Litigation Necessitating a Layered Approach to Professional Liability Insurance

Professionals face heightened exposure due to increased litigation, much of it fueled by third-party financing and resulting in so-called nuclear verdicts. The increase in both frequency and severity of losses underscores the importance of securing comprehensive Professional Liability Insurance with sufficient limits, a solution that may require one or more excess layers on top of the underlying coverage.

The recent landmark judgment of $1.8 billion against the National Association of Realtors (NAR) and several real estate brokers highlights the critical need for a robust insurance program. 

Policy limits for NAR’s Professional Liability Insurance, underwritten by Chubb, have been exhausted. Unless state and local NAR chapters previously secured excess layers of Professional Liability Insurance, they no longer have coverage for potential damages and legal defense fees if they’re hit with copycat lawsuits concerning allegations of cooperative compensation practices. 

Attorneys vs. their clients 

Attorneys are increasingly facing litigation from clients, with a notable surge in multimillion-dollar payouts. 

According to Bloomberg Law, this trend can be attributed to two primary factors: 

• The rise of third-party litigation finance, which incentivizes lawsuits against attorneys perceived to have deep pockets and extensive insurance;
• The frequency with which clients turn against their legal counsel during business downturns. 

One prominent case involves Elon Musk suing Wachtell, Lipton, Rosen & Katz for $90 million in legal fees incurred during his Twitter purchase, alleging the firm charged excessive legal fees during a vulnerable period for the social media company.

Emerging trend for defense outside policy limits 

In 2023, Nevada passed legislation mandating that admitted insurers place defense limits outside primary limits on all liability policies. While this legislative action aimed to safeguard consumers against escalating defense costs that erode policy limits, businesses raised concerns about potential adverse consequences. Subsequently, lawmakers quickly amended the regulation, issuing guidelines to clarify the legislation’s intent. 

Similar legislative initiatives may arise this year as state legislators explore strategies to prevent policyholders from being left with a defense-only policy — coverage that includes legal defense costs but not settlements or indemnity payments.

To enhance protection, professionals can request that legal defense costs be placed outside the primary limits for an additional premium.

What’s ahead

Here’s what Alera Group said in our 2024 Property and Casualty Market Outlook about factors influencing the market for Professional Liability Insurance: 

• “Pricing will be more stable. Best-in-class businesses with good experience will likely see their policies renewed without increase. Clients with less-favorable loss histories could see increases of around 10%. Pricing will vary based on profession. Architects and engineers will likely see increases ranging from 3%-10%, while rates for real estate professionals are expected to see low single-digit increases. Lawyers and other professionals could see a slight reduction in pricing due to growth in capacity.
• “Availability will depend on the profession. Underwriters will have increased concerns about architects and engineers in California, Florida, Illinois, New York and Pennsylvania because of recent nuclear verdicts. Those involved in major construction projects, condominiums and multiyear projects will have the greatest difficulty seeking coverages. Lawyers practicing as solo practitioners and smaller firms will find limited insurer interest and might have to seek coverage through the nonstandard market. Real estate agents and brokers will find competitive markets to be broadly available.
• “Capacity in standard markets will depend on the business sector, required limits, loss experience and judicial environment. Limits up to $5 million are likely to be available in the standard markets for all disciplines. Clients requiring excess layers may need to access the nonstandard market.
• “Underwriting scrutiny will continue. Medium to large accounts will undergo the most extensive evaluations, with expectations that functioning risk management programs are in place. Detailed applications including loss history will be essential.
• “The underwriting process will require a 60- to 90-day lead time. Allow sufficient time to respond to the information underwriters will require.”

Challenges in securing higher limits and excess layers 

The shrinking capacity of Professional Liability Insurance carriers poses a growing challenge for professionals seeking high limits or those contractually obligated to maintain high primary limits and excess layers. 

This often requires engagement with four to five carriers on a pro rata basis to build higher excess layers, a growing practice in recent years. Under the pro rata approach, each carrier contributes to claims proportionally based on the coverage percentage provided. 

Consequently, some middle market professionals may find the desired limits unaffordable, potentially leading to operating underinsured. 

What you can do

Selecting the right insurance broker is critical for professionals seeking to protect their livelihoods, significantly enhancing the probability of securing the best coverage terms, limits and pricing in the marketplace. 

Brokers specializing in Professional Liability Insurance within your industry understand your professional requirements, possess loss experience managing claims, and tailor insurance and risk management for your unique exposures. 

Prioritize brokers who are endorsed by local and national associations, and who are actively engaged in the profession. 

Preparing for stricter underwriting 

For the most optimal outcome, work with your broker to engage proactively with underwriters.

1. Start the application or renewal process early, and comply with new information requests.
2. Address past claims, and explain new protocols implemented to prevent recurrence.
3. Present proactive risk management controls that are specific to your profession and industry.
4. Anticipate underwriter questions, and preemptively provide thorough responses.
5. Craft a comprehensive narrative and supplement it with documentation, leaving no room for ambiguity.

In today’s litigious environment, comprehensive Professional Liability Insurance serves as a crucial safeguard for professionals to protect their assets, reputations and livelihood against allegations of negligence. 

CONTACT A PROFESSIONAL LIABILITY SPECIALIST  

About the author 

Joel Jarvis 
Producer 
Alera Group  

Joel Jarvis specializes in property and casualty insurance, with a strong focus on Professional Liability, Errors and Omissions, and Directors and Officers Liability Insurance for boards of directors and executives. With over two decades of experience, Joel has designed customized programs for attorneys and clients in the transportation, hospitality, nonprofit and construction sectors. His unwavering commitment to achieving success for his clients is evident in his win-driven approach. Joel strives to create environments where everyone thrives. His expertise in Professional Liability Insurance has been nationally recognized by industry publications, including PropertyCasualty360 and Digital Insurance. Beyond his professional achievements, Joel actively contributes to nonprofit and legal organizations by serving on their boards and committees. 

Contact information: 

• joel.jarvis@aleragroup.com 
• Connect with Joel on LinkedIn