Insurance is a form of gambling: You put your bet down (call it a premium), then the wheel of life starts spinning, and you see what happens while the wheel spins for the term of your policy. If the ball drops into a “safe” slot — you never make a claim — you might feel like you wasted your money, but that’s only because you had no claim against you for insurance to cover. Or, if the ball drops in another “bad news” slot, you’ve got a claim against you, but it’s covered by insurance.
Most people only know those two options, but it’s the others that are often a bigger problem: What if the ball drops and you’ve got a claim against you, but it’s supposedly not insured — says the insurer — because the ball dropped too early or late, or the insurer refuses to pay based on some excuse, even if your claim would normally be insured. (A coverage dispute is like arguing with the “house” at a casino — casinos like to disqualify sophisticated gamblers, for example, because they expect the odds to skewed in their favor.) By denying a claim after the fact, the insurance company wants to use the benefit of perfect hindsight — eliminating the risk it was supposed to be running in exchange for taking your premium payment.
That’s where the big money in insurance coverage litigation arises — because the cost of litigating the coverage claim is far less than the cost of paying the claim or pursuing a frivolous claim.
Legal malpractice insurance is about the only protection clients with big claims against law firms have to get paid. Even big firms carry little insurance and it doesn’t cover everything — like excessive legal bills in most situations. Healthy law firms might have some assets, but that’s usually accounts receivable, which can dry up if the firm fails. Chasing lawyers to pay a judgment of an old firm is tricky, as you can imagine. One crooked or incompetent lawyer (or employee) can bring an entire law firm down, leaving their clients out of luck except for insurance (and sometimes special bar funds set up for certain types of lawyer fraud). Continue reading