Legal Malpractice Insurance Terms
Admitted Carrier - A carrier that is licensed and authorized to write insurance in a particular state using rates, rules and forms that have been approved for use by that state's Department of Insurance. These entities are subject to the highest level of regulatory oversight and scrutiny.
Annual Aggregate Limit - For claims-made policies, the annual aggregate limit is the maximum amount the carrier will pay for all covered claims first made against the insured during a given policy year. For claims-made and reported policies, the annual aggregate limit is the maximum amount the carrier will pay for all covered claims first made against the insured and reported to the carrier during a given policy year.
Assessable Policy - A type of insurance policy that allows the carrier to make assessments against insureds over and above the original premium charged to assure sufficient reserves and capital surplus are maintained.
Cancellation - The termination of an insurance policy either by the carrier or the insured prior to the expiration of the current policy term. State law generally sets out the required notice and acceptable reasons for cancellation or non-renewal of legal malpractice policies by the carrier, including: non-payment of premium; mutual consent of the parties; fraud or material misrepresentation; revocation or restriction of the attorneys' licenses; or an increase in the hazard insured against.
Claim - An express, written demand upon an insured for money or services as compensation for civil damages.
Claims-Made Policy - A type of policy that offers coverage for a claim arising from a legal service that not only occurred on or after the retroactive date (as set forth in the Declarations Page of the policy), but also was first made against an insured during the policy period.
Credit - A discount applied to the policy premium based on underwriting criteria.
Debit - An increase applied to the policy premium based on underwriting criteria.
Declarations Page - Issued by a carrier along with the insurance policy, this document states basic information about the policy, including policy period, types of insurance coverage, limits of liability, premiums due and coverage restrictions.
Demand Trigger - A type of claims-made policy provision that requires a claim actually be made against an insured during the policy period for coverage to apply.
Endorsement - An amendment added to an existing policy modifying its terms.
Event - An accident. Typically, all injuries arising from (1) the same or related acts, errors, or omissions or (2) the continuous or repeated exposure to substantially the same errors is considered one event.
Exclusion - A policy provision setting forth a specific loss or risk the policy does not cover.
Exhausting/Reducing Limits Policies - Some policies include defense costs within limits. This means that for every dollar spent to defend an insured, the limits of coverage are reduced by a dollar. For example, if a policy contains an exhausting limits provision and has limits of $500,000, and the carrier incurs defense costs in the amount of $400,000, only $100,000 of the limits is left to pay claims.
Extended Reporting Endorsement (Tail Coverage) - Applicable to claims-made policies, this coverage allows the insured to report claims first made after a policy termination date. However, such claims must result from an event that occurred on or after the retroactive date, but prior to the policy termination date. Some carriers waive the additional premium for this coverage in the event of an insured's death, disability or permanent retirement.
Hammer Clause - A policy provision that reduces the available limit of liability if the insured refuses to provide consent to settle a claim. Under a hammer clause, the carrier is typically released from any exposure beyond the amount the claim could have been settled for had the insured given consent.
Incident - An event the insured knows or reasonably should know is likely to result in a claim.
Incident Trigger - A type of claims-made policy provision that does not require that a claim actually be made against an insured to trigger coverage, but rather requires only that the insured reasonably anticipate that a claim is likely to result from an otherwise covered incident. Claimsmade policies with this provision are often referred to as "incident trigger" policies.
Indemnity - As used in this informational document, indemnity is generally intended to mean the payments made by an insurance carrier on behalf of its insured to cover loss arising from liability claims for which the insured has become responsible, and for which the insurance policy issued by the carrier provides coverage.
Limits of Liability - Policy limits set the maximum dollar amount a liability policy will pay on behalf of an insured to cover claims made against that insured for liability resulting from negligence and other covered acts (if any). Limits are usually stated as a per occurrence/claim amount and as an annual aggregate amount. The per occurrence/claim amount is the amount the carrier will pay for each covered occurrence/claim arising during one policy period. The aggregate limit represents the total amount the carrier will pay for all occurrences/claims arising during one policy period. For example, if an insured has a policy with limits of $1,000,000/$3,000,000, and the carrier pays a $500,000 claim which arose during the policy period, the carrier will pay only up to $2,500,000 more in claims with respect to the same policy period.
Non-Admitted Carrier - A carrier that is not licensed to do business in the jurisdiction in question, but which may otherwise be approved or permitted to do business there. Generally, the rates, rules and forms of such carriers are not approved by the Departments of Insurance, and they are not required to follow the stringent rules and regulations that an admitted carrier is required to follow. Generally, surplus lines carriers are the most common type of non-admitted carrier, although other nonadmitted types include Risk Retention Groups (RRGs) and captives.
Non-Renewal - Termination of a policy at the expiration of a policy term by the decision of either the carrier or insured.
Prior Acts Coverage - Similar to an extended reporting endorsement or tail coverage, this coverage allows the insured to report claims arising from events that occurred after the retroactive date but prior to the effective date of the insured's current policy. Prior acts coverage is offered by a law firm's new carrier when coverage is purchased under a new policy. In contrast, tail coverage is provided by the prior carrier and allows the reporting of claims after the expiration of coverage with that carrier.
Retroactive Date - Generally listed on the declarations page of a claims-made policy, this is the date after which an event must occur to be eligible for coverage under the policy.
Risk Management - A systematic approach used to identify, evaluate and reduce or eliminate the possibility of an unfavorable deviation from the expected outcome of legal services. The primary purpose of risk management is to prevent injury to, and the loss of assets of, clients due to negligence or perceived negligence.
Risk Retention Group (RRG) - An RRG is an insurance entity formed under one state's law but, pursuant to federal law, may operate in any state after formal registration in those states. The registration process is simple when compared to the requirements placed on an admitted carrier. Because RRGs operate outside the regulations and oversight applicable to admitted carriers, their rates and forms are not reviewed or approved by the states' Departments of Insurance. Risk Retention Groups are generally owned by their members.
Substandard Risk - A person or entity that fails to meet standard underwriting criteria. In order to secure coverage (often only found in the surplus lines market), these insureds must pay higher premiums and/or be subject to special coverage restrictions.
Surplus Lines - Sometimes referred to as Excess and Surplus (E&S) insurance, surplus lines insurance is coverage secured through a nonadmitted surplus lines insurance carrier. Surplus lines carriers are typically not regulated by states' Departments of Insurance and do not file rates, rules or forms (other than for informational purposes). The coverage available through a surplus lines carrier is typically limited to those coverages that are not available from an admitted carrier and cannot be accessed merely to secure more favorable pricing.
Tail Coverage - See definition of "Extended Reporting Endorsement."
Underwriting - The process by which the carrier evaluates policyholder risk, including the application of applicable credits and debits, and determines if non-renewal is warranted in cases where the risk no longer meets acceptable underwriting guidelines.