New law firms and independent law practices need liability insurance. It's a standard cost of doing business and one you were prepared for. After all, professional liability cases can occur and must be dealt with even when you and your team have done nothing wrong.
However, many attorneys who are new to running their own law firm have discovered that liability insurance premiums make some serious leaps in the first years of practice. Well beyond the initial price quoted and the insurance overhead you have budgeted for, even if you haven't filed a single claim.
Why exactly do your premiums go up when you haven't filed a claim? That is exactly the question we're answering today. Like any insurance concern, there are multiple factors that might contribute to your higher premiums and knowing what they are can help you to manage the cost of your professional liability insurance. Right now, you may feel totally blind-sided. But it'll all make sense soon.
You Are in the Maturity Rating Phase
The biggest reason you will see your liability insurance premiums increase is that you are within the first five years of your practice or policy coverage.
This is called the Step-Rating phase or the Maturity phase of your law practice and insurance. It's related to the retrospective nature of professional liability coverage. This covers your professional cases that have accumulated since you opened your policy.
You see, each year your policy is renewed, your insurance coverage actually increases. It may not feel this way, but consider this for a moment: You are in your second year of practice and coverage. What happens if you are sued about a case that happened last year? Your insurance company is covering cases from last year and the ones you have open this year. Next year, they'll cover three years, and so on.
You can expect to see your premiums increase with a corresponding increase to your prior acts coverage. In most cases, you will see your liability insurance premium double from the original premium over the course of five years before it stabilizes. These increases are typically relatively predictable. The premium will increase at a decreasing percentage over time.
Your Areas of Practice Have Expanded
Another interesting possibility that usually results in raised insurance rates is a change in your Areas of Practice (AoPs). Most insurance companies that offer professional liability insurance have actuarial tables telling them how much risk is associated with each AoP. For example, real estate law and plaintiff work are considered higher risk AoPs driven by larger and more frequent claims. While criminal defense has a much lower risk to an insurance company as you are both less likely to be sued and, if sued, average claims tend to be lower in value.
Therefore, if your AoPs have changed and expanded during the last year or so, then your liability insurance company has likely reassessed just how much risk your practice poses for a potential claim. The more Areas of Practice you cover, and the riskier those areas are, the higher your premiums will be. Likewise, if you shift your percentage of cases further toward a higher-risk AoP your premiums will be affected.
On the other hand, the less areas of practice you cover, and the less risky those areas are, the lower your premiums will be.
You Have Hired More Lawyers
If your insurance covers your entire law office, then the number of attorneys on staff will also make a difference with your insurance premiums. Most professional liability carriers use attorney count as a basis for developing your premium. As your firm grows and new attorneys are added, your premium will gradually increase. The discussion earlier about step rating will have an impact on the premium increase from adding attorneys. The full or mature premium for an attorney added today will continue to develop over 5 years. Even if you or the firm are no longer maturing, step rate will still be applied to the new attorney and be reflected on your premiums.
This makes sense in terms of insurance policy risk, considering that two attorneys working in tandem double the chances that the practices as a whole may be subject to liability claims based on cases taken by both attorneys. The more attorneys on staff who are under the umbrella of professional liability insurance coverage will, naturally, raise your premiums.
You are Dealing with a New Insurance Firm
Then there's the factor that is outside of your control. New entrants to the insurance industry sometimes miss the mark on carefully assessing the risk of a particular type of insurance. A newer insurance firm that has never covered legal professional liability before might offer a fairly low-cost deal to many lawyers to drum up business.
But if they do not specialize in professional liability suits, the first claim filed might shake the whole structure as they run into issues. If the insurance company decides that professional liability is a bigger risk than they thought, then premiums for lawyers will go up across-the-board. Even if your practice was not the one to file a claim, causing the company to reassess their valuation of legal liability insurance. For this reason, it is important to work with experienced carriers who can offer you realistic and consistent coverage.
If a professional liability insurance rate seems too good to be true, it might be. Getting a low price is good, but should be faced with caution. When the rate seems surprisingly low, ask how long the company has offered professional liability insurance, what their AM Best rating is, and how your premium was calculated.
Is Your Premium Increase Fair or Is It Time to Move On?
If you're starting to feel the pressure of professional liability insurance premiums on the rise, stop and do a few calculations. Is your firm less than five years old? Have you drastically expanded your cases or changed your areas of practice lately? Have you been hiring new staff? If there is no clear explanation, or if the increases seem disproportionate to your internal practice changes, then it might be time to look for a new professional liability insurance company with greater transparency and more affordable liability plans.
Protexure Insurance is experienced in helping both new and established law practices get the most cost-effective professional liability policies on the market. Contact us today to start your search for a new insurer, or just to start comparing prices to see if your current insurer is playing fair.