PHIL’S CORNER: If LPL Is Important, Are Limits Also?
Phil’s Corner is a special column from OAMIC’s President & CEO Phil Fraim that is sent in our e-newsletter each month.
Most of the good, conscientious lawyers I know support the idea of the importance of lawyers professional liability insurance (LPL) and would not think of practicing without it. This is not because they think they are prone to mistakes, don’t know the law or are inexperienced. The fact is, they fight against the same mental impediment to effective risk management that we all fight, which is the thought “It surely can’t happen to me! If it can’t happen to me then why am I buying it? If I have bought coverage and haven’t had a claim in multiple years, I must be wasting my money.” Don’t let yourself go down this thought path. We buy insurance as part of the risk-management process whereby we transfer risk primarily because we can’t afford to self-insure the total exposure.
Every occupation has a line of coverage that is their cross to bear. A contractor deals with much higher workers comp rates and premiums, a manufacturer has high products liability insurance costs and a real estate owner/developer pays significantly more for property insurance. Sometimes professionals feel unproportionally discriminated against because of the cost of professional liability insurance.
Recently, someone I consider to be an outstanding lawyer and a real rising star in civil litigation within the Oklahoma legal community analogized it best – and without any prompting from me. Even though this individual pays more than $3,000 a year, they indicated it was surprising to them that it was not a lot more. They said they pay about the same for auto insurance with lower limits. This individual has not had a claim – yet – so how can they feel like this is the case? It is because they are cognizant of the value of the matters they handle and the fact that there does not have to be much in the way of merit for someone to bring a claim.
So, What About Limits?
If we can agree that LPL is important, then what about the significance of adequate limits? In my opinion, this is almost as important as having coverage. It is such a close call that I almost can’t tell you which is more important. You might wonder why or how I can make this comment. Well, if you’ve ever seen a claim that has merit, brought against an insured you know has sacrificed by spending good money to buy their coverage, it is particularly painful for all of us to realize that the limits of their policy are not sufficient to resolve the claim at hand because the damages, without argument, are greater!
I tell lawyers all the time, unfortunately there’s no magical formula to determine the appropriate limit – unless, of course, you can tell me what you are going to be sued for. Seriously, since we are talking about limits, I want to mention what I consider to be an issue that can become a problem with respect to limits. My concern is that almost one quarter of all the policies we issue, covering almost 14% of insureds, are at the minimum 100/300 limit. This split limit means the limit on any individual claim is $100,000 and the total of all claims in a given policy year can’t exceed $300,000. The $100,000 is not a lot of coverage in today’s world. If you consider the average claim now is approximately $72,000 including defense costs, you can see how quickly $100,000 can run out.
My intention is not to seem like I am calling you out if you have the 100/300 limit. It is possible that you never run into a matter that is more than $100,000 in value. If so, then it might make sense – but make sure you at least consider the next limit from a cost/benefit analysis. You might be surprised to find the difference may only be in the $20-30 per month range.
Keep in mind, the policy provides what is known as a “claim expense allowance.” This is an aggregate amount in addition to the per-claim limit, which is applied to defense costs. All limits above 100/300 contain a $100,000 claim expense allowance, while the 100/300 limit has only a $50,000 claim expense allowance. If defense costs exceed the claim expense allowance, then any additional defense costs would begin to exhaust or erode the per-claim limit.
We will certainly be glad to help you in your consideration of appropriate limits for your practice. If you have the minimum 100/300 limit, I definitely recommend that you compare the cost of the 200/600 limit at your next renewal. It is fantastic that you have coverage, but let’s do our best to evaluate what limit might make most sense for you. We want to avoid that painful scenario of not having a limit adequate enough to resolve the matter.