Do I really need to report this situation to my carrier and what is going to happen to my premium if I do report it? Often, these are two of the very first questions asked by Insureds when they are faced with a situation. As is so often the case in a legal setting, the answer is, “It depends.” This article will attempt to generally outline the importance of timely reporting and the impact of reporting a claim or circumstance on premium.
If a client, or anyone else, has filed a lawsuit, demanded that the law firm either work for free, refund its fees, or pay money damages, the situation will certainly require prompt reporting. In the ALPS policy, a “claim” is defined as a “demand for money or services” and if the Insured receives such a demand, the policy requires the Insured to promptly report it. This is true even if the Insured does not believe the situation has merit or the firm wants to handle it on its own. In other words, the obligation to report a claim and the evaluation of its merits are two separate and distinct issues and the Insured is not excused from reporting obligations just because he or she does not believe the demand is meritorious.
The claims process is started by providing written notice to ALPS – a telephone call does not constitute notice. Once ALPS receives written notice, the notice will be assigned to a claims attorney who will work with the Insured to determine how to handle that particular claim. Issues discussed may include the policy provisions, background of the claim situation (including the Insured’s obligation to provide a complete copy of the entire file to ALPS), whether it is appropriate to retain defense counsel, etc. Claims situations vary greatly and underwriters will view each claim on a case-by-case basis trying to determine whether a specific claim impacts the firm’s risk profile. (However, please see below for discussion of the potential for a claims surcharge.)
Okay, so what if there is no “demand for money or services” but a client or opposing party raises an issue that calls into question the legal services the Insured rendered? Or what if the firm becomes aware of a missed deadline but believes it may be able to be remedied? Or a client is angry and storms out of the office muttering threats? These types of situations warrant at least a telephone call to an ALPS claims attorney to discuss in more detail. The claims attorney and the Insured will attempt to determine the potential for a more formal legal malpractice claim. Most often, the claims attorney will suggest the Insured send in written notice. Once the notice is received by ALPS, if there has been no demand for money or services, the notice will likely be treated as a “circumstance” – that is, a circumstance that could lead to a claim, and will be monitored as such.
Precautionary reporting of circumstances protects the firm’s available coverage under the policy. It is extremely important not to underestimate the Insured’s obligation to disclose such situations, particularly before the Insured applies for continuing coverage. If the Insured fails to disclose a circumstance that could lead to a claim during the continued coverage application process and a more formal settlement demand or lawsuit is served after the new policy is issued, coverage may not be available at all due to the Insured’s failure to provide written notice in a timely manner and his or her failure to truthfully answer the questions on the continued coverage application. In Claims-Made and Reported policies, such as the ALPS policies, coverage is determined first when the situation is reported. Therefore, ALPS strongly recommends that an Insured at least call an ALPS claims attorney if the Insured has a question as to whether or not a situation needs to be reported. The Insured’s coverage depends on it. As reporting relates to the firm’s risk profile, the underwriter will generally note that the firm was cautious, reported the situation in a timely manner, and will feel confident that this firm will promptly report other matters as they develop. This of course, assists underwriting in assessing the firm’s risk and assuring that an appropriate premium is charged for the risk the firm represents.
So, now that the Insured has reported a claim or circumstance, what is going to happen to the Insured’s premium? As just discussed, circumstances have little to no adverse impact on a firm’s risk profile. As for claims, generally, if ALPS spends more than a given sum on a claim, (whether that money is paid towards defense expense, loss, or some combination of the two), a claims surcharge will attach upon the firm’s continued coverage. The surcharge stems from our actuaries who have concluded, based upon their calculations, that once the amount spent totals a certain sum, the firm is statistically more likely to experience additional claims over the next five years. The firm is in a higher risk bracket for additional claims and the surcharge reflects that higher risk bracket. If no additional claims arise, the surcharge will decrease each year until five years have passed, and will disappear on the sixth year. The surcharge is not a “punishment” or “penalty” because the insurer spent over a given sum on a claim. It is simply a reflection of what the numbers tell us; that once a given sum has been spent, the firm represents a higher risk for a period of years.
After discussing the surcharge with the firm, a question often posed is whether the firm can pay a settlement out of its own pocket to keep the amount spent by ALPS under the given sum. While we appreciate the offer, because the surcharge is a reflection of the increased risk, once that amount has been paid, it does not matter who pays the amount, only that that amount has been spent. Therefore, whether the firm pays or the insurer pays, the surcharge will remain the same.
Given the variety of claims and situations that we regularly address, it is not possible to discuss how one particular claim or circumstance will affect that particular firm’s premium. Hopefully, this brief general overview has helped to clarify reporting obligations and has addressed common concerns when a firm is faced with a situation that requires reporting.