By Brian Ahern, Ahern Insurance Brokerage
For law firms and other professional entities that are limited liability partnerships (LLPs), a little-known change to California law could have major ramifications.
Recently, the state amended California Code 16956, changing the amount of professional liability insurance that all registered LLPs providing legal services must have.
Under the new code, which went into effect in January, all law firms that are LLPs and have five or fewer licensed attorneys must hold an insurance policy and/or policies amounting to no less than the total annual aggregate limit of liability of $1 million, a $500,000 increase from 2007.
For LLPs with more than five legal professionals, an additional $100,000 of insurance must be obtained for each additional licensed professional. The maximum amount of insurance is not required to exceed $7.5 million.
While this amendment is now in effect, many law firms are not aware of the changes, as the required increases went largely unreported. Law firms not compliant with the amended code run the risk of personal liability for firm attorneys. Without the required coverage, all firm partners may be personally liable for malpractice and other liability infractions, even those partners not involved in the matter.
While the increase in coverage impacts all law firms that are LLP’s, the financial impact is likely the greatest on smaller law firms, as the increased requirements now double the limits for firms with five attorneys or less. Depending upon a small firm's current limits, the new statute could cause a 10 percent to 25 percent increase in annual premiums.
Larger firms typically carry more coverage than small firms, so these LLPs may already meet or have limits closer to the new requirements. However, no firm should assume its coverage is adequate. Firms should contact their insurance broker to review their policies to determine if they are in compliance. Accounting and architectural firms are also effected by the changes to the code and should review their coverage as well.
Minimum requirements and more
Minimum statutory policy requirements are only one of several factors that a law firm should consider when determining what policy limits to secure.
The firm should also review its practice areas and the value of transactions and litigation matters with which it is involved. If a claim did arise from such services, what would it take to fully compensate the client for an actual loss?
It also is a good idea to evaluate how complicated a malpractice case may be based on the firm's area of specialty. For more sophisticated areas, more money may be spent in defending the claim, regardless of its merit. Keep in mind most policy's limits of liability are eroded by defense costs.
When determining policy limits, it is important to consider past services provided by the law firm. Even if a firm no longer practices in an area of law that warrants higher policy limits, the need for higher limits does not cease. A client can bring a claim against a firm until the statue of limitations has fully expired for that type of work. With regard to future work, some firms may find that prospective clients want to know their respective limits of insurance.
Firms should consider the element of time when a case is brought against the firm. Cases can take several years from the filing of a lawsuit to the time it goes to trial. During that time, the value of the case may change and a law firm's policy limits may or may not be enough.
Often when a firm is looking at policy limits, it looks only at the limit in terms of the maximum possible amount on any single claim. However, two or more claims may be made in the same policy year, and the accumulated cases may exhaust the firm's policy limits.
In addition, firms should consider the possibility that lawyers within the firm may offer services to friends or relatives outside of their regular scope of work. For example, a firm may specialize in estate planning. Yet, family members of a firm lawyer may seek services on a real estate issue. As a result of providing the service to the family member, the firm's exposure has changed and the firm should account for that probability when determining its limits. Surprisingly, many claims are filed related to work done for family and friends. Have you heard of the saying "no good deed goes unpunished?"
As a result of a thorough analysis, in many cases firms will find that the coverage they need exceeds the requirements outlined in the California regulations. With so much at stake, law firms should acquire professional liability insurance that not only adheres to the law but also makes sound business sense.
Ahern is RPLU, CEO/President of Ahern Insurance Brokerage (AIB), one of the largest independently owned insurance brokerage firms specializing in the insurance needs of law firms. AIB presently insures over 2000 law firms and is the Designated Professional Liability Broker for several bar associations.
Ahern Insurance Brokerage (AIB), one of the largest independently owned insurance brokerage firms specializing in the insurance needs of law firms, has more than 16 years experience in professional liability coverage insuring over 2,000 law firm clients.
About Ahern Insurance Brokerage
Ahern Insurance Brokerage (AIB) is an independently owned insurance brokerage firm specializing in the insurance needs of law firms. With a philosophy founded on building long-term business relationships, AIB and founder W. Brian Ahern have been providing Professional Liability Insurance to attorneys for over fifteen years. As a result of this considerable experience, AIB has developed strong industry partnerships that enable the firm to provide its clients with superior service, professional representation, and the ability to deliver the most comprehensive programs at the most favorable premiums. For more information on AIB, please visit the Ahern Insurance Brokerage website.
