Legal Malpractice Insurance Explained
Legal malpractice insurance is a type of professional liability insurance that helps to protect lawyers from claims made by clients who allege that the attorney’s negligence or wrongful acts have caused them harm. Legal malpractice occurs when an attorney fails to provide competent representation to a client, resulting in damage to the client. This can include errors and omissions in legal advice and representation, failure to file court documents on time, or even intentional misconduct. Legal malpractice insurance provides attorneys with a financial safety net in the event that they are sued for legal malpractice.
Attorneys purchase legal malpractice insurance to protect their practice from potential claims . Like malpractice insurance for doctors and other healthcare professionals, legal malpractice insurance helps to cover the costs of defending against a legal malpractice lawsuit, as well as any damages that may be awarded to the client. In addition to protecting the attorney’s assets, legal malpractice insurance helps to ensure that clients are compensated for any harm that they may have suffered as a result of the attorney’s actions.
Legal malpractice insurance is an important tool for attorneys, as it helps to protect their business and ensures that clients have a means of recourse in the event of legal malpractice.
Attorney Requirements in the State of New Jersey
The Rules of the Administrative Office of the Courts governing the practice of Private Civil Trial Actions for the New Jersey State Bar Association require all attorneys to maintain legal malpractice insurance in accordance with New Jersey rules. The New Jersey Lawyers’ Fund for Client Protection, attests that the requirement for malpractice insurance is set forth in the New Jersey Rules of Professional Conduct ("RPC") 1:1A-1, calling for states to establish a mandatory professional liability insurance program.
RPC 1:1A-1 (a)(1), states that "every attorney admitted to the bar of [New Jersey] shall maintain professional liability insurance in an amount no less than $100,000 per occurrence, with limits of coverage of no less than $300,000 per year, on or before January 1, 2016. The attorneys’ annual proof of insurance shall identify each state and territory in which the lawyer is admitted to practice, or, in the alternative, confirm that the lawyer has office or client matters pending in other jurisdictions and describes any claim in which the lawyer has had any direct involvement, whether as attorney, employee, consultant, witness, or otherwise."
RPC 1:1A-1 (b)(1) states that "every attorney admitted to the bar of [New Jersey] who is a partner, member, shareholder, officer, director, or employee of a firm or corporation or who is an officer or director of an association of the members of the bar of another state or territory shall be maintained in force insurance in an amount of no less than $100,000 per occurrence and $300,000 an annual aggregate or the equivalent thereof in other insured forms," must comply.
RPC 1:1A-1 (c) states that "every attorney admitted to the bar of [New Jersey], who renders professional services as a sole practitioner or in private practice, shall either maintain professional liability insurance, or, in the alternative, shall be required to provide the Office of Attorney Ethics with evidence of financial responsibility in the amount of $100,000 per occurrence and $300,000 an annual aggregate or the equivalent thereof in other insured forms."
RPC 1:1A-1 (d) states that if a lawyer [here, an attorney], either voluntarily or involuntarily, fails to renew his or her professional liability insurance, then the lawyer must file with the Office of Attorney Ethics a disclosure by September 30 of the year in which the insurance coverage expires that confirms the lawyer’s compliance with the duty to notify clients, and by December 31, shall confirm either that he or she has obtained the minimum insurance coverage required, or, alternatively, that he or she has made a good faith effort to purchase such coverage and is unable to obtain such coverage at this or another financially viable level. RPC 1:1A-1(d)(1).
Finally, RPC 1:1A-1 (f) states that "any lawyer who is required to have and has failed to comply with the insurance coverage requirements of this rule shall pay an annual surcharge of $250 to the Supreme Court Bar Admission Account out of that lawyer’s own funds."
Advantages of Legal Malpractice Insurance
The benefits of carrying legal malpractice insurance as an attorney go beyond simply having required coverage. Most importantly, it is a policy that can allow peace of mind and help to build trust with clients. For attorneys, demonstrating a track record of preventive measures such as obtaining and maintaining legal malpractice insurance can go a long way to providing the trust that clients want. In addition, of course, legal malpractice insurance can provide financial reimbursement in the event that a lawsuit is filed against an attorney alleging legal malpractice or professional negligence. For litigation costs and potential settlement fees, proper legal malpractice insurance is critical. Legal malpractice insurance can even provide coverage in some cases for a public relations consultant to help control negative publicity. An attorney who uses such a consultant as part of the process of defending a professional negligence or legal malpractice claim can benefit from the PR messages that help reduce the potential for damage to reputation, which can in turn go on to reduce the chances that future clients will be wary about hiring an attorney who has no other claims against them. Such valuable services offered through legal malpractice insurance can help attorneys minimize the damage of a suit and maintain profitability and a solid reputation going forward in the industry.
Essential Elements in a Legal Malpractice Policy
Legal Malpractice is defined as a lawyer’s failure to perform their legal duties that causes a client to sustain damages. Legal Malpractice insurance is an important form of insurance for lawyers. It protects you from liability when a case does not go well because of an error or omission on your part. It will also provide you with a defense, paying for a lawyer to defend against a lawsuit. Legal Malpractice policies can cover you for the length of your career. That is, they will cover you for any events that occur during the policy period, so long as you purchased your policy when the malpractice occurred.
Legal Malpractice insurance policies are similar to many other professional liability policies. Their primary purpose is to provide a defense. The limit of liability available under the policy applies to the total amount of any settlement or judgment, including legal fees. Because of this, the amount of the coverage you purchase is extremely important. Legal Malpractice insurance premiums will vary based upon the amount of coverage purchased and other factors. Generally, the more coverage you purchase, the higher the premium. It is important to remember that legal malpractice claims can easily exceed the limits of coverage, with settlements in the six and seven figure range not being uncommon. Buying a smaller amount of coverage can be attractive, but it usually results in a significantly lower premium.
Making the Right Choice for Your Legal Malpractice Carrier in New Jersey
When it comes to choosing a legal malpractice insurance provider in New Jersey, consider a few factors. First and foremost, check the reputation of the provider. Ask fellow attorneys who they use, and, more importantly, if they’ve ever had to file a claim. While the latter is an unpleasant topic, having experienced counsel that can comment on the customer service and responsiveness of the claims group may eliminate some of the anxiety and regret after a claim. Second, check what types of coverage and providers are offered, from the "traditional" to the "alternative." From the experience of one of our staff attorneys, the benefits of higher coverage for office equipment is so obvious that it was surprising that his former provider did not offer it . Third, how flexible is the policy? Are you able to add an attorney for minimal coverage, or are you strongly discouraged to do so? Many additional concerns that may arise later on (e.g., auxiliary organizations, true partners, dissolution of partnerships, mergers). Lastly, how responsive is the customer service group? If you need to speak with someone about an immediate concern concerning a potential or actual claim, is the person at the other end the person who can actually provide you with the advice that you seek? This is not an exhaustive list of concerns or considerations, but this is a good start. The market is so extremely competitive, that there are so many options, for better and for worse. As a result, the best policy for you may not be the best policy for your colleague, or even your association.
Premium Rates and Considerations in NJ
Factors affecting legal malpractice insurance in New Jersey, and throughout the United States, are similar to those of other types of professional liability insurance. There are many variables which are used by the insurance company to determine a premium for a lawyer’s malpractice policy. These variables include the area of practice involved (some areas such as trust/estates have more claims), the size of the firm (the more people in the firm the more chance of many overlapping clients), claims history (the more claims a firm has, the more expensive the premiums), losses/government settings (governments or municipalities have a much larger area of risk), as well as many others.
The average cost of legal malpractice insurance in NJ is about $3,000 per year for a small firm of 2 lawyers. However, these rates fluctuate often, so it is difficult to get an accurate reading. We have seen premiums rise significantly over a short period of time, and we have also seen them drop considerably.
For example: in 2009, a small 2-person firm in New Jersey was quoted a premium at $3094.96 per year. In 2011, the same firm, with the same issue, was quoted at $1015.95 per year. This is a $2079.01 savings. In 2012, the same firm with the same issue, was quoted at $916.33. In 2014, the firm was quoted at $1222.32 per year. That is a $1772.64 increase. In 2015, the same firm was quoted at $960.30. You can see that the numbers continue to change and depending on the year, the market, and the type of claim that is brought against the firm, the premiums outlook can change and at times be substantially different.
Claims Handling in New Jersey
When a legal malpractice claim is filed against an attorney, or an insurance policy provided by an attorney, the claim is almost always handled by the claims department of the carrier which sold the policy. They will be the ones who control when a claim is paid, and the procedures relating to the claim, including how it is investigated. Usually, within days of receipt, a letter is sent to the insured or attorney informing them that a claim has been made. The claim department may also request a written report from the insured about the incident. Then, after an investigation of some sort, the insurance company will again write to both the insured and the third party claimant (where that applies), inform them of its decision, and request that the parties execute a release (where that is appropriate).
If the claim is found to be covered, then the insurance company will pay reasonable expenses for defense (subject to a deductible). If a suit is involved in the claim, a request is made that the complaint in that suit be served on the insurance company. A suit in New Jersey against a lawyer must also be accompanied by an Affidavit of Merit (see McHugh v. Williams).
Once a case is filed, the insurance company will have as much control as the policy will allow, including but not limited to, deciding whether the policy holder should accept an offer, if an offer is made, and/or contribute to a settlement. If a demand is refused, and the ensuing result is an excess judgment against the attorney, the attorney may become subject to a "consent judgment", whereby the insured agrees to a judgment often for the full amount of the liability, in return for an agreement that the insurer will then pay the judgment.
Closing Thoughts: Protecting Your Practice
Ultimately, legal malpractice insurance is an investment in your legal practice. The benefits of malpractice insurance far outweigh the costs. Obtaining quality legal malpractice insurance and understanding what is and is not covered is essential to an effective malpractice prevention plan. By ensuring that your firm has the proper protection it is in a position to better protect itself and your clients . Not only does insurance provide coverage to pay for what is owed to a third-party should a lawsuit be filed against you, it also provides peace of mind for your practice. It is essential that as an attorney you maintain your knowledge of the law, provide competent representation to your clients and work hard for those who rely on your services. Likewise, it is essential that your practice is insured.