Understanding Claims Made Liability Coverage

As an attorney, you probably already know that the vast majority of legal malpractice policies offer “claims made” coverage, but we are often surprised in our practice to learn that even experienced lawyers don’t always understand all the nuances and implications of a claims made policy.  In this article, we want to provide a simple, plain-language overview of the essential facts that every lawyer should understand regarding claims made policies and retroactive dates. We’ll start out with the real basics, but even if you have a good handle on how your insurance works, we still urge you to read the section on retroactive dates. Full understanding of these concepts is crucial to properly protecting yourself.

Claims Made, Occurrence Coverage and Retroactive Dates

lawyer scratching head looking at paper

Wait, how do retroactive dates work again?

Every lawyer probably understands this part, but let’s start with a few definitions, just so we’re clear.

  • Occurrence coverage would insure you for mistakes allegedly made during the policy coverage period. Most of us are used to this type of insurance for our cars – it’s typically the carrier in place at the time of the accident who covers the claim. When we get in a car accident, we feel the jolt and hear the crash of glass and crunch of metal. It’s not like the accident will go unnoticed for several years. Obviously that’s not the case with legal malpractice allegations. Because of the long lag times, occurrence coverage is extremely rare for malpractice insurance. The statute of limitations clock on making a claim does not even kick in until the client discovers the error, at which point the client still has two years to file. On average, claims are filed 18 to 24 months after the work is done, but in our practice we have seen claims come in up to ten years later. Therefore it’s important to be covered not so much at the time the alleged error is made, but at the time the claim is made.
  • Claims made coverage covers the attorney for errors and omissions for which claims are made during the policy coverage period and for which the occurrence falls within the retroactive date. That last point is extremely important as we’ll soon see.
  • The retroactive date defines how far back your coverage will protect you. If you maintain continuous coverage, your retroactive date on your current policy will go back to the original retroactive date on your original policy even if you change carriers. If, however, you carry insurance for twenty years and then accidentally let insurance lapse, your new carrier will probably reset your retroactive date to the day when your new policy begins. Let’s say you practice for eight years and then let insurance lapse for a couple of years during maternity leave. In most cases your retroactive date will reset and your new carrier will not cover work done before the maternity leave, putting you at substantial liability risk if a claim arises from that time. You may be able to get “head coverage” to push the date back but it may be unavailable or expensive.

Where we’ve seen lawyers most likely to get confused is with respect to retroactive dates. It is important to understand that though a claims made policy is designed to cover you for past work, there can be substantial limitations if you let your retroactive date reset. Some special cases need particular attention. For example, what happens if you leave your firm and go out on your own? In theory, that firm is responsible for keeping their retroactive date so that any work you did for that firm stays with that firm. However, if that firm goes bankrupt and lets their insurance lapse you could be left out in the cold.

What Constitutes a Claim and When Do You Notify Your Carrier?

The issue of retroactive dates can be a little complicated, but it’s usually also perfectly clear. Your policy defines a retroactive date and work before that isn’t covered. It’s as simple as that. Where things get messy is on the question of when exactly a claim has been made and when you need to notify your insurer. Generally, you need to notify your insurer “as soon as practicable,” so if a claim arrives by mail while you’re on vacation and you notify your insurer on your first day back in the office, that would meet the standard. The harder question is what constitutes notice of a claim requiring you to notify your insurer. Consider a few possible scenarios.

  1. A client calls and says, “I’m a little disappointed by the outcome, but I guess that’s life.”
  2. A client calls and says, “It’s your fault we lost. If you had handled my case correctly, I’d be retired to the tropics right now!”
  3. A client calls and says, “If you had filed the motion on time, I wouldn’t be in this situation. You’ll be hearing from my lawyer.”
  4. A client’s malpractice attorney sends you a letter and says, “We are taking you to court.”

Clearly, in the last situation, you must notify your insurance company right away and in the first situation you’re still in the clear. But what about options #2 and #3? Number 3 expresses an intention to file a claim, but of course it is not the same as actually filing a claim. For most lawyers, though, you’re probably wise to contact your insurance company at that point. Number 2 is more ambiguous, but there’s no stated intention to file a claim, so you are probably okay if you wait to see how the situation develops, but this is a judgement call and it may be in your best interest to notify your insurer.

Why is it in your interest to notify even when you don’t feel a claim has been made? First, your client may be someone who likes to beat around the bush and though he thinks it’s clear he’s threatened to sue, the actual language may be vague. It’s possible when the case goes to court that the client will document the claim as being made on the date of that first somewhat ambiguous call, while you date the claim to the date the letter from the client’s lawyer arrives.

If the court agrees with the client regarding the date of the claim, you could be in trouble. With claims-made coverage you are covered by the insurer who carries your policy at the time the claim was made. So let’s say you are covered by Insurer A when you get that first call on March 30, but you change to Insurer B on April 1. The lawyer’s letter arrives on May 1. When you go to court, the client and his attorney say they made the claim on March 30 and the court agrees with them. Now who has you covered? Every malpractice insurance application has an “awareness provision,” meaning that you must disclose any claims that might be in the pipeline at the time you sign the policy. So it could happen that Insurer A will not cover you because the claim was not made during the coverage period, while Insurer B will not cover you because you failed to disclose a potential claim. This is why it is in your best interest to establish a timeline with your insurer right from the get go.

What if you’re getting ready to retire? Couldn’t a claim roll in many years after you’ve stopped practicing and therefore stopped carrying coverage? In fact, it could, so before you retire you must ask your broker about “tail” coverage. Tail coverage, also known as “extended reporting” coverage will take care of you for future claims based on work done during the policy period. This coverage need not be expensive and will give you peace of mind.

Nielsen & Geenty Insurance Services Inc. is a boutique insurance brokerage that specializes in lawyers professional liability insurance. The firm offers legal malpractice insurance, errors and omissions insurance, workers compensation insurance and office package policies.

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