Insurance Glossary
Key insurance terms explained for attorneys and law firm administrators.
Policy Structure
Claims-Made PolicyA type of insurance policy that provides coverage only when a claim is first reported to the insurer during the active policy period, regardless of when the underlying incident occurred. The claim must arise from an act committed on or after the policy's retroactive date. This is the standard policy form for legal malpractice insurance.Prior Acts DateAlso called the retroactive date, this is the earliest date from which a claims-made policy will cover alleged wrongful acts. Claims arising from acts committed before this date are excluded from coverage. Maintaining a continuous prior acts date when switching carriers is critical to avoiding gaps in retrospective coverage.Tail CoverageAn informal name for an extended reporting period endorsement purchased when a claims-made policy is canceled or not renewed. Tail coverage allows the insured to report claims after the policy has ended for acts that occurred during the policy period. The cost typically ranges from 75 to 300 percent of the final annual premium depending on the reporting period length.Extended Reporting PeriodA provision in a claims-made policy that extends the time during which claims can be reported after the policy has expired or been canceled. Most policies include a short automatic extended reporting period of 30 to 60 days, with optional supplemental periods available for purchase ranging from one year to unlimited duration.Retroactive DateThe date specified in a claims-made policy before which any alleged wrongful act is excluded from coverage. It functions identically to the prior acts date and establishes the earliest point in time from which the policy provides retrospective coverage. Full prior acts coverage means the retroactive date matches the insured's first date of continuous coverage.Defense Costs Inside LimitsA policy structure where defense costs, including attorney fees, expert witness fees, and court costs, erode the policy's per-claim and aggregate limits. As defense spending increases, less coverage remains available for settlements or judgments. This structure is standard in most legal malpractice policies and is sometimes called an eroding limits or burning limits policy.Defense Costs Outside LimitsA policy structure where defense costs are paid in addition to the policy's stated limits, preserving the full per-claim and aggregate limits for settlements and judgments. This structure provides significantly more total coverage but is less common in legal malpractice policies and typically commands a higher premium when available.DeductibleThe amount the insured must pay toward a covered claim before the insurance policy begins to pay. In a deductible arrangement, the insurer typically manages the claim from the outset and either bills the insured for the deductible amount or deducts it from claim payments. Deductibles for small law firm malpractice policies typically range from $1,000 to $25,000 per claim.Self-Insured RetentionA specified dollar amount that the insured must pay out of pocket before the insurance carrier's coverage obligations are triggered. Unlike a deductible, an SIR typically requires the insured to manage and fund the claim independently until the retention is exhausted. SIRs are more common in policies for larger law firms with greater financial capacity.Aggregate LimitThe maximum total amount an insurance policy will pay for all covered claims during a single policy period. Once the aggregate limit is exhausted through claim payments and, in policies with defense costs inside limits, defense spending, no further coverage is available until the next policy period begins. Common aggregate limits for law firms range from $1 million to $10 million.Per-Claim LimitThe maximum amount an insurance policy will pay for any single claim, including defense costs if the policy has a defense-costs-inside-limits structure. The per-claim limit is always equal to or less than the aggregate limit. A policy with $1 million per-claim and $3 million aggregate limits can pay up to $1 million on any single claim and up to $3 million total across all claims in the policy period.Occurrence PolicyA type of insurance policy that covers incidents occurring during the policy period, regardless of when the claim is subsequently reported. Occurrence policies are common for general liability and property insurance but are rarely used for legal malpractice coverage. Unlike claims-made policies, occurrence policies do not require tail coverage because the reporting date is irrelevant to coverage.
Coverage Terms
Innocent InsuredA policy provision that preserves coverage for insured attorneys who had no knowledge of or involvement in a co-insured's fraudulent, dishonest, or intentional acts. Without this clause, one attorney's misconduct could trigger a policy exclusion that voids coverage for all attorneys insured under the same policy.Consent to SettleA policy provision requiring the insurance company to obtain the insured's approval before settling a malpractice claim. This protects the attorney's professional reputation by preventing the insurer from settling claims the attorney believes are without merit. Many policies include a hammer clause that modifies this protection.Hammer ClauseA policy provision that limits the insurer's financial exposure when the insured refuses to accept a recommended settlement. If the insured declines a settlement the insurer recommends and the claim later resolves for a larger amount, the insured may bear some or all of the excess cost. Hammer clauses range from soft versions sharing the excess to hard versions placing full excess liability on the insured.Duty to DefendThe insurer's obligation to provide and fund a legal defense when a covered claim is made against the insured, even if the claim is ultimately found to be without merit. The duty to defend is typically broader than the duty to indemnify and is triggered by the allegations in the claim rather than the actual facts.Duty to IndemnifyThe insurer's obligation to pay settlements, judgments, and other covered losses on behalf of the insured when a claim falls within the policy's coverage terms. Unlike the duty to defend, the duty to indemnify is determined by the actual facts of the claim and applies only to covered losses up to the policy limits.Additional InsuredA person or entity added to an insurance policy who is not the named insured but receives coverage under the policy for specified purposes. In the law firm context, landlords, co-counsel, and affiliated entities may request additional insured status on a firm's general liability policy. Additional insured status is less common on professional liability policies, where coverage is typically limited to attorneys and the firm entity.Certificate of InsuranceA document issued by an insurance carrier or broker that provides evidence of coverage, including the policy type, limits, effective dates, and named insured. Law firms frequently need to provide certificates of insurance to clients, landlords, courts for pro hac vice applications, and referral networks. A certificate is informational only and does not alter the terms of the underlying policy.
Regulatory
Surplus LinesInsurance coverage provided by carriers that are not licensed (admitted) in the state where the policy is issued but are approved to write coverage through the surplus lines market. Surplus lines carriers offer greater flexibility in pricing and policy terms but are not backed by state guaranty funds. A surplus lines tax, typically 3 to 5 percent, applies to these policies.Admitted CarrierAn insurance company that is licensed by the state insurance department to write business in that state. Admitted carriers must file their rates and policy forms with the state regulator and participate in the state guaranty fund, which provides a financial safety net for policyholders if the carrier becomes insolvent.IOLTAInterest on Lawyers Trust Accounts, a program in which client funds held in trust by attorneys are deposited into pooled interest-bearing accounts, with the interest directed to fund legal aid and other charitable purposes. IOLTA accounts are subject to strict state bar rules regarding segregation, record-keeping, and disbursement, and mishandling of IOLTA funds is a common source of both malpractice claims and disciplinary proceedings.Trust AccountA separate bank account maintained by a law firm to hold client funds, settlement proceeds, and other money belonging to third parties. Trust accounts must be kept strictly separate from the firm's operating funds and are subject to detailed state bar regulations. Commingling personal and client funds or misappropriating trust account money is one of the most common grounds for attorney discipline and malpractice claims.Fiduciary DutyThe highest standard of care imposed by law, requiring an attorney to act in the best interest of their client with undivided loyalty, confidentiality, and good faith. Breach of fiduciary duty is a common basis for legal malpractice claims and can arise from conflicts of interest, self-dealing, commingling of funds, or failure to disclose material information to the client.Conflict of InterestA situation in which an attorney's duties to one client, a former client, or the attorney's own interests are adverse to or potentially adverse to the interests of another client. Failure to identify and properly address conflicts of interest is a leading cause of legal malpractice claims and disciplinary actions. Robust conflict-checking systems are a key risk management tool.
Underwriting
Experience RatingAn underwriting method that adjusts an insured's premium based on their individual claims history relative to the expected claims for their risk class. A firm with fewer or smaller claims than average receives a premium credit, while a firm with worse-than-average claims experience faces a surcharge. The experience rating period typically covers the most recent five to seven years.Loss RatioThe ratio of claims paid (losses) to premiums earned, expressed as a percentage. A loss ratio of 60 percent means the insurer paid $0.60 in claims for every $1.00 of premium collected. Carriers use loss ratios to evaluate the profitability of their book of business and to make underwriting and pricing decisions for individual accounts and market segments.UnderwritingThe process by which an insurance carrier evaluates the risk presented by a prospective insured and determines whether to offer coverage, and if so, at what price and on what terms. For legal malpractice insurance, underwriting factors include practice area mix, firm size, claims history, geographic location, and risk management practices.Risk Management CreditA premium discount offered by malpractice carriers to law firms that implement approved risk management practices. Qualifying activities may include formal intake and conflict-checking procedures, calendaring systems, continuing legal education beyond minimum requirements, and engagement letter protocols. Credits typically range from 5 to 15 percent of the base premium.
Claims
Statute of LimitationsThe legally prescribed time period within which a malpractice claim must be filed after the alleged wrongful act or, in some jurisdictions, after the claimant discovers or should have discovered the harm. Statutes of limitations for legal malpractice vary by state, typically ranging from one to six years, and their application directly affects the length of time an attorney remains exposed to claims from past work.Discovery RuleA legal doctrine applied in many states that delays the start of the statute of limitations for a malpractice claim until the client discovers, or reasonably should have discovered, the alleged harm. The discovery rule can significantly extend the period during which a claim may be filed, sometimes years after the underlying legal work was performed, making long-term prior acts coverage essential.