What You Need to Know Before Applying for Your 1st Malpractice Insurance Policy

Here at ALPS, we do try our absolute best to make sure the application process is as seamless and convenient as possible. That said, if you have a little knowledge about how coverage works up front and couple that with the completion of a few key practice decisions prior to applying, the process can be even smoother regardless of which insurer you hope to work with. The following list of eight things you need to know will help you get there.

1) Let’s start with the effective date of a policy. The effective date must be on or after the entity formation date of your firm. Yes, trying to get a jump start on coverage may seem like a good idea; but you can’t insure a firm or practice that doesn’t yet exist.

2) Because there are so many things lawyers need to take care of when first starting out, it can be easy to allow the purchase of a malpractice policy to slip by the wayside for a little while. Just be aware that back dating coverage isn’t an option. If you postpone applying based on an assumption that the insurance company will offer coverage back to the day you met with your first client, your assumption is wrong. Coverage will usually start on the day your fully complete and signed application is submitted, assuming that’s the policy inception date you have applied for, and you accept your quote within the time limit set forth in your quote. 

This reality also means you shouldn’t sit on a quote for an extended period of time. Should you fail to accept your quote in accordance with the terms of your quote, the insurer again may be unwilling to backdate coverage opting instead to issue a new quote with a new policy inception date. Were this to happen, this would mean you would have no coverage for any work you did during the delay because coverage will start on the updated policy inception date set forth in your new quote if you decide to accept that quote in accordance with its terms.

3) The adage you get what you pay for holds true in the insurance space. Cheaper polices are cheaper for a reason and often the reason is the cheaper policy is what we call a self-liquidating policy, which means you may not be getting the coverage you think you are. In short, these policies place defense costs inside policy limits, which means for every dollar spent on defense, the amount of money available to cover any loss is reduced by one dollar. If you’re good with that, fine. If not, pay more and purchase a policy that provides a claims expense allowance. These polices place a significant amount of the defense costs outside of policy limits before they begin to self-liquidate, which means the coverage limit you think you have is going to be accurate in all but the costliest of claims when it comes to defense costs.

4) Even if your plan is to purchase coverage in your name because your firm is set up as a sole proprietorship, understand that the policy you purchase will not cover you for everything you might do as a lawyer. For example, because malpractice policies only cover you for work you do on behalf of your clients, should another firm hire you as a contract attorney, you will need to be added to that firm’s policy if you will be providing professional services to clients of that firm.

5) Certain dates are important. Insurers will typically want to know the date you were first admitted to the bar, the date you started practicing, the date your firm was established, and the date you want your coverage to begin. The reason why is this information helps the insurer evaluate and accurately underwrite the risk your practice represents. The date you were first admitted to the bar is important because it indicates the number of years of experience you have in the legal profession. The date you started practicing is relevant because it helps the insurer understand the nature of your practice and the level of experience you have in your areas of practice. The date your firm was established is significant because it provides insight into the stability of your practice and the level of experience of any partners and associates. Finally, the date you want your coverage to begin is essential because it determines the period for which you will be covered by the policy.

6) If you happen to be transitioning from a firm to the solo practice space for any number of reasons, don’t forget to ask about the availability of prior acts coverage. While the purchase of prior acts coverage may or may not be recommended based upon the circumstances behind your transition, it’s important for you to know that the opportunity to purchase prior acts coverage is only available when purchasing your initial policy. Stated another way, you can’t add prior acts coverage to an existing policy. As a side note, if you or your prior firm purchased tail coverage in anticipation of your transition or the firm you left is stable and you are comfortable relying on former attorney language in that firm’s policy, the purchase of prior acts coverage with your new policy may not be necessary. 

7) Sometimes answering certain questions on your initial application can be a challenge, particularly any question that asks for the percentage of your practice spent in various practice areas. If your plan is to focus on more than one practice area, answering this question can be difficult if you are just starting out because you have no history to make that calculation. Insurers understand this conundrum. Try to estimate the percentages based upon your reasonable expectations of how your practice will build and evolve over the upcoming year. That information will suffice for this initial application. 

8) Finally, when shopping for coverage, apply for multiple limits and deductibles. This will result in a wider range of premium options to choose from. And when reviewing those options, make sure you choose an appropriate level of coverage from the outset because you can’t just call up anytime you want and have your limits immediately raised. 

A common misstep looks something like this. A lawyer learns that in order to receive referrals from a client referral program all participating lawyers must have malpractice insurance in place. So, he’ll rush out and buy the cheapest policy he can. Unfortunately, once the contract for the referral program is reviewed, it’s only then he realizes that the contract requires substantially higher limits than what he purchased.

Budgets can be tight. I get it; but purchasing low limits until a major matter walks through your door believing that when it does all it will take is a quick call to your insurer to have your policy limits raised is a mistaken belief. Your carrier may or may not be open to that request, especially if it’s a midterm request. And even if the carrier is willing, making the change will often involve having your current policy canceled and then rewritten, a process that may take several days to complete.