Phil’s Corner is a special column from OAMIC’s President & CEO Phil Fraim that is sent in our e-newsletter each month.
The number one question I get asked by our insureds is, “What limits do I need?” It’s a tough question to answer, because no magical formula exists. I often facetiously tell people that if they can tell me what they’ll be sued for, we can set the limit very accurately. Absent that ability, we have to focus our attention on other factors.
Sometimes the questioner takes a different tact and asks, “What do most people have?” Fact is, what most people carry in regard to limits may have very little to do with what you should carry. Remember when you told your mom what all your friends were allowed to do, and you asked her if you could do the same? She might have responded by asking, “If they all jumped off the bridge, would you?”
There might be some similarities we can look at with respect to our insured profiles, but most firms have their own unique factors. Area of practice can give us an idea of the likelihood of seeing a claim, and we can also gauge average severity within different areas. Keep in mind that those things are based upon historical data that should prove fairly accurate, but not necessarily exact, as we move forward.
In whatever area you practice, annually you should evaluate the average case/file value of the top 5 or so matters in your office. Typically, if you encounter an act or omission, the damage is not the total file value. However, it can be “all or nothing” in certain circumstances, such as a missed statute of limitations.
One of the more concerning facts about our policy profiles is that far too many people assume the minimum limits are adequate given that they are very careful, really good at what they do, and they don’t have any – or at least many – assets to protect. Nearly one quarter of the policies issued by OAMIC (which make up almost 15 percent of all OAMIC insured lawyers), purchase the minimum or lowest limits. We estimate that only about 20 percent of those that purchase $100K per claim limit policies are adequately covered, and it doesn’t make much sense when you do a cost/benefit analysis of the premium difference. On average, for about $300 per year (or $25 per month), you could double your coverage from $100K to $200K. Unless you are just starting into practice and this is all you can possibly afford, the minimum may prove woefully inadequate.
I often tell people to buy what they can comfortably cash flow. The absolute worst claim scenarios are those where people don’t have adequate limits to cover the damages involved. In the case of very low limits, sometimes there is not enough limit to even properly defend and get to trial. I feel for insureds who spend good money and still potentially face excess of limits situations. Remember that it does not even come close to doubling the premium when you double your limits.
We have seen some shift upward in average severity of claims, especially those that have an indemnity payment. Yet, even in those that are resolved without indemnity payments (which thankfully is a decent portion), the average cost of defense has risen. Over the past 15 years, we’ve seen the largest increase in severity in our largest claims, meaning that the big claims have continued to get bigger and bigger.
Why is this? An obvious answer is that we pay more per hour to hire outside defense counsel. But the bigger reason has to do with the underlying case. If you keep in mind that the legal malpractice claim is the “case within the case,” it will begin to make sense. Assuming there is an attorney-client relationship and resulting negligence from a breach in the standard of care, resultant damages – if any – are based upon the value lost in the underlying matter. The underlying matter may be based upon assets, property values, medical costs, the value of a business entity in a transaction, etc. All of these items have increased through the years, making the legal malpractice potentially worth more. Many of your clients understand these factors, and it is why some of them are not only requesting certificates of insurance, but they are also specifying the limits they want you to carry, including cyber limits.
So, what does all of that have to do with your policy limits? It should tell you that, on occasion, you need to re-evaluate the firm’s limits based on the type of matters and the value of files in the office. We will be more than happy to help walk you through those considerations.