Saying ‘No’ to Malpractice Insurance – The True Cost of “Going Bare”

SunburnI will admit that I honestly don’t understand why a lawyer would ever make a decision to not buy a malpractice policy but many lawyers do and the reasons I hear are many.

Some believe the premiums are beyond affordable. They’ll tell me “just look at what Docs have to pay.” Others have decided that if they ever get sued they’ll just declare bankruptcy to avoid the loss. Some choose to self-insure thinking that the savings on premium will more than offset any possible loss. I’ve even had attorneys tell me they’ve chosen to protect their assets in others ways. And then there’s this one. “Having a malpractice policy simply invites claims. No insurance means no one will ever sue me because there’s no deep pocket.” I just shake my head over the naivety of that belief.

As lawyers we are to protect the interests of our clients. Lawyers and those in their employ can and will make a mistake from time to time. None of us are perfect. In fact, even good lawyers who do great work can still get sued. It happens. We’ve handled such claims. The question, however, is this. Should a significant misstep ever occur, what might the fallout be? Think about the answer as a member of our learned and honorable profession. Clearly if and when a significant misstep occurs, the client will be harmed in some fashion. Now put yourself in the client’s shoes and ask yourself who should be held reasonable particularly if the harm involves a financial loss? You know darn well what the answer is. After all, if a lawyer representing you blew a statute resulting in a lost opportunity for any kind of recovery you would expect to be made whole and you know it. If you then learned that your attorney was bare and from that point on was going to do everything he could to avoid being held responsible for your financial loss, you also know what your response to this would be. You see, insuring for malpractice isn’t about protecting yourself. It’s about protecting your clients should something go wrong and that’s the way it’s supposed to be.

Now let’s talk about a few specifics. While numbers vary between the states and over time, approximately 4-5% of attorneys practicing in the U.S. will face an allegation of malpractice in any given year. Yes, it’s true that a significant number of these allegations will resolve without any loss being paid; but this doesn’t mean the claim has no impact. Time and money are going to be in play. Claims can easily take 6 to 24 months to resolve and defense costs on a claim with any merit at all can break that $100,000 mark before you know it. But that’s not all. Lawyers who are sued often see their income drop for a period of time, particularly if they’re self-insured or the situation has made it into the local news. Making matters worse, if the claim becomes something of a topic among the local bar and part of the story is that the involved lawyer is bare, it’s pretty much a given that good referrals from other lawyers are going to drop off.

Next, let’s discuss the affordability issue. While I get that the term “expensive” is relative to one’s financial reality, legal malpractice policies are nowhere near as expensive as some medical malpractice policies. In addition, the initial premium is going to be much less than for those attorneys who have been in practice and insured for a number of years. This is simply due to the fact that coverage will start from the date the policy is first purchased because you can’t by coverage for work you’ve done in the past. From the insurance company’s perspective, newly insured practitioners have limited exposure because they’ve not done a lot of covered legal work yet. The odds of a covered claim arising from a newly insured practitioner are going to be much lower than those for an attorney who has been insured and in practice for ten years or more. Yes, premiums will rise for a period of years as you do more and more work, but all things being equal, it should stabilize about six years in.

Finally, let’s take the “It’s the right thing to do” argument off the table for a moment and just focus on the financial risks and realities addressing those who buy into the de facto self-insure approach. Are you religiously setting aside whatever you would have spent on premiums to deal with an allegation of malpractice? All I can say is that I’ve never come across a situation where that was happening; and truth be told, unless that pool is well into the six digits it’s not even going to be enough to put on a good defense let alone cover a sizeable loss. Leverage those dollars and buy a policy. You will never be able to build a pool of funds in the small firm self-insure model that comes close to the amount of coverage (not to mention peace of mind) that those same dollars could buy. But of course, we can’t take the “it’s the right thing to do” argument off the table because we are professionals who still have the privilege of self-regulation and our rules require that we protect the interest of our clients. Should the worst happen, what does this better than malpractice insurance? From where I sit, nothing.

All opinions, advice, and experiences of guest bloggers/columnists are those of the author and do not necessarily reflect the opinions, practices or experiences of Solo Practice University®.

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One comment on “Saying ‘No’ to Malpractice Insurance – The True Cost of “Going Bare”

  • I am blown away by the very concept of a lawyer being allowed to choose not to have malpractice insurance. I think I am pretty safe in saying that every province in Canada requires insurance in order for a person to practice. The profession here would be stripped of it ability to self-regulate in a heartbeat were we to even consider something like this.

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