Aon | Professional Services Practice
Following the Numbers: The Case for Higher Law Firm Professional Indemnity Insurance Limits
Release Date: August 2024U.S. law firms often ask how much Professional Indemnity (PI) insurance limit is enough? What does the firm really need to protect itself?
Key Takeaways
- Lawyers Professional Liability Insurance provide lawyers with protection against lawsuits arising for legal services, including the risk of a firm threatening claim outcome.
- Loss information and benchmarking help firms make optimal decisions when purchasing PI.
- As the number of large PI claims continues to rise, law firms would be well served to review the PI limits they purchase.
PI insurance for law firms has always provided the peace of mind lawyers need to work on high value transactions and high stakes litigations, knowing that they have a policy that would respond should a lawsuit arise from these legal services.
For many firms, having PI insurance is not only an efficient financial risk transfer for practice risk. It can also help prevent them from going out of business due to a catastrophic malpractice lawsuit.
To help firms make optimal decisions around their purchase of PI insurance, two data sources are particularly important:
- Loss information and what this says about the changing nature of the underlying risk
- Benchmarking information for comparable peer firms
In each case, the depth and robustness of the data helps validate decision-making to a higher level of confidence.
In recent years, we have identified compelling trends that have a significant bearing on limit adequacy and what adequate protection really means for US law firms.
The number of “bet-the-firm” claims continues to rise. More specifically, the observed volatility and a rise in severe claims is largely driven by:
- Large underlying transactions that expand damage models, often far in excess of insurance limits
- Social and economic inflation
- Rising defense costs
- High quality and well-funded plaintiffs firms more willing than ever to sue law firms
- Law firm revenue growth and deal size outpacing insurance limit increases.
Since 2019, we have seen at least ten “incurred” losses, the total of settlements and defense costs, in excess of US$75 million, with the losses ranging from US$75 million to more than US$400 million. Moreover, our 2023 claim collections exceeded US$500 million.
Losses have varied by firm size. Our data shows that the largest single loss involving firms with less than 200 attorneys is approximately US$40 million, for firms with 200-1,000 it is over US$275 million and for firms with more than 1,000 it exceeds US$400 million.
Our benchmarking shows that 42% of our “large law” client base (firms with more than US$200 million in revenue) has increased PI insurance limits at least once since 2019.
Given the changing nature of the risk environment, we recommend that firms evaluate their PI insurance limits on a regular basis. Firms that have not reviewed limits for several years should take a fresh look.
Questions to consider include:
- What is the average deal size that the firm works on?
- What is the largest deal size that the firm works on?
- What are peer firms currently buying?
- What does publicly available information about large claims against law firms tell us?
- What size of claim, if lost, would significantly impair the firm’s ability to operate?
- What size of claim, if lost, would cause attorneys in the firm to consider looking or moving elsewhere?
PSP’s aggregated claims data and proprietary benchmarking can help firms consider these questions. Claim information is particularly valuable, as it helps firms focus firm risk management efforts by identifying areas producing claims as well as supporting decision-making on PI insurance limit setting.
In addition, our market presence gives us the largest look into what potential PI risk issues are concerning insurers. We use this information to help firms prepare for insurer meetings and present their best story to underwriters.
Contact
The Professional Services Practice at Aon values your feedback. To discuss any of the topics raised in this article, please contact Marc Boccio, Erin Martin or Chester White.
Marc Boccio
Senior Vice President and Executive Director
New York
Erin Martin
Senior Vice President and Executive Director
Chicago
Chester White
Senior Vice President and Executive Director
New York
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