Purchasing a malpractice insurance policy can be a daunting task. While navigating through the world of malpractice insurance you might be running into a few roadblocks and wondering where to turn next.
Through my years of working at Protexure Insurance Agency, I have held many roles and have worked with thousands of lawyers looking to purchase malpractice insurance. Over the years I have noticed some of the same problems come up time and time again for lawyers purchasing their first policy.
- Difficulty selecting a carrier
- Trouble understanding exactly what this type of policy covers
- Choosing the right limits for their firm
- Understanding how their premium is determined
In this post I will help you navigate through the most common problems and questions someone new to malpractice insurance might have.
How Do I Select a Reputable Carrier?
This is one of the most important things to consider when purchasing an insurance policy. Although, you never want to use the policy, you want to have peace of mind knowing your potential claims will be handled thoroughly and the carrier will be around when and if you have a claim.
With so many insurance carriers out there, how does someone know which are the best and most reputable? This can be difficult to determine, but there is a company to help you.
A.M. Best is a credit rating agency that rates the financial strength of insurance agencies. They provide credit ratings, commentary, research and analysis with insurance news, financial data and thought leadership to help consumers and professionals make more informed insurance decisions.
A.M. Best assigns a rating to insurance carriers from D to A++, with D being the lowest rating and A++ being the highest. The higher the rating, the more likely a carrier is to meet their ongoing insurance obligations.
The company will also provide an identifier for how they feel the company will trend in the future. These include negative, stable and positive.
When selecting a malpractice insurance carrier, your best bet is to choose one with at least an A rating and stable outlook. Generally speaking, A+ and A++ rated carriers tend to charge higher premiums.
Carriers with an A rating generally offer you peace of mind while also providing competitive pricing. When a carrier drops to a B or lower rating, the likelihood of going out of business dramatically increases. You want to be confident your provider will be there when you need it.
What Does a Malpractice Insurance Policy Cover?
A malpractice insurance policy protects lawyers and law firms from bearing the full cost of potential claims made against them while performing legal services. While that is the basic definition, there is a lot involved in what exactly your policy will cover and what it will not cover.
The best way to ensure you are appropriately protected is to take a close look at your policy. There are a few terms you want to pay close attention to.
First you will want to review what your potential policy defines as a professional service. The definition or professional services will provide a broad description of what the policy covers. Make sure your day to day activities are covered.
You will also want to give an extra look to how your policy defines the named insured, insured and predecessor firms. Named insured is typically the firm being covered. Policies are typically issued in the firm’s name. Insured typically includes the personnel of the firm.
You will want to be sure the policy covers all past, present and future personnel. Predecessor firms provide coverage for past entities. If this is your first time purchasing, a predecessor is not necessary as the policy’s prior acts date will exclude it anyway. If you have coverage and are looking to switch providers this can be very key if you have coverage for a previous entity.
These definitions will provide you with a general idea of what and who is covered.
Next, review all of the policy exclusions, as these will provide you with scenarios in which a claim could be denied. A key exclusion will be the prior acts or retroactive date. This is typically the date the firm first purchased the coverage.
An important item to also note is that malpractice insurance policies are written on a claims made basis. This differs from a typical auto or home policy which is written on an occurrence basis.
With an occurrence policy, you only need to carry coverage when the loss occurs. While a claims made policy requires coverage to be maintained from the time the error occurred through the time the claim is made.
The last part of the policy you should examine are the extensions of coverage. These are important as they offer additional ways for the policy to respond other than an official claim being made. These payments could include, subpoena assistance, disciplinary coverage, regulatory coverage, crisis events, cyber liability, regulatory inquiries as well as others.
It is key to understand what is covered by the policy. You never want to be in a position where a claim comes in and is denied for various reasons. The policy language will also provide you with the claim reporting requirements.
What Limits Should I Purchase?
Determining your limit of liability is one of the biggest problems with purchasing malpractice insurance. There is no “one size fits all” when it comes to insurance limits. Therefore, choosing limits tends to be a pain point for many lawyers because there is no exact science as to which limits you should choose.
Many carriers will walk you through all the factors you must consider, but ultimately it comes down to a combination of your risk profile and your budget.
If I had to give you one piece of advice when it comes to choosing limits, it would be; the higher the limit, the better.
Essentially, the higher the limit, the more insurance you have.
That being said, higher limits do come with a higher price tag. You will want to make sure you are comfortable with both your limit of liability and your insurance payments.
Depending on your practice, you may never come close to approaching very high limits, therefore selecting limits appropriate for your risk profile is the best approach.
For small firms, carriers generally offer limits in the range of $100,000 for each claim to $10,000,000 for each claim.
Carriers and states can potentially have restrictions or requirements based on firm attorney rosters. Generally, the more attorneys you have the higher limits you should purchase.
If you have multiple attorneys working at your firm then you are most likely providing more services to more people, more often than a sole practitioner. According to insurance companies, the more business you are conducting, the higher the risk is to have a claim made against you. Thus, requiring higher limits to protect against your increased risk exposure.
Along the same lines. you will also want to try and determine the value of the cases you are taking in. In a malpractice suit, the plaintiff will need to show the value of the loss they sustained.
If you are taking on high value cases, you should purchase higher limits to protect you against the possibility of clients claiming they sustained a large loss. A typical 1 – 5 attorney firm will carry anywhere from $500k to $2M in limits.
The opposite is also true, if you are not taking on high value cases, you can be more comfortable with lower limits.
The moral of the story is, you never want to have a claim made against your firm and be forced to pay out of pocket after years of paying insurance premiums. Therefore, choosing the appropriate limits to keep you and your firm safe from potential claims is essential.
How Is Pricing Determined?
The one question that is on everyone's mind by this point is, “How much is this going to cost me?”
One of the biggest challenges with malpractice insurance is the feeling that the price infront of you is just an arbitrary number the insurance carrier decided to assign to your policy.
I can assure you, that is not the case. Each insurance carrier has a complex rating system in place with a number of factors that go into determining a firm’s annual malpractice premium.
The first factor in determining premium is location.
Insurance companies evaluate their loss experience to determine how location impacts the frequency and severity of losses. Some states have a higher cost to defend and some states have more claims than others. Some states even tend to have larger plaintiff awards.
If you are located in an area with either a high frequency or high severity of loss, you could see that reflected in your insurance premiums.
The next factor will be the firm’s attorney roster. Generally, the larger your firm is, the higher your annual premium will be. As we discussed earlier, a larger firm will have more clients and therefore are more likely to have a claim made against them, thus increasing premiums.
The length of time the firm has maintained continuous coverage also plays a role in determining premiums. Carriers discount premiums when an insured is just starting to carry coverage. The likelihood of a claim being made for services performed during that same year is very low, thus the discount.
As the firm continues to renew the policy, the more likely it is to have a claim for services performed in previous years resulting in the carrier removing these standard discounts. Premiums will not increase forever either since statute of limitations plays a role in the risk as well.
After considering all the factors mentioned above, the insurance carrier will then take a look at your claim history, areas of practice, and practice management to determine your premium. Past claims or high risk areas of practice can lead to an increase in your insurance premiums.
On the other hand, implementing the proper practice management protocols to mitigate potential risk could actually save you money on your malpractice insurance.
On average, an insurance policy with $500,000 in coverage will run a firm approximately $2,500 for each attorney.
Navigating Malpractice Insurance Problems
We’ve examined the basics in malpractice insurance, but there are many other factors to be determined.
Each firm has different things they would like to see in their malpractice insurance provider, but many of the topics we discussed today should always be considered when starting a new policy or switching to a new company. It is imperative to know the ins and outs of your policy in order to avoid any gaps in coverage.
If you would like to know more or have specific questions please call us to learn more.