What is the most important part of your professional liability policy? Without exaggeration, the most important part of your policy is your limit. All the bells and whistles won’t protect your firm and personal assets if you don’t have enough coverage.
We spend many days and hours negotiating with insurance companies over the fine print points of every professional liability policy. And yes, they are important: Are you financially exposed to defense costs? What definitions and fine print are the best fits for your firm? Is that the best premium? All of these points consume our behind the scenes work to obtain the best insurance options for our clients.
But if the amount of insurance – the limit – is insufficient, the fine print won’t matter and having a good insurance policy (even a great one) will not adequately protect you. While there is no scientific method for selecting your limits, we present below the various ideas on how to calculate your limit.
1) Average client – Purchase the amount of insurance that represents an amount near your average client exposure. Especially for a firm that is primarily litigation, this method can be used by taking your average case value. We assume that you will not commit malpractice on your largest cases as you will be committing your best resources to that client matter. Some practice areas, like SEC work, high end Trust and Estates, and IP work values need specific attention with this method of analysis. If you represent high net worth individuals, they tend to be litigious and not surprisingly, they are also litigious against their lawyers – be aware.
2) Per lawyer – Half to ¾ a million per lawyer. This is the roughest calculation. This means that a 20 lawyer firm should consider 10-15 million in coverage.
3) Cynical approach – The firm should purchase the minimum amount of insurance so as not to be the defendant firm (in a multi defendant professional situation) of having the “deepest pockets” but not too little that plaintiff attorneys pursue your personal assets. There is anecdotal and logical evidence for this approach but it is especially important to constantly review these goals with your broker for specific advice to keep you abreast of the industry norms when it comes to insurance limits.
4) Pure financial – Unrelated to your practice areas of risk and your average client size, the firm conducts a purely financial analysis of the value of current revenues compared to the cost of the insurance. Regardless of the risk profile of your firm, the quotes are obtained for various limits and selected purely on the economics of the situation. For example, a highly profitable $25 million dollar firm might purchase $30m -$50m in limits as the cost of the insurance might only be $200,000 (a small amount for a highly profitable firm). A similarly sized law firm but one that is less profitable with fee revenue of $10m might only purchase $10m.
The best approach of all is to use a blended and educated approach to your limit selection. The discussion with your broker should be annual and should consider changes in your firm and changes in the insurance market. If you firm has grown or changed in practice mix, past limits might not be enough. In the past 10 years, excess insurance policies premiums have come down considerably so that what made sense financially even a few years ago, no longer is a prudent financial decision. As with all important firm decisions, the analytical approach is the way to go when you decide your professional liability limits.