In the insurance industry, a law firm that does not carry malpractice insurance is called a bare firm. Typically, bare firms are either newly formed firms seeking coverage, an established firm that has never carried the coverage, or a firm that has let their coverage lapse.
All attorneys should carry professional liability insurance because at some time in an attorney’s career they may encounter a dissatisfied client. Right or wrong, the client could sue the firm for malpractice and even if the allegations are frivolous in nature, it poses a large risk for the attorney’s livelihood. A professional liability policy protects an attorney from bearing the full cost of a potential claim made against them while providing legal services.
For a bare firm, it can be difficult to navigate the complex landscape of professional liability for the first time. If you’re looking to purchase a lawyer’s professional liability policy for the first time, you may have some of these questions:
Why Do I Need Malpractice Insurance?
First and foremost, it is important to understand that malpractice insurance is a crucial part of any long-term business plan. If a claim is made against a law firm that does not carry malpractice insurance, it is the individual attorneys that will have to allocate time and money to resolve the claim. Obtaining and maintaining malpractice coverage prevents attorneys and law firms from losing assets, paying high legal fees, and potential business failure in the event of a lawsuit.
Additionally, not only is the firm protected against claims for professional negligence, but the staff and associates are also protected. Malpractice coverage allows the firm peace of mind and affords the attorneys time to focus on other aspects of their practice.
How Do I Choose My Limits of Liability?
Once a bare firm decides they need professional liability insurance, the next step is choosing the appropriate limits of liability to protect their firm and assets. Typically, choosing limits of liability can be a difficult step because of the amount of options there are to choose from.
So, how does a firm choose the right limits of liability? Several factors affect how much liability coverage you should have.
First, limits of liability should be chosen based on your firm's level of exposure to risk. Your law firm’s potential exposure can be determined by looking at your practice and examining the higher risk areas of practice you engage in. Some areas of practice that are affiliated with larger claims such as Real Estate, Trusts & Estates, Corporate Business Transactions, and Plaintiff Litigation may require larger limits of liability.
Another factor to consider when choosing limits of liability is the monetary value of the firms’ cases. If a claim arises, the claim value is directly proportionate to the client represented. So, when determining limits, it is helpful to consider the potential damages if a claim arose from your biggest case.
Your personal assets and those of your partners may also aid in determining your coverage limits. Typically, younger attorneys have accumulated fewer assets and may need less coverage. However, over time this will change and coverage should be expanded accordingly.
If you neglect to choose the pertinent limits of liability to protect your firm, you are putting your firm's assets at risk. In the long run, it is more financially efficient to purchase higher limits, and pay more in premium, than the potential cost of under insuring your firm. Saving a few dollars in premium is not worth the risk of losing your hard-earned assets.
How is My Premium Determined?
It almost goes without saying, the price for coverage is dependent on “how much” coverage is selected. The higher the limits of liability chosen, the higher the premium will be. But, premium pricing goes beyond just “how much” coverage is selected and is also determined by the profile of the attorney or firm.
For all firms, premium for malpractice insurance is also impacted by the areas of practice, number of attorneys, and current risk management protocols. Each of these factors have a varying degree of impact on premium, but nonetheless, are important to determining the appropriate premium for the risk profile of the firm.
Will My Premium Increase Over Time?
The short answer, yes.
A crucial component of professional liability pricing for bare firms to be aware of is step-rating. For many attorneys buying insurance for the first time, step-rating can be an unpleasant surprise. But, knowing about this industry wide pricing model from the beginning can helpful when evaluating insurance carriers.
Premiums for a claims made policy are commonly set by step-rate, a pricing model where premium increases each year as the carrier is insuring more of the firms work.
For a bare firm, premium is the least expensive in the initial year of the policy because the carrier doesn’t provide prior acts coverage for the years that the firm was not insured. The largest increase in premium occurs after the first policy renewal due to the likelihood of a claim increasing as more of the firm's work is insured.
With the step-rate pricing model, premiums increase by a decreasing percentage each year until the law firm reaches “maturity”. A firm is typically considered mature after five years of consecutive coverage. Once the firm is mature, premium levels off to a consistent rate.
How do I obtain Professional Liability Insurance?
Bare firms tasked with obtaining professional liability insurance may find the process daunting. The best place to start is to talk to a representative from a carrier that specializes in your type of firm. Additionally, check your local bar association for recommendations based on your firm's profile.
For solo attorneys and small law firms, a Protexure agent can help you determine your coverage needs, help you through the application process, bind coverage, and answer any additional questions you may have about professional liability insurance.