Demystifying Professional Liability Insurance Coverage Limits for Lawyers

Professional liability insurance is an indispensable safeguard for lawyers. It offers financial protection in the event of malpractice claims and disciplinary actions. When selecting a professional liability insurance policy, understanding the nuances of coverage limits is crucial.

Limits of Liability

Professional liability insurance policies are structured with two essential types of coverage limits: per claim and aggregate.

• Per Claim Limit. The per claim limit is the maximum amount the insurer will pay for all claims arising from the same or related acts, or omission, regardless of the number of claimants or the number of insureds involved.
• Aggregate Limit. The aggregate is usually defined as the total limit of an insurer’s liability for all claims made during a policy year. For example, if an insurance policy has a per claim limit of $250,000 and aggregate limit of $500,000, the insurer will pay up to $250,000 for the first claim and then up to another $250,000 for all other claims made during the remaining policy period. When selecting the aggregate limit, insureds should carefully consider the likelihood of having multiple claims in the same policy year.

Selecting the right balance between per claim and aggregate limits is essential. Lawyers should assess their practice’s risk exposure and choose limits that align with their professional needs.

Defense Costs & Limits of Liability.

Legal malpractice insurance policies provide coverage for both the costs of defending the claim and any damages arising from the claim. Not all policies are created the same.

• Claims Expenses Outside the Limit (CEOL). This is the broadest insurance coverage that you can purchase for defense costs. The costs of defending your claim will not reduce your limit of liability. You retain 100% of the limit for payment of damages.
• Claims Expenses Inside the Limit (CEIL). This insurance is less desirable but results in a lower premium. CEIL is also known for eroding limits of liability. This is because your policy limit is reduced by the cost of defense, leaving you with a reduced or possibly exhausted limit available to pay any damages. As an example, if you have a $100,000 per claim limit with CEIL and the defense costs are $75,000, then you only have $25,000 available for damages.

Law firms should use extreme caution when purchasing policies with low limits of liability that have CEIL.

Partial Claims Expense Outside the Limit.

Some insurance policies provide a hybrid of CEOL and CEIL. In this case, there may be limited claims expense in addition to the limit.  For example, you may purchase policy with a $2,000,000 limit that has $250,000 defense costs outside the limit.  In this case, the first $250,000 of defense is paid outside of your limit and any further defense costs will erode your $2,000,000 limit, leaving less than $2,000,000 available for damages.

The partial claims expense outside the limit may be a specified dollar amount, a percentage of the limit of liability or another formula.  Law firms should have a clear understanding of how a hybrid claims expense policy will respond in the event of a claim.

Customizing Your Coverage Limits

The ideal coverage limits for professional liability insurance vary from one lawyer to another, but it depends on several factors.

• The risk and financial exposure of the severity potential of your representation. Some higher severity areas of practice include:
  • Business Transactions
  • Securities & Bonds
  • Patent Prosecution
  • Wills, Estates, Probate & Trust
  • Commercial Real Estate
  • Mass Tort / Class Action
• The assets of your firm, the structure of your firm (partnership, corporation, LLP, LLC, etc.)
• Personal assets of you and your partners
• The frequency of claims in your area of specialty. Some higher frequency areas of practice include:
  • Personal Injury Plaintiff
  • Residential Real Estate
  • Collection
  • Family Law

A well-balanced policy provides the protection you need without excessive premiums or inadequate coverage. It is important to consult with insurance experts, like Pearl Insurance, to help determine the most suitable coverage limits for your firm.

Understanding professional liability insurance coverage limits and all their nuances is essential for lawyers. Choosing the right limits tailored to your firm’s unique needs is key to safeguarding both your career and your reputation.

Questions?

At the end of the day, Pearl Insurance is here for you. We work tirelessly to help you find a policy that fits your firm’s exact needs. Pearl takes our responsibility to protect your firm seriously and will always put people before profit.

Want to know more? Find out for yourself.
(800) 346-6680 | pearlinsurance.com/lawyers/professional-liability