If you are trying to figure out why the cost of your professional liability insurance is so high it may be due to optional coverages that are sometimes not easily understood due to insurance jargon.
Below, you can learn more about common options and potential costs. This will help you make an informed decision on what you may or may not need and how it adds to your premium cost.
The Basics
Before exploring potential options and coverages, first, you need to understand the basics of how professional liability is cost determined.
Liability insurance has a basic rate structure that takes the following into account:
- Your state (some states require your county as well)
- The number of attorneys
- Your Areas of practice
- Your number of years in practice
- Your limit and deductible
While many of the factors in the basic rate structure are outside of your control, the limit and deductible option is where you begin dictating the potential costs of your insurance.
When choosing your limit, just like with any other type of insurance, the higher your limit the higher the premium. The same goes for your deductible but in the opposite direction, the lower your deductible the higher your premium. Most people understand this since it is common across most types of insurance. However, in professional liability, there are a few specific options that are not commonly understood. Here we will talk about Split Limits, Defense Outside the Limit, Aggregate Deductible and First Dollar Deductible
Limit Options
Your limits tell you how much your insurer will payout on your behalf. Your limit is either a “split” or “single limit”.
For example, you can have a single limit often represented as $250,000/$250,000 which means for your annual policy period the most the company will payout is $250,000.
You can also have a split limit for example of $250,000/$500,000. This means the most the insurance company will pay out for any single claim is $250,000, and the most the insurance company will pay out if you have more than one claim is $500,000.
If you choose a split limit, it will add to the cost of your basic premium. It’s important to consider how likely you are to have multiple claims in any one year.
Defense Inside/Outside the Limit
On most policies, you can choose “defense inside” or “defense outside”. Defense inside is the standard coverage and included in your basic premium. This means insurers have a duty to defend you in the event of a claim. Also, most insurers have a panel of lawyers that specialize in professional liability claims they can utilize should you need their counsel.
Payments to attorneys, court fees, investigation, and expert witnesses make up defense costs. Compensation to the injured party including fees is considered indemnity costs. Defense costs are paid out against the limit on a standard policy (Defense inside).
Most insurance carriers give you the option to choose Defense Outside the Limit. This means that you have a separate limit for additional defense costs.
“Defense Outside” is a limit option that provides your full limit for defense costs and your full limit for any indemnity costs. For example, if you have a $500,000 limit and choose defense outside, the company will pay up to $500,000 for defense costs and $500,000 for indemnity costs. This option generally adds 10% to the premium cost.
The Defense Inside option means that all defense and indemnity payments will erode your limit. When you are trying to figure out if you need this you should compare this cost to the cost of carrying a higher limit. When considering the cost of a higher limit, account for coverage that would cover both defense and indemnity adequately. Often the cost of a higher limit that covers you for both indemnity and defense is comparable to a Defense Outside limit option.
No matter which option you choose, Insurance companies have a duty to defend you. You can choose to have the defense costs erode your limit or you can have a separate limit for your defense costs.
Deductible Options
Your deductible is what you are responsible for monetarily when expenses or indemnity are paid as part of a claim. There are also additional options that you can add to your deductible as well.
Aggregate Deductible
The standard deductible option included in a professional liability policy is a per claim deductible. With a per claim deductible, you pay your deductible each time you have a claim in that policy period.
An aggregate deductible is an option where no matter how many claims you may have in a policy period you would only pay your deductible once. Oftentimes, policyholders have significantly less than one claim in a year. This option can add 10% to your policy's premium cost.
First Dollar Defense (Indemnity only)
When you have a claim you pay your deductible regardless if it is an indemnity payment or defense payment. This is how a standard policy is structured. A “First Dollar Defense” or “Indemnity Only” deductible means that you do not pay any deductible for defense costs. For example, if you have a claim and it is determined that there is no liability on your part then no indemnity costs are paid. However, your insurer paid defense costs to defend you against this claim. With First Dollar defense you would not pay a deductible. This option will generally add an additional 10% to your premium.
Next Steps
While these additional options can give you some peace of mind, they are not replacements for carrying adequate limits with a reasonable deductible. Your basic professional liability is going to cover you for professional errors if/when they happen. When your policy comes up for renewal, review your limit and determine if it will cover you in the event of a loss without any additional bells and whistles.
Don’t make the mistake of thinking “It will never happen to me”. Even if you do not make an error it will not keep you from getting sued by an unreasonable client. Once you feel comfortable with your limit and deductible review the price and determine if you need any of the additional options discussed above.
