By JOEL BERG, a freelance journalist and college professor
As McNees Wallace & Nurick added attorneys and offices over the last decade, risk came along for the ride.
So, the growing law firm in Harrisburg, Pa., decided to add insurance coverage in two new areas: management liability and employment practices liability, said David Kleppinger, the firm's chairman.
McNees Wallace hasn't faced any lawsuits, Kleppinger said. But like many law firms, it is seeing heavier traffic in and out of its doors, creating more opportunities for error.
"We do follow cases where law firms are being sued, and we did see that there are age discrimination, sex discrimination cases, harassment cases," Kleppinger said. "And those led us to believe that we ought to get the protection instead of self-insure."
Law firms across the country are reaching similar conclusions as they become increasingly businesslike in their operations, according to brokers and insurance carriers. The recession, which has idled thousands of lawyers and shuttered some major firms, also has prompted firms to reconsider their insurance coverage.
The downturn is loosening inhibitions among attorneys about bringing lawsuits against former employers and partners. It could be a young associate who felt she was wrongly let go or a senior partner questioning decisions that led up to a firm's sudden closure.
"It's truly a free agency," said Jonathan Kurens, senior vice president in the global professions practice at Aon Corp., the Chicago-based insurance brokerage. "And the idea that you can't work in this town again if you bring the lawsuit, which 35 years ago may have been true, is absolutely not true."
Management and employment practices liability insurance have been around for years, brokers and insurers say. But law firms are showing greater interest in both. Employment practices coverage is more common, particularly at larger firms, Kurens said. But management liability is catching up.
Growth is driven, in part, by the ability of firms to combine the two coverages under a single policy with a shared limit, he said. In addition to paying less, law firms can benefit in cases when a claim might fall under either coverage.
In other cases, employment practices alone is not enough, he said. For example, the coverage might not apply to disputes between partners.
In the past, law firms would review proposals for management liability coverage and decide their money was better spent strengthening risk management practices.
But minds are changing as firms grow and partners are more distant, said Anne Marie Davine, a managing director for New York City-based Marsh. She oversees the company's U.S. law firm practice.
"You can't possibly know everybody, and so that unknown often is an indicator for consideration of transferring that potential risk to an insurance product," Davine said.
Premiums have fallen, meanwhile, as more insurers enter the market, Davine added. "The more supply, the more competition. And pricing for law firms in particular has come down over the years."
Similar dynamics are at play for professional liability insurance coverage, another market changing in response to the recession.
Although competition is holding premiums in check, carriers are finding ways to deliver savings to law firms shopping for professional liability coverage.
"They're definitely looking for better prices, that's for sure," said Jim Rhyner, worldwide lawyers products manager and law firm industry business manager for Chubb Specialty Insurance, a unit of Chubb Group of Insurance Companies in New York.
Chubb works with customers to tweak deductibles and coverage limits, Rhyner said. And it is extending a 7.5 percent discount on premiums for policyholders that give up the freedom to choose their own defense counsel in case of a claim. "Some law firms appreciate that," he said. "They say, 'You know what you're doing. We trust you handling our claim. We don't want to be bogged down with that.'"
Financial squeeze or not, some firms are buying coverage for the first time, particularly in states such as California, which this year began requiring attorneys to disclose whether they carry malpractice insurance.
Other states ordering disclosure include New Mexico, Pennsylvania and Ohio, according to the American Bar Association. Maine, New York, Utah and Vermont are considering similar requirements.
"That generates the need for at least some level of professional liability coverage," said Stephen Tuuk, president of Hanover Professionals, which handles lawyers professional liability insurance for The Hanover Insurance Group, based in Massachusetts.
Hanover has been developing "starter policies" for first-time customers, Tuuk said. The policies would start with lower deductibles and lower limits and gradually rise over time.
Hanover also has rolled out tail coverage for lawyers whose old firms dissolve and leave them exposed to claims arising from their earlier work, Tuuk said. The policy was developed in partnership with a Hanover agent who identified the need.
"It's a stand-alone tail where the tail on the last policy, for whatever reason, is not available to individuals," Tuuk said.
Insurers also are aiming policies at in-house attorneys. This year, Zurich unveiled coverage designed to address potential gaps in coverage for company lawyers.
Existing policies, for example, may not cover legal work done on behalf of employers. And the policies may not extend to paralegals, legal assistants or outside attorneys assisting a company's in-house staff.
Most claims against company lawyers have come in areas such as the approval of financial statements and mergers and acquisitions, said Brad Gow, an expert in specialty errors and omissions (E&O) coverage. Pro bono work is another area of potential exposure. "There are some significant gaps in what companies are buying already in terms of liability protection," Gow said.
For law firms, meanwhile, potential gaps in liability protection are closing. Some jurisdictions have been allowing claims from non-clients, which could fall outside policy language limiting coverage to claims arising only from the attorney-client relationship
"Courts have not reached the same conclusion in every jurisdiction, but we do see claims," said Dan Reed, second vice president and national practice leader for lawyers, real estate agents and accountants in the professional liability unit of Travelers' Bond & Financial Products.
In response, Travelers is phasing out clauses that limit coverage to the attorney-client relationship, Reed also said.
Travelers also is modifying forms to deal with claims that attorneys knew about frauds committed by their clients, Reed said.
The carrier is extending coverage to what it calls "innocent insureds." These are lawyers who can show they did not know about a fraud, even if other attorneys at the firm did, Reed said.
As some gaps close, others may be opening. One of them is computer network security, often referred to as cyber liability. The gap stems from the reams of electronic data handled by law firms today.
A loss of data could be covered under existing liability policies, particularly if the loss relates to professional services or employment practices. But it might not be covered, insurers and brokers said.
Issues could arise, for instance, if a firm sends out an electronic greeting that spreads a virus to clients, said Homer Sandridge, vice president for professional liability at Travelers' Bond & Financial Products. Courts might view sending cards as a business activity, not a professional service covered by a traditional liability policy.
Many law firms are only beginning to grapple with the questions raised by cyber exposure, said Kim Pihlstrom, senior vice president in charge of risk management and underwriting for the lawyers' and real estate division of OneBeacon Professional Insurance in Avon, Conn. "It is a long process for a law firm to sort of change direction," Pihlstrom said, "and decide that they need a less traditional form of insurance."
August 1, 2010
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