By all accounts, Lloyds of London wrote the first lawyer’s professional liability (LPL) policy on a claims-made form in the early 1940s. But when LPL coverage migrated from England to America over the next few decades, it was primarily written on an occurrence basis because that was the dominant form of liability insurance in America at the time. Occurrence-based LPL coverage predominated in America until the professional-liability insurance crisis of the 1970s.
The 1970s witnessed a cratering stock market, high inflation, and “legal rights explosion.”[1] This led to “price increases and reductions in coverage far exceeding the normal cycle pattern.”[2] Physicians were hardest hit, but lawyers were not far behind. There was a “dramatic increase in claims frequency coupled with a sharp increase in average claims cost which caused many insurance companies to withdraw from the lawyers’ professional market and those remaining to increase their premiums rates by multiples of their expiring rates.”[3] It became difficult for lawyers to find affordable malpractice coverage, with an increasing number going naked. As the larger commercial-liability carriers withdrew from the LPL market, smaller specialty carriers began entering it, but writing on a claims-made form. The occurrence form eventually disappeared from the LPL market.
Insurers transitioned to claims-made coverage “as an antidote to the problems arising with occurrence insurance.”[4] The Achilles heel of occurrence coverage is long-tail liabilities.[5] A long-tail liability is one where it typically takes a long time for the act or omission to ripen into a claim and to resolve the claim. Professional negligence is a notorious long-tail liability.[6] The latency of years or decades makes it difficult for the insurer to accurately price the risk because so many pricing variables can change between inception of the occurrence policy and payment of a claim (e.g., investment returns, inflation, defense costs, jury awards, societal litigiousness, emergence of new liability grounds, and changes in coverage law).[7] “Pretty much everybody who has the slightest acquaintance with insurance law knows that the longer the gap between the time the insurer takes the premiums and the time when the insurer pays out on the risk, the more likely the insurer is to get burned.”[8] To avoid “get[ting] burned” on long-tail liabilities, insurers charged more as a safety margin or avoided the risk altogether, leading to higher premiums and a shortage of coverage in the 1970s. Tailing liabilities are also problematic for insureds who may find their liability limits insufficient to cover a loss many years down the road as a result of inflation.[9]
Claims-made coverage solves the “long tail” problem by calculating the premium closer in time to payout.[10] For example, assume a patent lawyer mis-drafts a claim that is invalidated ten years later in a patent infringement suit, prompting the client to sue. Under an occurrence policy, the risk was priced ten years beforehand; under a claims-made policy, it was priced less than a year beforehand. From an actuarial standpoint:
“. . . [T]he major difference between the claims-made and the occurrence policy lies not in the coverage provided, but in the timing of pricing decisions affecting that coverage. Under claims-made we are always pricing the next year’s claims. Under occurrence pricing we must take into account claims to be reported many years in the future. The accuracy of any forecast is a direct function of how far beyond the data the projection is to be carried.”[11]
There is another problem with using the occurrence form for legal malpractice claims: the difficulty of ascertaining when injury occurred. Injury is the coverage trigger under an occurrence policy. What constitutes a legally-cognizable injury may not be clear under applicable law. Uncertainty regarding timing of the injury complicates determination of the applicable occurrence policy; multiple policies may be implicated, requiring coordination between insurers, and increasing the potential for follow-on coverage litigation.[12]
A good example is litigation-based malpractice, such as failing to recognize and assert a defense. When does injury occur from overlooking a defense? Is it when the client incurs additional defense costs beyond the motion-to-dismiss or summary-judgment stage where the litigation could have otherwise been terminated? Is it when the client suspects the litigation is not being handled correctly and pays another attorney to review the file? Is it when the client loses the case in the trial court? Is it when the adverse judgment is affirmed on appeal? Or is each of these a discrete coverage-triggering injury, thereby triggering multiple occurrence policies?
An injury coverage trigger works well for non-continuous losses that are easily pinpointed in time, but is problematic for diffuse, protracted losses as often present in the legal malpractice context. A claim trigger is better because the timing of the claim is typically more ascertainable than the timing of the loss. However, this timing-of-occurrence problem is not completely avoided with claims-made coverage because it may reemerge in the retroactive-date analysis, although it is less prominent and more manageable in that context.[13]
[1] Thomas F. Sheehan, The history of lawyers’ professional liability insurance, 13(3) The Forum (Section of Insurance, Negligence and Compensation Law, American Bar Association) 808, 810 (Spring 1978); see also Donald J. Ladanyi, Lawyer’s Professional Liability Insurance, 21 Clev. State L. Rev. 66, 68 (1972) (“Substantial increases in the premiums on attorneys’ professional liability policies have been the rule rather than the exception in recent years.”); Joseph O. Marker and F. James Mohl, Rating Claims-Made Insurance Policies, CAS Discussion Paper Program, 265, 267-78 (May 1980) (“In the early 1970’s the insurance industry was hit by a triple whammy: severe recession resulting in the steepest plunge in the stock market since the 1930’s, soaring economic inflation, and price controls which held back rate increases while doing nothing about social inflation”).
[2] National Association of Insurance Commissioners, Cycles and Crises in Property/Casualty Insurance: Causes and Implications for Public Policy at 2 (1991) (NAIC Publication No. 71).
[3] Thomas F. Sheehan, The history of lawyers’ professional liability insurance, 13(3) The Forum (Section of Insurance, Negligence and Compensation Law, American Bar Association) 808, 813 (Spring 1978).
[4] Anderson v. Aul, 862 N.W.2d 304, 310 ¶ 30 (Wis. 2015); see also Templo Fuente De Vida Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 129 A.3d 1069, 1076 (N.J. 2016) (“ ‘Occurrence’ policies insuring against professional negligence began to fall out of favor in the latter part of the twentieth century because of the difficulty underwriters faced in setting premiums on policies with an unlimited ‘tail’ that extended beyond the policy period and thus required insurance companies to forecast far into the future the costs of the risks assumed. This time lapse made it particularly difficult for insurance companies to accurately calculate premiums for latent injuries, such as those caused by professional malpractice, where claims are frequently made years after the insured event.”) (cleaned up); Craft v. Philadelphia Indem. Ins. Co., 343 P.3d 951, 957 ¶ 29 (Colo. 2015) (“Claims-made policies proliferated in the 1970s as a solution to the problems many insurers were facing in writing professional malpractice insurance policies.”); Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So. 2d 512, 514 (Fla. 1983) (“Initially, all professional liability policies were occurrence policies but because of numerous difficulties with this type of coverage, claims-made policies were initiated and the present trend is toward the latter type.”); Montrose Chemical Corp. v. Admiral Ins. Co., 913 P.2d 878, 903 n.24 (Cal. 1995) (“ ‘Claims made’ coverage arose more than 20 years ago, initially in the field of professional liability insurance, because underwriters were concerned that occurrence-based coverage was adversely affecting the underwriting process. Because the injury and negligence giving rise to a malpractice claim is often not discoverable until years after the negligent act or omission, professional liability insurance carriers, in an effort to reduce their exposure to an unpredictable and lengthy ‘tail’ of lawsuits, shifted to the ‘claims made’ policy.”).
[5] Joseph O. Marker and F. James Mohl, Rating Claims-Made Insurance Policies, CAS Discussion Paper Program, 265, 267-78 (May 1980) (“Something had to be done to cut the exposure presented by the tail: either get out of the business or find a way to expose ourselves to that risk a year at a time and price it a year at a time. Out of that idea grew the decision to try a claims-made approach.”).
[6] See Thoracic Cardiovascular Assocs., Ltd. v. St. Paul Fire & Marine Ins. Co., 891 P.2d 916, 919 (Ariz. App. 1994) (“Because injuries from professional malpractice claims may not manifest themselves for years after the occurrence policy has expired, however, an exposure time, or a ‘tail,’ is created. A tail is the time lapse between the date of the negligent act or omission and the time when a claim is made.”); Zuckerman v. Nat’l Union Fire Ins. Co., 495 A.2d 395, 399 (N.J. 1985) (“In the context of professional malpractice or long-term exposure to hazardous environmental conditions, however, the injury and the negligence that caused it are often not discoverable until years after the delictual act or omission. Consequently, with these types of perils, claims will frequently be made years after the insured event, and long tail exposure becomes a significant problem.”).
[7] See Zuckerman v. National Union Fire Ins. Co., 495 A.2d 395, 399 (N.J. 1985) (“Not only is this actuarial problem the result of inflation, but new theories of recovery in tort law and increased consumer awareness have contributed to an increase in the number of claims that undermines the actuarial basis for premiums on occurrence policies issued years earlier.”).
[8] Root v. Am. Equity Specialty Ins. Co., 130 Cal. App. 4th 926, 944, 30 Cal. Rptr. 3d 631, 644 (2005).
[9] See Truck Ins. Exch. v. Ashland Oil, Inc., 951 F.2d 787, 790-91 (7th Cir. 1992) (“And the higher the rate of inflation is during the interval, the likelier is the insured’s liability to exceed the policy limits.”).
[10] See Chas. T. Main, Inc. v. Fireman’s Fund Ins. Co., 551 N.E.2d 28, 30 (Mass. 1990) (“The closer in time that the insured event and the insurer’s payoff are, the more predictable the amount of the payment will be, and the more likely it is that rates will fairly reflect the risks taken by the insurer. The purpose of a claims-made policy is to minimize the time between the insured event and the payment.”); Root v. Am. Equity Specialty Ins. Co., 130 Cal. App. 4th 926, 944, 30 Cal. Rptr. 3d 631, 644 (2005) (“The key is the pricing of premiums. The core idea behind the move to claims made insurance policies was to close the gap between the time when the insurer prices a risk and the time when the insurer may incur an obligation to pay on that risk.”) (emphasis in original).
[11] Joseph O. Marker and F. James Mohl, Rating Claims-Made Insurance Policies, CAS Discussion Paper Program, 265, 274 (May 1980); see also Zuckerman v. National Union Fire Ins. Co., 495 A.2d 395, 399-400 (N.J. 1985); Stine v. Continental Cas. Co., 349 N.W.2d 127, 131 (Mich. 1984); Ballow v. PHICO Ins. Co., 875 P.2d 1354, 1367 (Colo. 1993); Chas. T. Main, Inc. v. Fireman’s Fund Ins. Co., 551 N.E.2d 28, 30 (Mass. 1990) (“the closer in time that the insured event and the insurer’s payoff are, the more predictable the amount of the payment will be, and the more likely it is that rates will fairly reflect the risks taken by the insurer”); Campbell & Co. v. Utica Mut. Ins. Co., 820 S.W.2d 284, 288 (Ark. App. 1991) (“claims made policy is designed so that the insurer can more accurately predict the limits of its exposure and the premium needed to cover the risk undertaken”).
[12] See Stine v. Cont’l Cas. Co., 349 N.W.2d 127, 131 (Mich. 1984) (“ ‘Claims made’, or ‘discovery’ policies, on the other hand, are of relatively recent origin and were developed primarily to deal with situations in which the error, omission, or negligent act is difficult to pinpoint and may have occurred over an extended period of time.”).
[13] See Mutual Fire, Marine & Inland Ins. Co. v. Vollmer, 508 A.2d 130, 136 (Md. 1986) (“To determine coverage it thus becomes necessary not only to look at the date when the claim was made, but also to determine if the retroactive date requirement has been satisfied.”).
