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Attorneys active in intellectual property, plaintiff class actions and real estate are among the more problematic areas for errors and omissions underwriters, although the situation has been helped by the soft market's ample capacity, observers say.
Intellectual property “is always about severity,” said Kim Quarles, New York-based senior vp at Willis North America Inc. “When it comes to (intellectual property) law firms, you can have a firm profitable for years and years,” she said. For insurers, because intellectual property claims are “so expensive to defend, you can wipe out 20 years of profit with one claim.”
The reason these claims are so severe is because of their complexity, said Ms. Quarles. An attorney who misfiles a patent that fails to protect its investors could mean the loss of millions of dollars. Furthermore, defending these claims requires expert testimony, which is expensive.
One challenge in handling patent business is that mistakes such as filling in a wrong date “are easy to make,” said James L. Rhyner, Warren, N.J.-based worldwide manager for lawyers professional liability insurance and miscellaneous professional liability insurance at the Chubb Group of Insurance Cos.
Mr. Rhyner said this also is a “very high-risk area” because “it's not just the U.S. If you're an investor, you want to secure your rights to your invention worldwide, and that's a pretty tricky path to navigate.”
Greg Leffard Simsbury, Conn.-based vp of professional liability for The Hartford Financial Services Group Inc., said policyholders are “fortunate in one respect: that there's a lot of competition out there,” so brokers can place the business.
Gerard Guterl, New York-based CEO for professional services specialty at Aon Risk Solutions, agreed. He said patent business is “an area that's concerned underwriters for over 10 years now.” Law firms with a significant exposure in this area may pay higher rates but the business is “certainly insurable,” he said.
Law firms that specialize in real estate comprise another challenging area.
This includes any firm that has been involved with credit default options and “robo-signing” of mortgage foreclosure documents, said Ms. Quarles. “What we're hearing from underwriters is that they expected more than has played out,” but claims could increase in the future once the federal government has picked the “low-hanging fruit,” she said.
Plaintiff class action firms are another E&O coverage challenge, experts say.
Mr. Leffard said plaintiff class actions “have always been a challenge. I would say probably more recently it's more loss-experience-driven,” he said. “It's basically a severity issue” because of the thousands of claimants potentially involved.
Peter Taffae, an E&O liability insurance expert at Los Angeles-based wholesale brokerage Executive Perils Inc. said, “We've got a couple of plaintiff firms coming up in the next 60 days and it's not going to be a pleasant renewal.
“You have to keep in mind the market varies in size; and so you have what I call gradations, if you will, for hardness or softness depending on the size of the firms,” Mr. Quarles said. For the largest law firms, for instance, “I would say the market is not as soft as it is for the smaller firms.”
Attorneys can enhance their coverage opportunities during the application process, said Mr. Leffard.
“It really starts with the application. To the extent they can fully complete an application and put their firm in the best light possible, that absolutely goes a long way,” he said.
Another significant factor is responding to the underwriter's questions, he said. “A lot of accounts don't have the opportunity to meet face-to-face” with the underwriter, who is making his decisions based “on what the firm looks like on paper,” so they “need to present themselves in the best light possible,” he said.
In addition, said Mr. Leffard, “We really like to see what they've learned from their past experiences.” When a law firm does have a claim, “any preventative action taken to prevent that type of loss from happening again goes a long way in our minds.”
“Law firms should position themselves as favorably as they can in the marketplace,” said Mr. Guterl. They want to distinguish themselves with better risk management procedures and client intake policies, and a “real fundamental understanding of the risk issues and how they're managing them and how to communicate those effectively to the marketplace,” he said.
Risk management practices differ based on the size of the law firm, with sophistication increasing with the size of the firm, said Ms. Quarles. A 200-attorney firm, for instance, is “likely to have a general counsel” as well as someone dedicated to the ethical issues involved, she said.
Larger law firms “should be meeting with underwriters, if not on an annual basis, certainly every other year” to communicate developments, said Mr. Guterl. There also is greater emphasis on managing claims, managing outside counsel and on how firms communicate with insurers. “The more transparency that a firm is willing to provide to its insurers generally, the better terms and conditions they're going to get,” he said.
“A lot of this just boils down to basic practice standards,” including client screening, said Ms. Quarles. “You have the processes and procedures to ensure you're accepting the type of business you want to accept and not getting entangled in business you don't want to get entangled in,” she said.
In addition, the value of the various products can vary dramatically, so policyholders “need to have broker adviser who understands those substantive and subtle differences in coverage,” Mr. Guterl said. “Too many customers focus on price and not on expanding the quality of coverage.”
Errors and omissions risks once characterized as hard to place now are merely challenging due to ongoing soft pricing, many observers say.