The market and malpractice insurance

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Published on 2/23/09

According to the Board of Bar Overseers, there were 51,999 active registered lawyers in Massachusetts in 2008. The board's Office of Bar Counsel, in its fiscal year 2008 annual report, states that complaints were opened last year against 814 of those lawyers - about 1.5 percent of the state's lawyer population.

Despite this small percentage of lawyers who potentially caused problems, every lawyer in Massachusetts (in accord with Supreme Judicial Court Rule 4:02, adopted a little more than two years ago), must certify in his annual registration statements whether he is covered by professional liability insurance. That makes the cost of malpractice insurance an issue for every lawyer in the state.

Annual malpractice premiums usually range from $3,000 to $7,000 per lawyer, often well beyond the ability of small firms and sole practitioners to purchase. In my home state of California, the state bar recently adopted a mandatory disclosure rule that is now before the California Supreme Court for consideration. Approximately 18 percent of the state's lawyers - some 30,000 - do not have malpractice insurance.

The implication is that they're bad apples; the truth is that they can't get affordable coverage. And there is no evidence that these 30,000 have more complaints filed against them than any other segment of the bar.

A study in California followed similar studies in other states to the effect that 25 percent of the active, private practitioners earn less than $50,000 per year; 50 percent earn less than $100,000 per year. These lawyers, for whom 1 percent or 1.5 percent of gross revenue spent on malpractice premiums might be reasonable, might feel they cannot afford to spend 10 percent or more of their income on a product they believe they are likely never to need.

In today's business conditions, small and solo practices must scrutinize every dollar in expenses. To do that for malpractice insurance premiums, it's important to understand how insurance rates are set.

Basically, three factors are involved: losses, which for most carriers is 5 percent to 10 percent of premiums paid; cost of reinsurance, meaning how much insurance risk insurers can pass off to other carriers; and investment income from stocks, bonds and other financial instruments in which carriers invest their excess premiums.

With the current financial crises unfolding, even if losses remain the same or go lower, and the cost of reinsurance remains stable (an unlikely event given the financial problems of the world), the investment income earned by the carriers is likely to plummet. As investment losses mount, the carriers likely will have to increase premiums to make up the shortfall in their portfolios.

When premiums do rise, lawyers will be compelled to make yet another cost/benefit analysis of affordability, considering such factors as these:

  • Cost: How much is the insurance premium? What is the nature of the coverage? Is it a wasting policy, meaning that defense costs reduce the face value of the policy?
  • Benefit: What protection is provided? Will the face value of the policy assure that the personal assets of the lawyer will not be subject to claim? Does the lawyer deal with clients, such as alleged criminals, who statistically are unlikely to bring a malpractice claim? Does the lawyer have valuable assets to protect, such as a house, stocks and bonds, etc.? What would be the financial impact of a judgment against the lawyer?

The market calls the shots. Even if a lawyer wants malpractice insurance, marketplace factors beyond the lawyer's control will affect the final cost - and purchasing decision.

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