November 21, 2014

From Law360

A malpractice lawsuit can be an attorney's worst nightmare, putting a lawyer's competency and ethics under the microscope as well as taking an enormous financial toll. But while many firms carry malpractice insurance, few are asking the right questions about what is actually covered under their policy.

An estimated 5 to 6 percent of all private attorneys face malpractice litigation each year, according to the American Bar Association, and depending on the scope of a legal malpractice policy, an insurer will help defray the costs of defending a suit and any resulting settlement or judgment. However, many firms don't carefully scrutinize the language in their legal malpractice policies until a complaint hits their desk. Law360 interviewed Polsinelli's Stacy Carpenter and others about what law firms and solo practitioners need to ask about their policies before it's too late.

The coverage provided under most legal malpractice policies turns on the definition of professional services, and if the work that an attorney is doing "does not fall within that definition or if it falls within an exclusion in the policy, you are at risk for having no coverage," said Stacy Carpenter, a Polsinelli PC shareholder and chair of the firm's commercial litigation group.

Most legal malpractice policies have a consent-to-settle provision requiring a carrier to obtain the insured's consent before agreeing to a settlement, but most also contain some form of "hammer clause," according to Carpenter. With such a clause in place, if an insurance company negotiates a settlement and the attorney refuses to consent to the payment of that settlement, the insurer will then send the attorney a "hammer letter," she explained.

While hammer clauses come in various forms, a hammer letter "generally advises the attorney that if the case is settled at a later date or goes to judgment and the insurance company ends up paying more than the amount of the original settlement that the attorney rejected, the insurance company is permitted to pursue recovery of the additional amount spent from the attorney," according to Carpenter.

"Some hammer clauses go so far as to say that the failure to consent to a settlement that is less than an ultimate judgment voids the coverage, allowing the insurance company to refuse to pay the judgment and seek reimbursement from the attorney of all amounts spent on the defense," she said.

(The full article is for paid subscribers only)