Lawyers take insurance policies out in order to mitigate the financial downfall in the event of a large loss. A common frustration is having to pay an increased premium when you have never used the insurance. A premium increase can be caused by claims not even made against your policy and as a result, the common question of “Why do I pay for other’s claims?” ensues.
In order to answer this question, it is best to first look at how insurance premiums are determined. Yes, your specific profile goes into the premium calculation but historical losses are also used in order to determine the likelihood of future claims in your area of practice.
Insurance programs pool groups of insureds together. Your pool consists of all insureds in the particular program under that type of policy. It is then determined how likely that group is to have a claim. Your location, practice areas and the firm size are main factors in determining premiums. Comparing some of these things with auto insurance may help explain malpractice insurance more clearly. Below we will go into some of the main factors for determining professional liability insurance premiums.
Let’s imagine you're planning to move from the rural countryside to a big city. When making a move like this, your auto policy premium is likely to change. This is because each location has more or fewer drivers and more or fewer accidents. Moving to the city increases the likelihood of you submitting a claim. The auto insurance company has determined that the increase in vehicles increases the chances of an accident. The cost of repairs is often more expensive in larger cities as well. Even if you are an excellent driver who has never been in an accident, there are factors now in play that are outside of your control. Historical data has told the insurance carrier that you’re location warrants a higher premium.
Malpractice insurance operates in the same fashion. Premium rates are partially determined by the location, state and/or county the firm is located in. If you are located in an area that has experienced more claims with higher payouts, you will be paying a higher premium. Each county’s jurisdiction affects insurance rates as well. Some counties have a reputation for awarding higher settlement or punitive damage amounts. Unfortunately, even if you are the best lawyer in town and have never had a claim, the insurance carrier needs to cover the possibility that you or others in your pool might. Each insured in the pool is paying for all claims in the category as well.
Areas of Practice
Believe it or not, with auto insurance, the type of automobile being driven impacts the price you pay. Insurance carriers evaluate how often the type of car you drive has been in an accident as well as how much the replacement parts will cost. Sports cars are seen as riskier than your dependable sedan, resulting in increased premiums.
For malpractice insurance, think of your areas of practice as your type of automobile. Some practice areas are more likely to experience claims and to have large claim payouts. For example, real estate claims often pay out more than criminal defense claims.
As a result, everyone who practices within that area will see an increase in their premiums.
Another comparable item from auto insurance to malpractice insurance would be annual miles driven. Auto insurance policies will be less expensive when less miles are driven since there is less opportunity to be in an accident.
Firm size is very comparable to mileage. When a firm has more attorneys, more services are likely provided to more clients. With more clients there is a higher likelihood of either making a mistake or coming across an unreasonable client, leading to a claim or potential lawsuit.
What You Can Do
Unfortunately, you can't control how insurance companies view and rate these factors. When establishing premium and insurance rates, it is just the nature of the business to account for the likelihood certain groups will have a claim. If you happen to fall into one or more of the groups that are viewed as risky, the cost of your malpractice insurance will be higher.
The good news is, there are still ways you can control how much you pay for malpractice insurance.
Your practice management and claim history can help you obtain additional discounts on the policy. Just like safety features and no past accidents help reduce auto premiums. Using engagement letters (amongst other best practices) and having a clean claim history will help reduce malpractice premiums.
Another way you can reduce your premium is by controlling (to a degree) the firms you are pooled together with and who’s claims history you are affected by. If your insurance company insures law firms of all sizes, unfortunately, you may be pooled with policyholders who have a higher risk and greater claims volatility than your firm does. You could be paying a higher premium to cover the claims cost of policyholders in large law firms.
Choosing a malpractice insurance carrier that specializes in firms of your size can reduce the price you pay for coverage.