Picture this, your small law firm is growing and you've decided to hire a new attorney. You’ve thought about all the changes the firm is about to face and have planned for just about all of them. You’ve set up a new office, added an extension to the phone line, and organized all the new hire paperwork. One aspect you may not have thought about, or at least not initially, is how this change in personnel will affect your professional liability insurance.
Roster changes affect more than just the dynamic of the office; they also affect the professional liability premium you pay. Whether someone new has joined your team, or an attorney has retired, your professional liability insurance will need to be adjusted to accommodate your firm's changing needs. For many, these considerations aren't brought to light until policy renewal, but knowing what to expect and preparing your carrier for the change can make the process a smooth one.
Hiring a First Year Attorney
Many firms think a new attorney should be more expensive due to their lack of experience and their increased chance of making a mistake. While this sentiment has merit, the opposite is actually true.
A first year attorney is less likely to have a claim brought against them during the initial policy term. Legal malpractice claims are normally brought against an attorney 2-5 years after the error occurred. Carriers understand this and, in return, discount the premium charge for new attorneys.
Each additional year the attorney has been with the firm the discount becomes less and less as the attorney builds a history of perming professional services on behalf of the named insured. This discount has less to do with the experience of the attorney and more to do with the fact the carrier is covering a shorter time frame of services.
Hiring an Experienced Attorney
When hiring an experienced attorney, the first item to consider is whether or not you want to cover the attorney’s prior work. Firms often think they made a quality hire, therefore, they should cover the attorney’s prior work. During the hiring process they researched the attorney’s past work and determined the attorney has done well and will be an asset to the firm, therefore covering the past work shouldn’t be an issue. Fact is, no attorney plans to make mistakes and excellent attorneys can still have a claim brought against them.
Firms put a lot of time, research and work in developing a clean and reputable business. A meritless claim could be made against a newly hired attorney and tarnish the reputation you’ve built. Additionally, the claimant could refuse to settle and continue to push the claim causing the firm’s defense costs to build up and destroy the claim history of the firm. Now, services the firm never performed will have a grave impact on the firm and a continued affect for years to come.
When hiring a new attorney, firms should be aware of the policy definitions. A policy could automatically include coverage for a newly hired attorney’s past services. Some policies provide career coverage, covering the preceding work of a new hire all the way back to their prior acts date. While other policies may include predecessor firm language, making the current policy liable for the previously solo attorney’s work and clients transferring into the new firm. Firms should always check with their agent and become familiar with predecessor firm coverage and career coverage definitions.
Removing an Attorney from the Roster
From time to time attorneys move on to other job opportunities. Oftentimes, when removing an attorney from the roster firms expect a refund in premium. This is not always the case, as policies provide coverage for past and present services. Premiums are paid on an annual basis and continue to respond to potential claims even after an attorney has departed the firm. This being said, much of a premium is based on the past twelve months, therefore, you can expect a reduced premium at renewal. Unfortunately, the exact amount of reduction is not always easy to predict. After the attorney has left the firm, the carrier continues to insure the previous work of the departed attorney. The premium reduction is not an exact attorney to premium ratio due to the amount of risk still being covered.
Dissolving a Firm
While firms aim to grow, sometimes the day comes that the firm decides to dissolve. When a firm dissolves, coverage for prior services can be difficult and expensive. A malpractice policy will not be renewed by the firm going forward and an extended reporting period, or tail, will need to be obtained. An extended reporting period protects firms from potential claims which could arise from past services, even when the policy is no longer in effect. Extended reporting periods can cost upwards of three times the firm’s annual premium and must be paid for in full. Many law firms do not have $30,000+ in cash to pay for an extended reporting period. Therefore, it is a good idea to put money aside each year incase of a rainy day or in the event the firm dissolves. Plus, if the extended reporting period is not needed, the members of the firm have a little extra retirement income.
No matter what changes are happening at your firm, notifying your professional liability insurance carrier is an important step to make. Your carrier will be able to explain what impact a change to your roster will have on your policy and your premium.
Posted by Ryan Schwartz
Since Joining Protexure Insurance Agency, Inc. in 2010, shortly after the company’s formation, Ryan has held many roles. From underwriting to new business sales, he has extensive experience with Protexure clients. Ryan currently serves as Customer Service Manager where he oversees the renewal team and actively works to improve the renewal process for current insureds. He holds a BS in accounting and an MBA, with an emphasis in Financial Management, from Benedictine University.