As an attorney, you understand the importance of details. A misworded contract, an overlooked precedent, a missed filing deadline – these mistakes can have serious consequences. That's why you carry malpractice insurance.
But even the most diligent lawyers can find themselves caught off guard by one of the least transparent aspects of their coverage: step-rating.
Picture this: you've just received your malpractice insurance renewal, expecting the usual adjustments. But instead of a modest increase, you're staring at a premium 20%, 30%, even 35% higher than last year. You haven't changed firms, taken on riskier cases, or been hit with a claim. What's driving this sudden spike?
The answer lies in step-rating, an industry-wide pricing structure that can leave even the savviest lawyers feeling blindsided. But unlike some obscure legal doctrine, step-rating is worth understanding. After all, knowledge is power – and in this case, it's power over your firm's bottom line.
At its core, step-rating is a way for insurers to match the cost of coverage to the increasing risk of a claim as time passes.
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.
Think of it like a warranty. When you first buy a policy, it's like a brand-new product – the likelihood of a "defect" (i.e., a claim) is low. But as the "warranty period" expands, so does the potential for something to go wrong.
With a step-rate, the premium for the first year of a claims-made policy is relatively low due to the minimal risk of filing a claim. It is uncommon for an attorney to take on a case, make an error, and have the client file a claim all within the span of the one-year policy period.
Conversely, after the initial year, the probability of filing a claim rises. You've handled more cases, represented more clients, and the potential for an oversight or misstep grows. Now, the insurer is not just covering your future work, but also your expanding backlog of past cases.
This is why your premium tends to jump most dramatically in the early years of coverage. Insurers know that legal mistakes often take time to surface, and each passing year exposes them to more potential liability.
The good news is, this escalation typically levels off after five years 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.
One of the most important things to understand about step-rating is that it's not a one-size-fits-all proposition. Just as every law firm is unique, every insurer approaches step-rating differently.
Some carriers are more aggressive, doubling your premium over just a few short years. Others may take a more gradual approach, phasing in increases over six or even seven years. But make no mistake – across the board, step-rating is a powerful force that can easily double your premium in the first five to six years of coverage.
Of course, step-rating is just one piece of the premium puzzle. Your firm's size and makeup, practice areas, policy limits, and claims history all play a role. And let's not forget the bigger economic picture – inflation and interest rates can also nudge your premium upward.
Insurers typically calculate premiums at both the attorney and firm level, then blend them together for your final bill. For solo practitioners buying their first policy, those early step-rating increases can be a real shock to the system. But take heart – once you've made it past that five-year mark, you'll be enjoying more stable rates while newer firms are still feeling the pinch.
Larger firms face a different dynamic. If you're in growth mode, continually adding new attorneys, you'll be triggering fresh step-rating curves each time. But if your team is seasoned, with most attorneys at that "mature" level, you can minimize the step-rating impact.
The key is understanding how step-rating works, both in general and specifically with the insurers you're considering. With that knowledge, you can make informed decisions and navigate the market with confidence.
So, how can you turn this knowledge into power?
As a solo practitioner or newly-minted firm, the early years of step-rating can be a real challenge. Premiums tend to jump most dramatically in this period, as your risk profile expands with each new case and client.
The answer lies in proactive budgeting and planning. When projecting your firm's finances, factor in those anticipated step-rating increases. It may mean tightening your belt in the short term, but knowing what's coming allows you to prepare.
Larger firms face a different calculus. On one hand, hiring is crucial to growth and expanding your service offerings. On the other hand, each new attorney brings a fresh step-rating curve, driving up your overall premium.
The key is careful workforce planning. Consider the experience level of new hires – bringing on seasoned attorneys will trigger less of a step-rating impact than hiring straight-out-of-law-school associates. And as you grow, it may be worth shopping around for insurers who handle step-rating more favorably for larger firms.
But here's the good news for large and small firms alike – if you do switch insurance carriers, your prior acts coverage will follow you. You won't be double penalized for past work, allowing you to make moves in the market without that fear of a coverage gap.
Step-rating may seem like an obscure aspect of malpractice insurance, but it's a real force in your firm's finances. By shedding light on this practice, you can make more informed decisions and avoid those unwelcome premium surprises.
So, don't just accept step-rating as a reality of insurance coverage. Understand it, plan for it, and let that knowledge guide your choices. Your bottom line – and your peace of mind – will thank you.