Insurance serves as a safety net, protecting the policyholder against a wide range of potential risks. There are numerous insurance policies available based on the customers' specific expectations and requirements. One such coverage that we will discuss in this article is legal malpractice insurance. After going through it, you will understand what legal malpractice insurance is, why you need it, and the cost associated with it.
Let’s start with the very basics then!
What is Legal Malpractice insurance?
The ever-increasing potential of the corporate legal world presents a challenge for lawyers in today's socioeconomic context. This is due to a variety of reasons such as increased dependency on professional assistance, the complexity of jobs performed, and increased awareness of legal rights. Furthermore, losses are more evident during periods of economic distress. In such cases, if a lawyer fails to offer appropriate services to his or her client, the aggrieved client may sue him for professional negligence. This may result from the thinking of the client that the service obtained was not worth the fee charged.
Legal malpractice insurance (also known as legal professional liability or malpractice insurance) becomes beneficial in such a situation. The possibility of making a mistake and being held accountable for it is always present in the legal profession, regardless of how talented or experienced a lawyer is. Legal malpractice claims are a common and costly aspect of working in the legal profession, no matter how careful you are. This sort of insurance covers all potential failures on the part of a professional lawyer in terms of financial damage sustained by the client as a result of error or omission in the services offered. The coverage would pay both the defence costs and any settlement amounts given to the aggrieved party. A General Liability Insurance policy covers events that can occur to any business owner. But, professional liability insurance for Lawyers covers the specific lawsuits that a lawyer may face.
Legal Malpractice refers to any negligent act committed by a lawyer. It occurs when a lawyer fails to carry out his obligations to acceptable levels and is unable to adhere to the specified code of professional and ethical conduct. Every client expects a specific outcome in his or her case, but failure to obtain that desired outcome does not constitute malpractice. To invoke malpractice by the client, the lawyer must have acted negligently in his approach or created some form of breach of contractual obligations. The lawyer owed a duty to the client that he did not meet, and the insurance covers the financial damages incurred as a result.
Situations when a lawyer may face lawsuits from clients
- Acts of negligence
It is fairly common for clients to feel deceived or tricked by their lawyer, especially if they do not win the case. In this scenario, a client may sue the lawyer if he or she believes there has been negligence on the part of the lawyer.
- Breach of confidentiality
The client-lawyer relationship is built on mutual trust and confidentiality. But if you mistakenly reveal crucial information about your client to a third party and your client suffers any damage as a result, you may be sued.
- Missing filing deadlines
What if you miss the filing deadline for documents in court? What if you forgot the hearing date and failed to appear in court? A lawyer can be sued if such acts of his may result in damage to his clients.
In India, it is not common for lawyers and law firms to obtain professional liability insurance or legal malpractice insurance. One of the primary reasons for this is a lack of awareness. Not all lawyers or law firms are aware of the existence of professional liability insurance. The clients are also unaware of the possibility to sue their lawyers or law firms for violation of professional duty or negligence. There have been few situations in which clients have sued the lawyers or legal firms for negligent services.
However, the Advocates Act of 1961 allows an aggrieved party to lodge a complaint against an advocate with the State Bar Council's disciplinary committee or the Committee to take Suo Moto proceedings. This results in the conduct of disciplinary proceedings against the lawyer who is accused of professional neglect or misconduct. This does not afford any recourse to the aggrieved party because it primarily addresses the conduct of the lawyer.
What are the benefits of Legal Malpractice insurance for lawyers?
Premium lawyer insurance will help pay for the defence costs and indemnity payments incurred in resolving claims filed against the lawyer or company. Such claims should allege specific conduct, errors, or omissions done while providing legal services. The following are some of the important advantages of legal malpractice insurance:
- Provides financial security
Financial losses from lawsuits might disrupt a lawyer's business. However, if he or the law firm has insurance, the insurance provider will cover all such expenditures. legal malpractice insurance covers all defence costs, including attorney fees, document filing fees, court fees, and other related expenses. Such protection acts as a safeguard against legal ramifications arising from negligence claims.
- Relieves the mind from additional burden
A lawyer who has liability insurance by his side can handle his or her task more confidently, leading to more effective results. without such an insurance cover in place, the lawyer would be constantly burdened with certain thoughts. These will include not meeting the client's expectations, being held liable for the negligence of any kind, and eventually being subject to numerous claims as a result of the services offered. However, legal malpractice insurance gives assistance in such a case and manages a situation that a lawyer could not have anticipated.
- Increases inflow of clients
Some people, particularly government officials, prefer to hire lawyers with professional liability insurance. With the advent of globalization, law firms have begun to serve both domestic and international clients. In reality, several countries require legal professionals to obtain professional liability insurance from the beginning. As a result, many international clients have requested that law firms representing them obtain professional liability insurance. In the instance of a firm being sued for damages, it serves as proof of the firm's ability to cover such damages.
- Ensures smooth running of operations
If client claims are frequent, it may seem that the services of the lawyer or the law firm are deteriorating and the clients are largely dissatisfied. Such claims resulting from error or omission may lead to significant financial loss and disruptions to the business operations of the lawyer or firm. Professional liability insurance assists in restoring the prior financial position, post the damages incurred due to the ongoing legal proceedings. Lengthy legal proceedings may lead to scenarios like loss of job and can also have a negative impact on business efficiency. However, professional liability insurance helps cover the legal expenses in the event of a negligence claim, strengthens the financial position of the lawyer or the law firm and keeps it afloat.
Now that you have come to know about what legal malpractice insurance is and why it is necessary for lawyers, let's discuss in detail about the costs associated with it.
What can impact the cost of Legal Malpractice insurance?
While insurers examine numerous aspects when calculating the cost, the most important one is undoubtedly the services provided by your law company. This is known as your "area of practice." Certain areas of practice are linked with a higher level of risk, which means that premiums for firms specialized in these areas are usually higher. Insurers constantly evaluate and calculate their loss experience in order to determine which areas of practice have a higher severity and frequency of losses.
Furthermore, if your firm practices a wide range of entirely unrelated areas, your charges will be far higher than those of a law firm that focuses in one area. In the view of the insurer, a lack of focus and practice in a range of unrelated fields indicates the lawyer /firm is operating in areas where they may lack experience. This may increase the likelihood of a claim being lodged against them.
Family law, criminal law, bankruptcy and most defence work fall within the category of low-severity areas. wills, real estate, personal injury, and trust and estate work are all high-severity areas. When it comes to premiums, conveyancing is one of the most high-risk areas as well. It is the practice that deals with the transfer of title deeds of property and land from one person to another. If conveyancing is your area of expertise, you should search for an insurer that can provide you with long-term insurance. This is because this type of business frequently comprises cases that last for years.
While calculating the premium of Legal Malpractice insurance, insurers rely heavily on historical claims data that they have collected over the years. This data is examined using two primary principles: loss frequency and severity.
Frequency: The number of claims an insurer expects to be reported to them. The insurer will compute a frequency rate based on the number of reported claims per a predetermined number of lawyers or law firms that they insure in a year. On the basis of this, the insurer will determine a premium.
Severity: Based on the particular practice area, this is the anticipated average size of a claim or loss. When evaluating the severity of a loss, two major factors are considered: the defence expenditures and the actual damages that must be paid when a claim is settled. When these two elements are combined, insurers obtain an average incurred loss value, which is essentially what severity denotes.
Insurers will combine their calculations for the projected frequency and severity of claims by practice area. This is to generate relativity modifiers, which will be used to develop procedures for setting premiums based on practice areas. In general, insurers are apprehensive of high-severity areas of practice since they are more difficult to underwrite and, as a result, have higher premiums. If you work in a riskier field, it is a good idea to specialise in that field. When reviewing your insurance alternatives, insurers will consider the experience, competence, and understanding that your legal team possesses in your area of practice. The more experienced and competent your firm is in high-risk and high-severity areas of practise, the lower may be your premium.
Other factors that may influence the cost of Legal Malpractice insurance
When determining the cost of Legal Malpractice insurance, there are numerous other factors to consider as well. Please note that no two law firms are guaranteed to pay the same amount for their coverage. There are aspects of your firm that you might not expect to influence your coverage costs. However, insurers will consider them crucial while calculating your premium.
Let's take a look at some of these important factors-
- The size of your law firm
It is obvious that your premium will increase when your law firm adds new lawyers. But, it is not usually an exponential increase. At times, insurers offer discounts when a law firm grows in order to retain them as their business expands.
- Continuity of coverage
Another element that insurers consider when calculating premiums is the continuity of your coverage. Typically, insurers will continue to increase premiums during the first five years. After the firm has been with the insurer for 5 to 6 years, the insurer will consider it as a mature law firm and will no longer increase its premiums every year. That is not to say that your insurance premium will never increase beyond the first 5 to 6 years. It simply means that a change in your insurance provider will not be one of the reasons for a premium increase, beyond a certain time period.
- Amount of coverage
The more your policy limit is, the higher will be your premium. However, because the cost of defence and any settlements are bundled under this limit, it may not be appropriate for your organisation.
- Amount of deductible
The deductible amount is determined by how much the firm must pay for indemnities and claims before the policy payout starts. Lower premiums mean a bigger deductible and vice versa. Insurers often demand higher deductibles as limits increase. However, insurers will set deductibles according to what they estimate the insured can afford. This estimation is again typically based on revenue figures from the previous year.
- Risk management portfolio
Firms with strong risk management policies will have lower premiums. Accessing risk management practises for law firms include, for example, the client selection process, whether it uses any kind of scheduling or conflicts-checking techniques or software, whether it sends engagement and detachment letters, and whether the firm has recently sued any client for nonpayment of fees and so on.
- Claims history
As stated previously, the claim frequency is essential to the insurer, but, the severity is even more important. If you have a lot of claims filed against you but none are paid out, you can anticipate your premium to stay consistent. Any large claim, on the other hand, will have a direct impact on your insurance premium. If your claims are both severe and frequent in terms of loss, the insurance provider may even refuse to cover you in the future.
It's also worth noting that failing to report claims to your insurer will not work. The insurance company exists to assist and protect you. As a result, informing your insurer of all existing and potential claims is the wisest course of action for all parties concerned.
We hope the discussion above will help you understand what legal malpractice insurance is, why you need one and what impacts the cost of such coverage. We have also discussed other important matters related to the cost of legal malpractice insurance. For the best recommendation on any kind of insurance, you may contact BimaKavach. Here, you can get the best recommendation for any insurance product in just 5 minutes.
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