.
When premiums rise openly, lawyers can make a cost/benefit analysis of affordability, balancing cost against benefit. The cost factors include the basic insurance premium, the nature of the coverage (more coverage, greater cost), and whether defense costs reduce the face value of the policy. Benefits come down to a question of how much protection is provided. Fee-suit exclusions in effect increase cost and decrease coverage without the lawyer being aware.
In every other business sector, creditors have the right to sue debtors for refusal to pay legitimate debts resulting from their purchases. Why should lawyers be placed in a different position?
The facts are, according to people I’ve spoken with in the insurance industry, there are few collection suits filed by lawyers and even fewer countersuits for negligence; when countersuits are filed, lawyers win as many as nine out of 10 disputes. Yet insurers do not acknowledge these realities when they refuse to pay defense costs or (unlikely) judgments.
Even if lawyers can afford malpractice insurance, marketplace factors beyond the attorneys’ control are conspiring against them. It’s another reason to make one wonder why anyone wants to go to law school.