Aon | Professional Services – Following the numbers: Arguments for higher professional liability insurance sums for law firms

US law firms often ask themselves how much professional liability insurance is sufficient. What does the firm really need to protect itself?

Law firm professional indemnity insurance has always given lawyers the peace of mind they need when working on high-volume transactions and high-stakes litigation, knowing they have a policy in place should litigation arise in the course of providing those legal services.

For many firms, professional liability insurance is not only an efficient financial safeguard against practice risks, it can also prevent them from having to go out of business due to a catastrophic malpractice lawsuit.

To help companies make optimal decisions when taking out professional liability 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 companies

In any case, the depth and robustness of the data helps validate decision-making to a higher level of confidence.

Over the past few years, we have identified compelling trends that have significant implications for the adequacy of the limits and what adequate protection actually means for U.S. law firms.

The number of bet-the-firm claims continues to rise. More specifically, the observed volatility and increase in severe claims are largely due to the following factors:

• Large underlying transactions that expand loss models and often go well beyond insurance limits
• Social and economic inflation
• Rising defense costs
• High-quality and well-funded plaintiff firms are more willing than ever to sue law firms
• Sales growth and order volume of law firms exceed the increase in insurance sums.

Since 2019, we have recorded at least ten “incurred” losses totaling over $75 million in settlements and defense costs, with losses ranging from $75 million to over $400 million. In addition, our 2023 claims exceeded $500 million.

Losses vary by firm size. Our data shows that the largest single loss is about $40 million for firms with fewer than 200 lawyers, over $275 million for firms with 200 to 1,000 lawyers, and over $400 million for firms with more than 1,000 lawyers.

Our benchmarking shows that 42% of our “large” clients (firms with revenues over $200 million) have increased their professional liability insurance coverage amounts at least once since 2019.

Given the ever-changing nature of the risk environment, we recommend that companies review their liability insurance limits regularly. Companies that have not reviewed their limits for several years should do so again.

Questions to consider include:

• What is the average transaction volume the company works with?
• What is the largest volume of business the company is working on?
• What are comparable companies currently buying?
• What does publicly available information tell us about large damages claims against law firms?
• At what level of damage would a loss significantly impair the company’s ability to do business?
• At what level of damage would the firm’s lawyers consider looking elsewhere or taking another job in the event of a loss?

PSP’s aggregated loss data and proprietary benchmarking can help companies answer these questions. Loss information is particularly valuable because it helps companies focus their risk management efforts by identifying areas that generate losses and supports decision-making in setting liability insurance limits.

In addition, our market presence gives us the best insight into the potential PI risks affecting insurers. We use this information to help companies prepare for meetings with insurers and present their best story to insurers.