One of the least understood aspects of a lawyer’s malpractice insurance policy is step-rating. Step-rate is an industry-wide pricing structure where the cost of insurance increases incrementally during the early years of coverage.
Many attorneys are surprised when, a year after buying their first malpractice insurance policy, their renewal premium rises anywhere from 20% to 35%, even though there was no material change in their practice, and they didn’t incur a claim.
Insurers implemented step-rating in recognition of the fact that there is generally a lag of several years between the time an attorney commits an error and the time the insured makes a claim. Step-rating allows insurers to match the premium charged to the risk of a claim being made.
What is Step Rate?
This industry wide pricing structure begins when a law firm purchases their first legal malpractice insurance policy or starts a new policy after a lapse in prior coverage.
Legal malpractice insurance is priced based on the amount of exposure the insurance carrier is taking on. If you have never been insured, according to an insurance carrier, you carry no past exposure.
In other words, with step rate the first year of coverage is the most discounted because only one year of coverage is being provided during which a claim can be filed.
Once you have carried an insurance policy for more than a year you begin to build up and carry more exposure.
At the first renewal the premium will increase due to an additional year of coverage being provided, or two years of coverage during which a claim can be filed.
The premium continues to increase each year because the likelihood of having a claim increases with each additional year of coverage provided.
Factors Affecting Step-Rating
Some of the factors affecting step-rating include the number of attorneys in the firm, the date of hire, areas of practice, the insurer’s rates, any limits of liability and the deductible.
With step-rate, your premium is relatively low the first year of a claims-made policy, because there’s little risk you will file a claim. The likelihood that an attorney will handle a case, commit an error, and have the client file a claim all during the one-year policy period is rare.
On the other hand, after the first year, there is an increase in the likelihood that a claim could be filed. Additionally, the insurance carrier is now covering all of the insured's work done prior to the current policy period, back to the firm’s prior acts date. For the next four years, the premium will continue to increase to match the increasing risk that the firm could incur a claim.
Step-rate increases typically stop after the 5th year of coverage, because an attorney’s exposure to malpractice claims arising out of prior acts stops increasing. Also, cases from three and four years ago are at less risk for the insurance carrier because of the statute of limitations.
Do all Insurers Price Step-rate the Same Way?
Lawyers professional liability policies are claims-made policies.
While most claims-made policies are step-rated, each insurer uses different step-rating factors. These factors may differ from those mentioned above. For example, the premium may more than double over five years for some insurers. In addition, some insurers spread the increases out over six or seven years.
However, most insurers’ step-rate increases will cause a firm’s premium to at least double over the first 5 to 6 years that it buys coverage, independent of other factors that affect the premium.
Other factors that can affect premium increases include: additions or subtractions to the attorney roster, the policy limits and deductible, the firm’s areas of practice, revenues, claims history, etc., and also inflation and interest rates.
Keep in mind most insurers calculate a premium for each of the firm’s attorneys and a premium for the firm, then blend them to get the final premium. While step-rating applies to all attorneys, solo practitioners buying their first malpractice policy will especially notice the increases, particularly in the first three years (Step 2 to 4), when the increases are typically larger and the premium is smaller. But, after five years, they won’t continue to feel the effects because the firm is considered to be mature.
Contrarily, a multi-lawyer firm could experience the effects of step-rate for years if they are continually adding new attorneys.
A multi-attorney firm will experience a step-rate increase in its premium for each attorney who’s in year 2 to 5 with the firm. Therefore, if the firm adds a new attorney every year, the firm will incur a step-rate increase every year. However, if most of the firm’s attorneys are mature in their prior acts, the firm will not incur a step-rate increase amid the other factors that affect the premium.
If the Firm Switches Professional Liability Insurance Carriers Does Step-Rate Start all Over Again?
No. One of the reasons that most insurance agents ask to see the firm’s declarations page and any prior acts endorsements is to make sure the agent is quoting and writing the firm a new policy that matches current prior acts coverage.
The reason this is important is the new carrier will be picking up the exposure for prior acts and looks to the prior acts date for any claims reported, even if the current carrier was not on the risk at the time the error was alleged to have occurred. The firm’s old carrier, once coverage expires, normally is not liable for claims being reported after the policy coverage has expired.
What Step-Rate Means For Your Law Firm
We get it, premium increases can be very frustrating for the insured, especially if the reason behind it isn't properly explained. When it comes to step-rate, keep in mind, this industry-wide practice helps the insurance carrier better protect its insureds from any potential financial harm that could fall on them.
While the initial rise in premiums can be shocking, knowing what to expect when purchasing a policy will help you better plan for your business.
If you are new to professional liability insurance and fielding quotes, think about what your premium might be in 5 years. Preparing for future expenses will help you choose the appropriate carrier and policy now. Planning ahead for step-rate will also help reduce any sticker shock you make experience during your policy renewal.
