How are defense costs allocated in multi-party malpractice claims?

Multi-party malpractice claims, where a client sues multiple attorneys or firms involved in the same matter, create complex defense cost allocation issues that can significantly reduce the funds available for settlement or judgment.

The first allocation question is whether defense costs erode policy limits. Most professional liability policies are written on a defense-within-limits basis, meaning defense costs reduce the total amount available for indemnity payments. If your $1 million policy pays $300,000 in defense costs, only $700,000 remains for settlement or judgment. In a multi-party claim with protracted litigation, defense costs can consume 30% to 50% of policy limits before any resolution.

When multiple attorneys at the same firm are named as defendants, they typically share the firm's policy limits. The firm's carrier assigns defense counsel and manages the defense for all named attorneys. However, if a conflict exists between the firm's interests and an individual attorney's interests, the carrier may need to appoint separate counsel for the conflicted parties, doubling or tripling defense costs.

When attorneys from different firms are co-defendants, each firm's carrier is responsible for its own insured's defense costs. The carriers will typically coordinate their defense strategies but allocate costs independently. Settlement contributions are usually negotiated based on each party's relative fault exposure, policy limits, and the strength of each party's defenses.

In some cases, the plaintiff's allegations do not clearly delineate which attorney's error caused which portion of the damages. This creates a joint-and-several liability risk where one carrier may be forced to pay more than its proportionate share if the other defendants are underinsured or uninsured.

To manage defense cost exposure, consider policies that provide defense costs outside of limits, sometimes called defense cost in addition to limits. These policies are more expensive, typically 15% to 25% more than defense-within-limits policies, but they preserve the full policy limits for indemnity payments. For firms in high-risk practice areas where multi-party claims are more common, the additional cost is a worthwhile investment.