Surprise! Your professional liability insurance underwriter doesn’t understand the practice of law.

Have you ever felt that your professional liability insurance underwriter does not know how a real law firm works?  The shocking truth is that most are not lawyers, have never practiced law, and therefore are misguided as to how a law firm works and how legal services are provided.  This causes unnecessary questions, erroneous overpricing, and fewer options for a law firm seeking excellent coverage at a fair price.

Three recent examples:

1) An underwriter thinks all SEC work (think IPO risk) is the same so overcharges for a firm that advises on small private placements.   Another recent SEC misunderstanding was an underwriter who classified a firm that does complex corporate litigation as an SEC firm and required them to complete a long (completely unrelated) Securities supplement (1933/34 issues) since a tiny fraction of their practice is representing defendants from SEC actions.

2)  A firm’s insurance was cancelled since the underwriter didn’t understand that in a given year a large IP litigation can make the regular 10% (in a general practice firm) go up to 20% in one year.  The underwriter judged the firm as becoming an IP firm (think Patent).

3)  An insurance company canceled a mid size General Practice / Commercial firm since they deemed them a Class Action law firm (higher rates than commercial).  Their “crime”?  They defended one of their clients who are one of many defendants in one class action suit.

So what can you do to protect yourself from being negatively impacted by underwriters?  The first step is to consider if what you are being told makes sense.  If not, question your insurance company and question your broker.  All too often, brokers act like messengers from insurance companies and parrot the insurance company nonsense.   Assuming that your broker understands themselves these issues, they must work to educate the insurance underwriter.

The bad news is that some underwriters cannot be educated enough to insure complex law firms.  The good news is that the New York law firm professional liability insurance market is so competitive that a specialist law firm insurance broker can manage a 15 company reverse auction.  You’ll never persuade all 15 insurance companies, but if done right you will have good options every year.

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