Every Lawyer should carry professional liability insurance, whether it is required by the state you are licensed in or you just want to protect yourself and your business. Everyone wants to know why they are paying what they are paying, and if they are getting a good deal.
These questions are hard to answer because there are so many factors that are unique from firm to firm that cause professional liability premium to differ. Below are six of the biggest factors that drive lawyers malpractice insurance.
When it comes to professional liability insurance; roster size has the biggest influence on premium. All else equal, a solo attorney is less expensive to insure than a two-attorney firm. The principle is simple, the larger the firm size, the more work there is to insure, resulting in a higher premium.
Although premium costs increase as a firm grows, some carriers offer discounts once a firm reaches 3 or more attorneys. For example, if a firm grows from a one attorney firm to a two-attorney firm, they can anticipate their premium to double. But, if a third attorney is added to the roster, the increase may not be as significant.
Additionally, many carriers also determine rates from the number of annual hours an attorney works at the firm. Some may offer part time rates while others may not. Some may even have the ability to not even charge for an attorney if they are working a marginal amount. It is always important to put an accurate number of annual or weekly hours worked so your firm is getting properly priced and covered.
Location is another large determinant in insurance premium. Professional Liability insurance rates are typically determined by the loss ratio in each state. States such as Florida, California, and New Jersey tend to have higher premiums because more claims have been filed and more money has been paid out on claims in these states.
More specifically, some carriers will even break states down by county to get a more accurate rating based on location. Typically, if a county has been broken out and assigned a specific rate, it is because the county has experienced higher than average claims. You can expect to pay more for professional liability insurance if you're practicing within a county that encounters a high frequency of claims.
Areas of Practice (AOPs)
The specific area of law your firm practices is another significant driver of premium pricing. Similar to states, carriers will price areas of practice based upon the number of claims that arise from each specific area of practice. For example, in litigation, defense is viewed significantly less risky than plaintiff, as many less claims arise from defense work.
Having a disparate practice can also cause an increase price. The less focused the firm, the more it appears that the attorney may be dabbling in areas they may have little to no experience, causing an increase in the likelihood of a claim. Vice versa, it is favorable to have a focused practice in which the attorney is more experienced, and may be less likely to have a claim.
Firm Characteristics and Management
Carriers look for a handful of specific firm characteristics and management practices when determining pricing. How a firm is managed is also considered when determining premium. For example, the use of a diary or docket system to avoid missing deadlines is crucial. A large number of claims come in for no reason other than missing the statutes of limitation to file. Having a diary/docket or calendar system is one of the best ways to prevent claims of this type.
Along along the same lines, engagement and disengagement letters are essential to providing quality service to clients and avoiding claims. An attorney must fully disclose the scope of work that the firm will provide the client. This will prevent the client from claiming they are unsatisfied with the services provided or claiming to be owed something that wasn’t agreed upon.
Carriers will also take note of the number of support staff at the firm. Many carriers have a standard ratio of lawyer to support staff. Too much support staff may indicate that non-attorneys are performing work that the attorneys should be doing, or at bare minimum be reviewing. Having sufficient support staff however will allow carriers to be more understanding of a slightly higher volume of work.
Case size is the last piece to note; the higher the value of the case the more exposure the attorney and carrier assume. Some carriers may be unwilling to provide terms for a firm that only handles real estate valued at one million or greater, as this carries a greater exposure.
Years of Continuous Coverage
Step rate is one of the most common and standard practices in professional liability claims made policies, but also one of the least understood.
Claims made policies are priced based on the amount of exposure the carrier is assuming. If you have never been insured, according to an insurance carrier, you carry no past exposure. Many carriers do not provide coverage for work done prior to a policy being put into place. Therefore, the first year a lawyer carriers professional liability insurance the premium will be discounted because very little work is being covered.
However, once you have practiced and carried a policy for more than a year you begin to build up and carry more exposure. During the second year of coverage you will see an increase because the carrier is now covering for your past year of work as well as the new year going forward.
This process repeats and price continues to increase year after year until the firm is mature and has carried a professional liability policy for around five years or more.
Every attorney should already be aware of how claims affect professional liability premium. If the attorney has experienced claims in the past, the risk of them experiencing a claim again is greater.
Having a high frequency of claims, even if very little or nothing is paid out, is viewed as very problematic. Claims indicate that either the firm doesn’t have the best practice management protocols in place or they are not doing their due diligence.
Claim size can also significantly impact premium. Most carriers will draw a hard line with claims in excess of a certain amount and not offer terms. If a claim pays out a certain amount or if there has been so many in the past few years most admitted carriers will stay away.
How to Get the Best Deal
Any small business owner want to save a dollar or two where they can; but with many of the factors listed above being firm characteristics that can't be easily changed, how do attorneys find the best rate?
The most effective way for small law firms and solo attorneys to save money on professional liability coverage is by choosing an insurance carrier that specializes in serving the needs of smaller firms. All too often, small firms and solo practitioners are insured by large insurance companies that also insure large firms. This means that the small firms are absorbing some of the large firm’s loss experience by paying premium rates based on claims that include claims by large firms.
There are many factors that go into determining the cost of professional liability insurance, therefore, it is important to keep in mind that the cost of insurance can vary widely from one attorney to another. While there is industry data that can assist you with determining where you might fall on the premium spectrum, the only true way to know what legal malpractice insurance will cost you, is by receiving a legal malpractice insurance quote.