There’s a combination of reasons for this, ranging from being too busy to being overwhelmed by the task to the widely held but erroneous belief that all policies are the same anyway — why invest the few hours that it can take to review the policies?
Here’s the scariest part — the fine print really does matter. It determines what is and what is not covered. For example, just because the policy is called a “professional liability policy,” it doesn’t necessarily cover all professional liabilities that you are found liable for or that generally cost the firm money. So what should you do? While we do recommend you read your policy and ask your broker to review the parts written in insurance language, here are four fine-print details you need to read or at least understand.
1. Definitions. All policies contain this section. Often overlooked, it’s not meant to merely be a glossary of terms; the description actually “defines” the coverage, aka limits of the coverage. Your largest fine-print definition exposures are probably the definition for legal services in your professional liability policy and the definition of a claim in your cyber liability policy.
The legal services definition must be written to include all of the services that you provide. Firms with practice areas in real estate, trusts and estates, or tax must pay special attention to this as those practice areas often include nonlegal services closely related to the delivery of the legal service and often done by the law firm. Some examples include paying fees and completing filings for clients during the course of your practice.
2. Defense Costs. All of your liability policies have two major components of the coverage: 1) it pays to reimburse you for actual liability from settlement or judgment, and 2) the defense costs defending the actual liabilities. These defense costs are mostly legal bills but also include other costs like experts and technology that would have to be contracted to defend your position. There is fine print that defines how these defense costs are covered by your insurance policies, and some of it allows for the entire amount of the insurance — aka the policy limits — to be reduced by the amount of money spent on the defense costs.
For example, if your fine print has that provision in your firm’s policy, the amount left for settlement or judgment after expenses could be much less than you need and lead to a devastating loss to the firm. You might see these options covered in your insurance quotes by insurance geeks like me calling them “Defense Inside and Defense Outside the Limit.”
3. Firm Obligations. The fine print in your policy details your firm’s responsibilities in time of claims, like your requirement to cooperate with the insurance company and their representatives, not admitting to a liability without their approval, and your financial responsibilities in time of a claim. Your financial obligation in the form of your deductible is deceptively clear on the declarations page. The dollar amount of the deductible is presented clearly as a dollar figure, but the fine print will determine many important factors. Look for language that addresses when it applies (loss only versus defense and loss). There may also be a capped multiple deductible (i.e., two or three times) and instances when it is actually reduced due to your participation in a risk management process to lower the cost of the claim, such as mediation/arbitration, or a quick settlement of the claim in a prespecified time limit.
4. Exclusions. The exclusion section changes everything. Ironically, even the regular policy readers are out of energy when they reach this most powerful section toward the end of the policy. So what should you look for here? Insurance companies have creatively reduced coverage in many areas, but there are two exclusions to focus on.
The first of these is any exclusions of certain practice areas like “securities” or “investments.” Even if your firm doesn’t think you practice in those areas, often the exclusions are written so broadly as to exclude all legal work even tangentially touching those areas. For example, a broad securities exclusion will exclude coverage for claims against your firm if the underlying litigation was based on any security holding.
The second powerful exclusion is one where the insurance company limits coverage when fraud is alleged — unless you are found not guilty by a court of the fraud. Since, practically speaking, most firms do not actually reach a court finding (let alone one of not guilty), this exclusion is a powerful limit on some of the most expensive types of claims — ones where malpractice and fraud are alleged.
In today’s fast, overworked world, we all look for shortcuts to accomplish our daily tasks. Assuming that all professional liability insurance policies (and their fine print) are identical can be a costly mistake. Investigate these areas with your insurance broker before you buy or at the least before your costly claim.
ABOUT THE AUTHOR
Uri Gutfreund is the National Law Firm Practice Leader for Risk Strategies Company, a national top 25 insurance broker. He and his multidisciplinary team advise law firms on all types of insurance and benefits. Gutfreund is a frequent speaker at legal conferences, and a writer and blogger on insurance and risk management.