When it comes to the cost of lawyers professional liability insurance, you may already know there are several factors that go into determining your premium. While you may be aware of some of the biggest influences on your premium, your limits and your deductible, you may not be aware of all the other firm characteristics insurance carriers consider when pricing your insurance.
Certain law firm characteristics that you may not even think have an effect on the premium you pay, in fact have a huge effect on the cost of your professional liability insurance.
We have included a short video below to introduce some of the biggest factors that go into determining your professional liability insurance premium.
In this article we take a deeper look at all of the factors professional liability insurance carriers look at when determining the cost of your insurance.
- Annual hours worked
- What state the law firm is located in
- What county the law firm is located in
- The firms areas of practice
- Years of continuous coverage
- Attorney roster
- Claims history
- Practice management characteristics
At Protexure Lawyers we have helped countless lawyers obtain affordable and reliable professional liability insurance. We pride ourselves in providing law firms with the tools they need to better evaluate their insurance policies.
Getting a low insurance rate is nice, but understanding how your premium is calculated will help you get the best coverage for the best price.
1. Annual Hours Worked
If you work a full 40 hours a week, you may have never come across this first pricing factor. For multiple attorney firms with some attorneys working part time, they can experience a pricing discount for the annual hours worked.
Some insurance programs do not offer part time policies, especially for solo attorney firms.
But, if a policy is available for part time attorneys, the premium is determined by the state that the firm is located in.
For most states, attorneys working under 1,000 hours are considered part time, and may be rated at a reduced or part-time premium. Part time attorneys working under 500 hours may be at an even more reduced premium. When filling out insurance applications, take time to consider the number of hours each attorney with the firm works in a year. If you don't, you could be leaving money on the table.
2. The State The Firm is Located in
Insurance carriers assign each state a minimum premium requirements per attorney. Within each state there are also individual rates set for each area of practice. Insurance rates can change annually as more claims are filed and the insurance carrier gets a better snap shot of the risks associated with the location and area of practice.
Unfortunately, even if an attorney has not made an error or had a claim filed against them, they may experience an increase in their rate or premium, based on the number of claims that the carrier experiences in their state.
You know what they say, one bad apple spoils the bunch. In this case, a few bad apples can cause an entire state to experience a higher premium rate.
3. The County The Firm is Located in
Location is a huge factor in determining premium pricing. But, the effects of location extend past states. Insurance companies can get pretty granular with their rating modifications and also look at each individual county in a state.
It might sound a bit extreme to consider not just the state but the county too. The reality is taking a look at the breakdown of risk on a county-by-county basis actually helps many firms get a more accurate premium estimate.
For example, if an insurance carrier see’s that there are a lot of claims coming from a particular state, they might be inclined to raise rates in that state. But, if they dive a little deeper and discover the vast majority of claims are coming from an individual county, they can raise the rates in that one county to account for the increased risk rather than the entire state.
Many counties within each state fall into a category called “Rest of State.” The “Rest of State” category includes all the counties that do not have an increased likelihood of a claim and will be assigned the overall state rate modifier rather than the county modifier. Every state’s “Rest of State” category is rated differently because of the reasons noted in the section above.
4. The Firm’s Areas of Practice
The areas of law in which the attorney and/or firm practice has a major impact on the cost of professional liability insurance. Insurance companies evaluate their loss experience to determine practice areas that impact the frequency and severity of losses. Some areas of practice experience higher premiums due to higher levels of risk associated with these areas of practice.
For example, medical malpractice is a higher rated area of practice due to the risk associated with handling these types of cases and the higher settlement values when these claims are resolved.
On the other hand, in litigation, defense is viewed significantly less risky, as many less claims arise from defense work. This results in a lower premium for law firms who practice in this area.
Along the same lines, practicing in many different or unrelated areas of practice can also cause an increase in price. The less focused the firm, the more it appears that the attorney may be dabbling in areas they may have little to no experience, causing an increase in the likelihood of a claim. Vice versa, it is favorable to have a focused practice in which the attorney is more experienced, and may be less likely to have a claim.
5. Years of Continuous Coverage
The number of years that a firm has carried continuous professional liability insurance coverage greatly affects their premium rate. If a firm has carrier insurance for less than five years, they will experience incremental premium increases every year until after the fifth renewal or sixth year of continuous coverage. After five consecutive years of coverage, the firm will be considered mature and will no longer receive a yearly increase in premium.
This process of slowly increasing the professional liability premium is a process known as step rate. Step rate is one of the most common and standard practices in professional liability claims made policies, but also one of the least understood. This industry wide practice begins when a firm purchases their first professional liability insurance policy or starts a new policy after a lapse in prior coverage.
Claims made policies are priced based on the amount of exposure the carrier is assuming. If you have never been insured, according to an insurance carrier, you carry no past exposure. With step rate the first year of coverage is the most discounted, as only one year of coverage is being provided during which a claim can be filed.
Once you have practiced and carried a policy for more than a year you begin to build up and carry more exposure. At the first renewal the premium will increase due to an additional year of coverage being provided, or two years of coverage during which a claim can be filed. The premium continues to increase each year because the likelihood of having a claim increases with each additional year of coverage provided.
Once again, after that fifth year of professional liability coverage, you will see your cost of insurance begin to level out barring any changes in the law firms profile.
6. Attorney Roster
When it comes to professional liability insurance, roster size has the biggest influence on premium. All else equal, a solo attorney is less expensive to insure than a two-attorney firm. The principle is simple, the larger the firm size, the more work there is to insure, resulting in a higher premium.
Although premium costs increase as a firm grows, some carriers offer discounts once a firm reaches three or more attorneys. For example, if a firm grows from a one attorney firm to a two-attorney firm, they can anticipate their premium to double. But, if a third attorney is added to the roster, the increase may not be as significant.
Although a premium increase for more attorneys is pretty straight forward, there is one aspect to adding an attorney that can get a bit confusing. When adding a new attorney, there is a good chance this attorney will be entering into step rate. Even though the firm may not be going through the step rate process, the individual attorney will be, resulting in gradual increases in the firms premium until the attorney is considered “mature” by the insurance carrier.
7. Claims History
Claims are also a large factor which affect the rating of an attorneys premium. The hope is that you and your firm never have to consider this pricing factor. But, if a claim ever does occur, it's important to know its effects on your premium pricing going forward.
Insurance carriers recognize that all claims are not created equal. If a claim is reported but nothing is paid out, you can expect little to no change to your increase premium.
But, if a large claim is made against your firm and the carrier incurred a large payout, it could cause a significant increase to your insurance premium. In some cases, the insurance carrier may even choose to not renew the firm in the following year.
Most carriers will draw a hard line with claims in excess of a certain amount and not offer terms. If a claim pays out a certain amount or if there has been so many in the past few years most admitted carriers will stay away.
Having a high frequency of claims, even if very little or nothing is paid out, is viewed as very problematic. Claims indicate that either the firm doesn’t have the best practice management protocols in place or they are not doing their due diligence. If the attorney has experienced claims in the past, the risk of them experiencing a claim again is greater.
It is important to keep in mind that reporting claims and potential claims to your insurance carrier does not mean an automatic increase in your premium or a non renewal. Your insurance carrier is there to help you in your time of need, not penalize you for taking advantage of the services offered to you under your policy.
8. Firm characteristics
Many of the factors we mentioned are, unfortunately, outside of your control. But, there is one factor that is 100% in your hands, good practice management.
A commonly unknown factor that goes into determining your insurance premium is how you manage your firm. Carriers look for a handful of specific firm characteristics and management practices when determining pricing.
For example, the use of a diary or docket system to avoid missing deadlines is crucial. A large number of claims come in for no reason other than missing the statutes of limitation to file. Having a diary/docket or calendar system is one of the best ways to prevent claims of this type.
Along the same lines, engagement and disengagement letters are essential to providing quality service to clients and avoiding claims. An attorney must fully disclose the scope of work that the firm will provide the client. This will prevent the client from claiming they are unsatisfied with the services provided or claiming to be owed something that wasn’t agreed upon.
Carriers will also take note of the number of support staff at the firm. Many carriers have a standard ratio of lawyers to support staff. Too much support staff may indicate that non-attorneys are performing work that the attorneys should be doing, or at bare minimum be reviewing. Having sufficient support staff however will allow carriers to be more understanding of a slightly higher volume of work.
Case size is the last piece to note; the higher the value of the case the more exposure the attorney and carrier assume. Some carriers may be unwilling to provide terms for a firm that only handles real estate valued at one million or greater, as this carries a greater exposure.
All of these firm characteristics will play a role in determining the cost of your professional liability premium. Implementing all of these best practices will have a positive effect on your premium and grant you a lower rate. Insurance carriers often reward good risk management with a reduction in premium. It is a win win situation for the insured, you save some money and the likelihood of your firm facing a suit is significantly diminished.
Determining Your Cost For Lawyers Professional Liability Insurance
Any small business owner wants to save a dollar or two where they can; but with many of the factors listed above being firm characteristics that can't be easily changed, how do attorneys find the best rate?
The most effective way for small law firms and solo attorneys to save money on professional liability coverage is by choosing an insurance carrier that specializes in serving the needs of smaller firms. All too often, small firms and solo practitioners are insured by large insurance companies that also insure large firms. This means the small firms are absorbing some of the large firm’s loss experience by paying premium rates based on claims that include claims by large firms.
Each professional liability insurance carrier rates differently, but the underlying principles are all the same. There are many factors that go into determining the cost of professional liability insurance, therefore, it is important to keep in mind that the cost of insurance can vary widely from one attorney to another. While there is industry data that can assist you with determining where you might fall on the insurance premium spectrum, the only true way to know what professional liability insurance will cost your law firm, is by receiving a quote.