Will The Cost of Legal Malpractice Insurance Increase Every Year?
As a renewal account executive I work alongside the lawyers we’ve had the pleasure of providing malpractice insurance coverage to for a year or more. Although my time with each client can be brief and the renewal process varies from client to client, there is one question which comes up time and time again, “Will my insurance premium increase every year?”
The short answer is, no, the cost of legal malpractice insurance will not go up every year. That being said, you may experience premium increases for a variety of reasons. Ultimately, the cost of insurance should remain fairly consistent after maintaining coverage for several years as long as no major changes to your law firm have occured.
One common misconception is the idea that insurance companies offer a “teaser rate” or “introductory rate” to get customers in the door. While I can’t speak for all insurance carriers, at Protexure, that is not a practice we engage in.
Premium increases do occur but those increases are due to three main reasons:
- Changes with the Law firm
- Changes with the Industry
- Step Rate
Let’s take a look at each of these so you can best control the cost of your legal malpractice insurance.
1. Cost of Law Firm Changes
There are many variables that go into determining the cost of legal malpractice insurance and each one is derived from the application completed by the insured at the time of renewal.
The application is one of the most important and informative aspects of the renewal process. It allows us to take a detailed look at the law firm.
The renewal application is equally as important as the first insurance application you ever fill out. It allows the insurance agency to note any changes in the law firm over the past year that could impact the price of their insurance policy.
There are specific components of the application that will have a large impact on the price of your insurance policy. If your application does not change year over year, you shouldn’t experience any large increases in premium.
Change in Number of Attorneys
A primary example of a law firm change that could cause a premium increase is a change in the number of attorneys at the firm. On page two of Protexure’s application, we specifically ask about the number of attorneys at the firm. Should your law firm add another attorney, the premium would increase because the firm is adding another attorney to provide coverage for.
Change in Areas of Practice
Another scenario worth mentioning is a change in the firm's areas of practice. If the law firm begins to practice in an area of higher-risk such as Real Estate Commercial, Workers Compensation Plaintiff, they can experience an increase to the cost of their legal malpractice insurance.
Additionally, if the law firm’s areas of practice haven't changed but the firm takes on a greater percentage of cases in a high risk area of practice, the law firm will experience an increase in premium.
Even with these potential increases, the opportunity for a premium to decrease is still possible. If an attorney stopped practicing in higher risk areas of practice, then they can expect their premium to lower. Another scenario is if the percentage of cases in high risk areas of practice are altered. For example, let’s say what once was 50% personal Injury, is now 10%, and the remaining 40% is moved to a lower rated category. The premium will reflect this.
While it might go without saying, claim history has a significant impact on the cost of legal malpractice insurance. An increase in premium will arise from a claim depending on the amount paid out on the claim and sometimes the loss reserves.
A common misconception is that simply reporting a claim will impact your premium, however, that is not the case. Protexure, for example, does NOT increase insurance premiums when a claim is reported.
Oftentimes potential claims do not result in a suit being filed and many reported claims are resolved with no payments needed. In these scenarios, insurance carriers do not punish their insureds with premium increases for being diligent and cautious with reporting claims. A claim supplement is used so any pending cases/potential claims can be tracked and reviewed.
As claim history can generate an increase in premium, the lack of claim history is absolutely acknowledged when a quote is being compiled. Those who are 5 years claim free, have a claim free credit automatically implemented onto the quote.
Although the firm make up has an absolute impact on the premium, the insurance environment can also play its part. These impacts are less consistent and not firm-specific, not all are affected but should the firms be applicable, there could be an increase in premium.
2. Cost of Industry Changes
The factors mentioned above are somewhat within the control of the attorney, but there are pricing factors that, unfortunately, are not and could lead to a premium increase. While these changes are not within the insured's control, it is comforting to know that premium increases, or decreases, due to changes in the insurance industry should not occur every year. And the likelihood of them impacting your firm year over year is rare.
When filling out a renewal application, the first information gathered is location information; address, state, county, zip code. This information allows insurance underwriters to categorize the law firm under review with a specific filing based on the state and county reported.
As applications are submitted and policies are renewed, the insurance carrier tracks any trends among states such as reported claims. If a specific state or county has experienced an increase in claims, the carrier will increase the base rate for insurance premiums in that area.
This allows the carrier to continue writing business and properly protecting their insureds in those specific locations. Unfortunately, a scenario like this could affect the cost of your legal malpractice insurance.
Other insurance environment changes include areas of practice base rate changes. This is an insurance environment change that is currently in effect. Various areas of practice such as Real Estate Residential, Trusts / Estates / Wills / Probate and others have all experienced base rate increases due to an influx of claims derived from these specific categories.
These areas of practice rate changes are statewide, and an application that lists any of the previously referenced categories will be impacted. Like the state base rate increase, this is implemented by the insurance carrier to compensate for the claims reported and allow the carrier to continue writing firms with these higher risk categories.
3. Step Rate
When an attorney asks, will my premium increase every year, the short answer is no. But, as we dive deeper into the intricacies of the insurance industry, it is important to note that the cost of legal malpractice insurance will increase every year if you’ve had insurance for less than 5 years.
This premium increase is caused by step rate, an industry-wide standard which causes an incremental increase to insurance premiums during the early years of coverage.
With this pricing model, legal malpractice insurance premium is the most discounted during the first year of coverage due to the possible delay between when an incident/potential claim occurs and when it is reported. The premium is lowest during the first year of coverage as this is the least likely time period for a claim to be reported.
During the second year of coverage, a claim becomes increasingly more likely; therefore, the premium increases. The premium continues to increase each year at a declining percentage until after the fifth consecutive year of coverage when the law firm is considered “mature.”
Once the law firm is mature, the premium levels off to a consistent rate.
Will Your Legal Malpractice Premium Increase Every Year?
Premium increases can, and will happen. But, they shouldn't happen every year. If you are experiencing premium increases year over year, it may be time to ask your insurance carrier some questions.
If you are unable to trace your premium increase to any of the reasons above, it might be time to field quotes from other carriers.
The renewal process should not be stressful, overwhelming or frustrating by any means. But, a price increase year over year would make anyone feel all of those emotions.
Although filling out a renewal application may feel tedious, especially if nothing in your firm has changed, the application is one of the most vital parts of the renewal process and the most informative. An accurate and timely application gives the insurance carrier the opportunity to provide a premium estimate that best fits your law firm.
Should you come across any questions while filling out your application please do not hesitate to reach out to any one of our renewal department members. We are happy to assist you in any way possible.