As in life, change in the insurance business is inevitable. That is certainly true looking back over the development of Lawyers’ Professional Liability Insurance in America. In comparison to the beginnings of insurance as a whole which dates back to London in the 1600s, professional liability insurance in America is really just an infant. Its start dates back to 1945. In the six decades that followed, claims under the coverage grew and insurers reshaped the policy as their taste for risk was gradually developed.
Professional liability insurance was first written on an occurrence basis. As long as the services that allegedly resulted in the claim were performed during the time the policy was in force, the policy would respond regardless of when the claim was actually brought against the insured. The Occurrence policy form quickly grew out of fashion with the early providers of professional liability insurance, however, because it became increasingly difficult to adequately price the insurance due to the tremendous delay (lag) in time from when the service occurred and the actual claim was made. Sometimes, that could involve decades. The early actuaries could not adequately predict the rising costs of defense and inflation over time. This led to the introduction of the Claims Made policy form in the 1970’s and eventually the Claims Made and Reported policy type which is predominate today.
Claims Made Policy
The introduction of the Claims Made Policy in professional liability insurance, allowed the insurance companies to close out a given policy year and tally their ultimate losses for the year much more quickly which allowed for rate adjustments (increases usually) to be implemented much more quickly. The reference to a “policy year” is confusing in that it actually means all claims reported from policies written January 1st of a given year until the last policy written December 31st of that year expires twelve months later. To completely close out any given year actually takes 24 months, none-the-less, quite an improvement over the earlier Occurrence policies.
The change from Occurrence to Claims Made in Lawyers’ Professional Liability Insurance really turned the product on it’s head, so to speak. Not surprisingly though, there are numerous other policy changes that occurred under the Claims Made policy to better define the conditions and scope of coverage. Some of the changes broadened coverage under the pressure of competition, but not all!
Other changes to the LPL claims made policy form
Claim expenses paid entirely outside the limit of liability versus the eroding limit policy of today;
Full consent to settle provision which is now the Reduction for Refusal to Settle Clause aka the "blackmail clause"
Pure Claims Made coverage becomes Claims Made and Reported requiring that claims be reported no later than 60 days after the policy expires and circumstances be reported during the policy period first discovered
In some policies, the insurer’s absolute right to choose defense counsel has softened to welcome the participation by the insured in the process
Remember the add-ons of OL&T, (premises liability coverage) for $25 in premium and the $1,000,000 Business ($50) and Personal Umbrella endorsements ($75)
Loss only Deductibles used to be readily available and basically free of charge
Full prior acts coverage for all insured lawyers, no questions asked
A solo practitioner could buy $5,000,000 in limits
Moonlighting and prior firm coverage is standard in comparison to the now "Acts on Behalf Of" requirement
The 12 month extended reporting period or “Tail” coverage is expanded to multiple years or unlimited
A less strict policy interpretation by the courts requiring prejudice to the insurer before a claim could be denied for late reporting
“Backdating” a policy renewal wasn’t such a big deal
What’s next in the years to come?
- A mobile app to report claims?
- First party Privacy Breach coverage comes standard?
- A national standardized policy form?
- A mandated claims reporting bureau?
- Mandatory insurance in order to practice?
We'd like to hear your predictions. Please comment below or send us an email to firstname.lastname@example.org.