The lawyers professional liability market continues to be in a state of flux. Rates are still rising, causing distress to the law firm clientele. But historic under-pricing and high claims payments have made this professional liability insurance segment unprofitable for many carriers.

In turn, some of these carriers are leaving the market.

Whats an insured or a broker to do?

A Troubled Market

Even attorneys practicing in non-high-risk areas have seen rates skyrocket at 50 percent over the last few years, while lawyers concentrating in traditionally high-risk areas including bodily injury, intellectual property, patents, securities law, class action suits, entertainment law and those involved in real estate transactions have suffered through significantly higher rate increases.

According to an August 2005 ABA study that cites data from 15 insurers comparing two four-year focus periods (1996-99) and (2000-03), it is estimated that private practice attorneys face a 17 percent chance of getting sued for malpractice in a given year.

The ABA goes on to assert that although the total volume of claims remains steady, suits alleging damages upwards of $2 million and higher have increased by a magnitude of 60 percent.

Furthermore, increasing damages sought in the wake of Sarbanes-Oxley regulations have continued to plague the industry. These regulations impact law firms that represent public-traded corporations as they are commonly dragged into any litigation stemming from their clients compliance issues.

In addition, an evolving class of malpractice claims, which move beyond traditional actions–based on creative malpractice theories–have emerged in the marketplace as a result of the dot-com bust. This latest breed of claims is putting additional strains on the lawyers liability marketplace.

Claims in this group, such as deepening insolvency and third-party claims, are becoming more frequent.

Deepening insolvency can arise when a law firms client is rendered bankrupt after participating in a capital-raising venture under the law firms advisement. The plaintiff may claim that but for the law firms advice throughout the transaction in question, they would not be positioned as a debtor.

Although this is not always the case, during the technology bust over the last few years, many companies began to sue the law firms who assisted them in the additional financing attempts.

Third-party claims are also arising at a steady rate, where individuals not directly involved in the initial interaction between an attorney and his or her client move to seek retribution for damages incurred.

For example, in a former personal injury auto accident case where the passenger of the car was killed, a third-party claim was issued. The deceased passengers estate sued the law firm defending their client (the driver of the car) because they failed to file timely with the automobile insurance carrier of the driver being sued, which resulted in denial of coverage for late reporting.

Hard Market Prevails

Although there was some speculation that the lawyers professional liability market would somewhat stabilize in 2005, elements of a hard market continue to prevail.

As many traditional carriers for lawyers liability have under-priced this particular line of business over the years, the emerging financial severity of claims against attorneys have placed significant pressure on the marketplace. In addition, claims experience data and benchmarks are becoming increasingly disconcerting, causing many carriers to reconsider firms they have previously written.

With insurer thresholds for different areas of legal practice changing, carriers are issuing conditional non-renewals and straight non-renewals. It is important to note, however, that there are key distinctions between these two classes of non-renewals:

Conditional non-renewals are typically required to be sent by state law if the carrier expects the premium to increase by 10 percent or if an additional material change will occur at renewal–for example, an increase in the deductible or elimination of one or more areas of coverage. Usually carriers will continue to issue renewal terms, but these will be revised as the carrier deems appropriate to continue writing the account for future profitability.

Straight non-renewals, on the other hand, are usually issued when a carrier is exiting a line of business or if there has been a material change during the policy period that renders the carrier unable to offer renewal terms. In these situations, it is likely that the carrier will not be amenable to re-writing the account, and participating attorneys and law firms will have to go elsewhere for coverage.

Downgrades and Exits

As some carriers contemplate exits from the professional lawyers business, others face rating agency actions for exposures unrelated to their professional liability books. As of September 15, Oldwick, N.J.-based insurance rating agency, A.M. Best placed Quanta Capital Holdings, LLC and XL Insurance are on the negative watch in the wake of Hurricane Katrina.

In addition, another prominent carrier has continued to significantly increase rates on renewals, which usually forces the remarketing and replacement of this business with another carrier. This is never an easy process though, as each carrier requires its own main-form application completed prior to quoting. This usually includes many supplemental applications, which leads to clients spending more time on the renewal process when they could be billing hours with their clientele.

As more of the potential carriers fall below A.M. Bests A rating " and more importantly, in some cases, exit the business " attorneys and law firms are left to wonder where to turn for coverage and what should be considered.

What You Can Do

If the law firm or lawyer is written by an admitted carrier, the carrier is required by state law to notify the insured of a non-renewal usually, on average, 60-90 days in advance. Non-admitted carriers will typically give 60 days or less, but this is not a requirement. So you must make sure you stay on top of what your carriers are doing at least 90 days in advance of the expiration date.

Upon receipt of the non-renewal notice, the agent or broker should begin to market the account to all potential carriers that would write this account. Once another option is presented, you must determine whether the new carrier quoting is offering terms that are comparable to the expiring terms and conditions.

One area to especially focus on is the prior-acts dates afforded each covered attorney. It is not unusual for a new carrier to want to come in with a clean slate and therefore not offer prior-acts coverage.

If that is the case, the insured will need to purchase what is called an Extended Reporting Period " ERP or tail policy " to allow the insured to report claims for wrongful acts that took place prior to the new policy inception date. Agents and brokers will also need to determine what the non-renewing carriers ERP/tail terms are and how to trigger coverage in this area.

Typically, in order to trigger this coverage, an insureds written authorization as well as payment of this ERP/tail must occur within a set amount of time after the natural expiration date of the policy, usually 30-to-60 days. This is usually spelled out in the policy form.

As with other lines of professional liability, there are many details to consider. Clients can " and should " look to their brokers as a trusted advisor when navigating the road to renewal. [IA]

Maria Treglia is a vice president for Program Brokerage Corporation in New York, a wholesale unit of Hub International Limited.

This article originally appeared in the November 14 edition of National Underwriter.