ALPS LAWYERS PROFESSIONAL LIABILITY INSURANCE GLOSSARY
Lawyers Professional Liability Insurance (LPLI) is a unique form of liability insurance designed to provide coverage to a lawyer for damages a client incurs arising from an attorney’s acts, errors, or omissions in rendering Professional Services to a client. ALPS provides this Glossary to help you better understand Lawyers Professional Liability Insurance and some of the unique features and benefits of this valuable insurance protection.
Disclaimer: While ALPS provides this Glossary to generally explain the LPLI product and help you understand its unique features and benefits, nothing contained in this Glossary should be interpreted, construed or applied to alter, modify, or amend any of the terms and conditions of any ALPS insurance policy. Each insurance policy ALPS issues has been filed and approved by your state insurance regulator. Therefore, ALPS does not alter, modify, or amend any insurance policy, except through an approved or authorized policy endorsement. You should refer to your LPLI policy for the terms and conditions of your LPLI coverage.
Lawyers Professional Liability Insurance is Provided on a Claims Made and Reported Basis
An LPLI policy is quite different than the more traditional insurance policy that you may purchase for your home, auto, or even health. These more traditional policies are provided on an “occurrence” basis while LPLI insurance is provided on a “claims made and reported” basis which is standard in professional liability insurance. The fundamental difference is the event that “triggers coverage” under the policy. In a more traditional home or auto policy, for example, coverage is triggered when a covered event such as damage to your home or an auto accident “occurs” during the policy period, without regard to when the covered event is reported to the insurer so long as the insurer is not prejudiced from a late reporting of the covered event.
The event from which a claim arises under a Lawyers Professional Liability Insurance policy is generally an act, error, or omission in Professional Services. This is commonly referred to as a “Wrongful Act” in an LPLI policy. In contrast to an “occurrence” based policy, the occurrence of a Wrongful Act during the policy period is not the event that triggers coverage under an LPLI policy. Instead, coverage is triggered under an LPLI policy only when a covered claim that arises from a covered Wrongful Act is “first made against the Insured and first reported to the Insurer” during the policy period. This is true even if the covered Wrongful Act did not occur during the policy period, so long as the covered Wrongful Act occurred on or after the Retroactive Coverage Date specified in the policy. This distinction is critically important because most mistakes that a lawyer makes in the practice of law are not discovered immediately and most claims against a lawyer for legal malpractice are not made against a lawyer until well after the actual mistake or error is made.
Extended Reporting Period (ERP) Endorsement
Frequently referred to as “Tail Insurance” or “Tail Policy”, an Extended Reporting Period Endorsement or ERP is not a separate policy at all. An ERP is unique to “claims made and reported insurance” because a lawyer continues to need insurance protection for Professional Services already rendered at the time the LPLI policy expires in order to protect the lawyer from a subsequent claim arising from those Professional Services. An ERP is simply an endorsement attached to an existing LPLI policy that extends the time within which a claim may be reported under the policy. It is important to note that an ERP does not extend coverage for Professional Services rendered after expiration of the existing LPLI policy, but rather extends the time during which a claim may be reported to the Insurer for a claim arising from Professional Services rendered prior to expiration of the LPLI policy. All three of ALPS’s LPLI policies provide the opportunity for the Named Insured to purchase an ERP of different duration, including an ERP of unlimited duration. ALPS Preferred and Premier policies also offer industry-leading free extended reporting periods for certain qualifying events like retirement, death, total and permanent disability, and active military service. Also known as an Extended Reporting Endorsement (ERE), this endorsement must be offered as a policy benefit in most states, but the terms and conditions of an ERP or ERE vary amongst insurers.
First Dollar Defense (FDD) Similar to other lines of insurance, an LPLI policy is issued with an insurance deductible amount that is the responsibility of the Named Insured. If you want to avoid paying an insurance deductible for a frivolous claim or a defensible claim for which you have no liability, then ask ALPS whether you qualify for a First Dollar Defense or FDD endorsement. When you report a covered claim to ALPS, we will fulfill our promise to provide you with a defense of the claim. The cost to defend a claim is generally subject to your deductible, which means you would be responsible to pay the initial defense costs up to the amount of your deductible. There is an additional legal malpractice insurance cost when you purchase an FDD endorsement. Once purchased, however, you are NOT responsible to pay for any defense costs up to your deductible. Instead, ALPS will pay the “first dollar” of defense and you will only be responsible to pay your deductible if ALPS pays an actual loss under your legal malpractice insurance policy.
Defense Within Limits (DWL) vs. Defense Outside Limits (DOL)
Every attorney purchasing legal malpractice insurance should be aware of this critical policy feature and whether the attorney fees and costs incurred to defend a claim are “within the limit of liability” or “outside of or in addition to limit of liability.” Why is this important?
Under a DWL policy or “defense within limits” policy, the defense costs incurred to defend a claim are applied against and reduce the limit of liability available to pay damages or loss for a covered claim under the policy. Thus, a DWL policy is commonly referred to as an “eroding limit” policy because the available insurance protection under the limit of liability erodes or is reduced as the claim is defended and defense costs are incurred. Defending an LPLI claim oftentimes is difficult, time-consuming, and expensive. As the defense costs continue to mount, the limit of liability or insurance protection available to pay damages declines and the insured attorney may find that the policy does not have enough remaining protection to pay the full extent of the damages or loss. In that unfortunate scenario, the attorney is faced with “uninsured damages or loss” in excess of the remaining limit of liability available to pay damages, thereby creating personal liability exposure for the attorney to satisfy the excess damages or loss.
Under a DOL policy or “defense outside limits” policy, the defense costs incurred to defend a claim are outside of the limit of liability and are not applied against and do not reduce the limit of liability available to pay damages. As you can see, a DOL policy is clearly superior protection for a lawyer when compared to a DWL policy and the legal malpractice insurance cost for a DOL policy is higher.
ALPS’s legal malpractice policies generally provide a substantial Claim Expense Allowance that is available up to $1 Million depending upon the limit of liability under the LPLI policy. It is extraordinarily rare that a Claim Expense Allowance would be exhausted, but under our LPLI policies the limit of liability would begin to erode only after the Claim Expense Allowance is exhausted.
You should also be aware that an LPLI policy with a Claim Expense Allowance is more expensive than a pure DWL policy without a Claim Expense Allowance. If you don’t believe you need a Claim Expense Allowance feature within your policy, then ALPS offers unique options for a true DWL policy that will reduce your legal malpractice insurance cost.
For a multi-attorney law firm, the Insurance Contact is the attorney designated by the law firm to communicate with your insurance carrier. This attorney will be the go-to-person for all decisions and the person responsible to take all insurance-related actions on behalf of the law firm. For firms where attorneys may not communicate with each other every day, either due to location or firm size, the designated Insurance Contact should understand the responsibilities they are assuming on behalf of the law firm. The designated Insurance Contact will be the primary contact for all communication with the insurance company, including, but not necessarily limited to, formal notices and correspondence, claim settlement discussions, and any communication surrounding payment issues and cancellation.
Limits of Liability (Per Claim vs. Aggregate)
Your ALPS LPLI policy is quoted with two policy limits of liability—an “each claim” limit of liability and an “aggregate” limit of liability. The “aggregate” limit of liability is maximum amount ALPS will pay for all claims first made and first reported during the policy period, without regard to the number of claims, claimants, or Insureds. The “each claim” limit of liability is the maximum amount ALPS will pay for any single claim first made and first reported during the policy period, without regard to the number of claimants or number of insureds. The “each claim” limit of liability is always subject to the “aggregate” limit of liability.
As an example, an ALPS quote of $500,000/$1,000,000 means you will have an “each claim” limit of liability of $500,000, but subject to the “aggregate” limit of liability. You will also have an “aggregate” limit of liability of $1,000,000.
Let’s walk through two very simple examples:
Example 1: A law firm maintains an LPLI policy with $500,00/$1,000,000 limits of liability. Two covered claims are first made against the firm and first reported to ALPS during the policy period. On the first covered claim, ALPS pays damages on behalf of the insured in the sum of $300,000, and on the second covered claim, ALPS pays damages of $450,000. In this first example, the loss payments for both covered claims fall within the “each claim” limit of liability, so not a problem there. In addition, the loss payments for both covered claims do not exceed the $1,000,000 “aggregate” limit of liability, so no problem there either. However, due to the “aggregate” limit of liability, the firm would only have a remaining limit of liability of $250,000 for any subsequent claims first made and first reported to ALPS during the policy period.
Example 2: A different law firm maintains a policy with $250,000/$500,000 limits of liability. Three covered claims are first made against this unhappy law firm and first reported to ALPS during the policy period. The total damages for each claim are $300,000 on the first covered claim; $175,000 on the second covered claim; and $150,000 on the third covered claim.
In this second example, ALPS pays damages on behalf of the insured in the sum of $250,000 on the first covered claim due to the $250,000 “each claim” limit of liability even though damages are $300,000. The law firm remains responsible for the uninsured portion of the damages of $50,000 that are in excess of the $250,000 “each claim” limit of liability.
ALPS pays damages in the sum of $175,000 on the second covered claim because it is within the $250,000 “each claim” limit of liability and, when added to the first claim, is within the $500,000 “aggregate” limit of liability. After two covered claims, however, the firm only has $75,000 remaining available under the “aggregate” limit of liability.
For the third covered claim, ALPS only pays damages of $75,000. Why? Even though the amount of damages in the third covered claim falls within the $250,000 “each claim” limit of liability, the third covered claim is subject to the $500,000 “aggregate” limit of liability and, as noted above, the remaining “aggregate” limit of liability is only $75,000.
Naturally, the legal malpractice insurance cost of a policy increases as the limits of liability increase. Not sure how much insurance to carry? Visit https://www.alpsnet.com/higher-limits for some helpful information.
Maturing (or Maturing Rating)
Every “claims made and reported” policy is rated in anticipation of the exposure assumed when providing coverage for an attorney's prior work. The industry typically refers to this as maturing rating or “step rating” and provides for a rating credit or discount for an attorney that is not considered “fully mature.” Each insurance carrier has a different opinion [which is generally based on a statistical (actuarial) analysis of a carrier’s historical data] of how many years of coverage it takes for an attorney’s exposure to be considered “fully mature”. As the attorney matures, the premium typically will increase correspondingly—a practice common throughout the industry.
An LPLI policy is always issued to the Named Insured law firm identified as the Named Insured on the Declarations Page. Individual attorneys within a law firm are Insureds, but they are not a Named Insured. This is an important distinction because an LPLI policy provides for certain rights, terms and conditions that are unique and specific only to the Named Insured law firm that are not otherwise available or applicable to each individual insured attorney within the law firm. If you are a solo practitioner practicing law as an individual however, and not within a registered business entity such as a professional corporation or limited liability company, then you are the Named Insured and the individual Insured attorney. With ALPS, you can always look to Item 1 of the Declarations Page to identify the Named Insured.
Prior Acts Coverage
A lawyer may practice law and render professional services for many years prior to becoming insured with ALPS. Because a lawyer has continuing exposure for “acts, errors, or omissions” with respect to those prior professional services, the lawyer must always consider whether to purchase prior acts coverage. ALPS may offer “prior acts coverage” to a law firm or an individual attorney joining a law firm if the law firm or attorney has been continuously insured by another LPL insurer for the prior professional services that have already been rendered. If ALPS is willing to offer you “prior acts coverage,” your ALPS policy will afford coverage to the law firm from the earliest date upon which the law firm rendered professional services and was continuously insured by another LPL insurer for those professional services. In essence, “prior acts coverage” means that an LPL insurer is willing to accept risk retroactively and insure the law firm retroactively back to a date that is prior to the effective date of the very first policy with the insurer.
This is one of the most important definitions in an LPLI policy, as it defines the scope of work performed by an attorney that will be covered by the insurance company. Each LPL insurer generally includes a definition within the LPLI policy defining the scope of professional services and setting forth any limitations on the scope of professional services. This definition can be a differentiating policy feature. In its most basic form, “Professional Services” means those services or activities that you perform for your insured law firm and render solely to a client in an attorney-client relationship. Your ALPS policy may extend the scope of Professional Services to include many of the additional “hats” that a lawyer may wear while practicing law, including, but not necessarily limited to, mediator, arbitrator, administrator, personal representative, trustee, guardian, director of a professional legal association, lobbyist, notary public, author of legal publications, and court appointed child and family investigator. Look to your ALPS policy to carefully review the scope of Professional Services covered.
Retroactive Coverage Date or Retroactive Date
Another industry-wide term commonly used in a Lawyers Professional Liability Insurance policy, the Retroactive Coverage Date is a date specified on the Declarations Page that defines the earliest date for which a Wrongful Act in the rendering of Professional Services will be covered under the LPLI policy. Any claim arising from a Wrongful Act that occurs prior to the Retroactive Coverage Date is not covered under an LPLI policy, even if the claim is first made and first reported to the Insurer during the policy period. As a condition for coverage to exist for a claim, the claim must arise from a Wrongful Act that occurred on or after the Retroactive Coverage Date.
When a lawyer purchases a new LPLI policy, this concept refers to a policy that does not provide “prior acts coverage.” Instead, the LPLI policy only provides coverage for a claim that arises from Professional Services rendered on or after the original Effective Date of the first LPLI insurance policy purchased from the Insurer.
Supplementary Payments or Sub-Limit Coverages
Often times, insurance carriers will add additional policy benefits or features that are separate and distinct from the primary coverage provided to the Named Insured. Many of these additional policy benefits or features are provided within the policy to protect the Named Insured for other types of exposure an attorney may face unrelated to an “act, error, or omission.” Perhaps two of the more common additional benefits or features provided under an LPLI policy are the subpoena assistance benefit and the supplementary payment made available in conjunction with a disciplinary proceeding before a state licensing board or disciplinary agency. It is important to note that these additional policy benefits have a separate and distinct maximum limit that the LPLI carrier will pay with respect to the additional policy benefit.