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No matter how talented or experienced an attorney is, the risk of making a mistake and being held liable for it is one that is always present in this profession. And while learning about the intricacies of legal professional liability (commonly referred to as malpractice insurance) might not be something legal professionals want to spend a lot of time on, the fact remains that this professional coverage is unavoidably important for any practicing attorney to have.
Attorneys are at risk of being sued for legal malpractice if they’ve handled, or are at least perceived to have handled, a case inappropriately either through their negligence or with intent to cause damages to their client. No matter how careful and diligent you are, legal malpractice claims are a frequent and costly reality of working in the legal profession.
Buying lawyers professional liability insurance is a crucial part of managing the risk of malpractice claims. If sued, the policy would kick in to cover both the defense costs and any settlement monies awarded to the wronged party.
An important part of the legal malpractice insurance cost vs. benefits analysis that goes into the decision to purchase coverage for law firms is, obviously, having a clear understanding of how much it would actually cost you or your law firm.
And as mentioned earlier, there are many things that go into determining your legal malpractice insurance cost that vary from firm to firm. Legal malpractice claims represent a complex risk, and no two lawyers or practices will have the same exposure.
Let’s take a look at the process that insurers use to calculate the cost of legal malpractice insurance, starting with the most important one; your firm’s area of practice.
How Your Area of Practice Influences Your Insurance Premium
While there are many factors that insurers consider when determining how much a law firm is going to pay for its professional liability insurance, the most significant one is certainly the services that your law firm provides.
This is usually referred to as your law firm’s “area of practice.” The area of law in which an attorney or law firm specializes has a major impact on legal professional liability insurance costs. That’s because there are certain areas of practice that are associated with a higher level of risk, which means that the premiums for law firms specializing in these areas are usually higher.
Insurers perform constant evaluations and calculations of their loss experience in order to gauge which areas of practice experience a greater frequency and severity of losses.
In terms of professional liability in general, medical professionals historically pay the highest rates because of the risks associated with the professional and the higher settlement values associated with claims arising from their work.
However, defending medical professionals has much less risk associated with it as an area of legal practice, which is why lawyers who specialize in defending medical professionals will usually pay lower premiums.
Furthermore, if your law firm practices in a large variety of completely unrelated areas, you can expect your rates to be much higher than the rates of a law firm that specializes in one area.
In the eyes of the insurer, a lack of focus and practicing in a variety of unrelated areas means that there is a greater chance that the lawyer or law firm is working in areas that they might not have a lot of experience in, which increases the chances of a claim being filed against them.
What Areas of Practice Are Typically High-Risk?
If you’re starting your law firm or looking to grow your practice and want to see if you could add different specialties to your practice, it would be a good idea to investigate before doing so in order to identify which areas of practice tend to be of a higher risk than others.
Areas of low severity include criminal law, bankruptcy, family law, and most defense work. High severity areas include personal injury, wills, real estate, and trust and estate work.
Conveyancing in particular, which is the name of the area of practice that deals with the transfer of legal title of real estate and property from one person to another, is one of the most high-risk areas when it comes to premiums.
If conveyancing is your area of specialization, it would be a good idea to look for an insurer that can offer you a long-term policy, since this type of work often involves cases that continue for years.
How Insurers Establish Premium Rate Factors Based on Areas of Practice
When underwriters seek to establish premium rates for lawyers professional liability insurance, it’s a data-led process that relies heavily on historical claims data that each insurer has collected over the course of many years and continues to collect. This claims data is analyzed according to two major principles, the frequency and the severity of losses.
- Frequency: This is the number of claims that an insurer anticipates will be reported to them. In order to create a premium, the insurer will calculate a frequency rate based on the number of reported claims per a fixed number of lawyers or law firms that they insure over the course of a year.
- Severity: This is the expected average size of a claim or loss based on practice area. There are two main components that are taken into consideration when calculating the severity of a loss; the defense expenses and the actual damages that need to be paid when a claim is settled. When these two factors are combined, insurers get an average incurred loss value, which is what severity essentially means.
- How Frequency and Severity Work Together: Insurers will combine the calculations they have made for expected frequency and severity of claims by area of practice to create relativity modifiers that are used in creating rules for setting premiums according to practice areas.
The truth is that no matter what your law firm’s area of practice is, your chances of being hit by a malpractice suit are solid. If your area of practice has a high claim frequency, you can still expect to pay less for insurance than a lawyer that practices in a low frequency but high severity area.
Generally, insurers are most wary of high severity areas of practice, which are harder to underwrite and, naturally, come with more expensive premiums. However, regardless of where your practice is on this spectrum, you should have legal malpractice insurance.
If you are working in a more hazardous area of practice, it’s a good idea to specialize in that area. High-severity areas of practice should not be dabbled with, rather, law firms that choose such an area of practice should be fully committed and focused on it.
When discussing your insurance options, one of the things that insurers will look at is the experience, expertise, and knowledge that your team of lawyers possesses related to your area of practice. The more knowledgeable and specialized your firm is, the lower your premium will be, especially when it comes to high-risk and high-severity areas of practice.
Other Factors That Affect Your Legal Malpractice Insurance Premium
There are many different things to take into consideration when determining the cost of your lawyers liability insurance and no two law firms are guaranteed to pay the same amount for their coverage. There are characteristics about your law firm that you might not expect will influence your coverage costs, but in reality, insurers will see them as crucial when calculating your premium.
Let’s take a look at some of the key factors that insurers look at when determining legal malpractice liability premiums.
Your Firm’s Size
While it’s true that your premium will go up as your law firm adds new lawyers, it’s not an exponential increase usually. This means that while your premium might double if you go from one lawyer to two lawyers, it’s not going to triple or quadruple with each lawyer that’s being added to your roster.
Insurers will usually offer discounts as law firms grow in order to keep the law firms with them as they expand their business.
Insurers use a system called “step rating” to determine legal malpractice premiums. It’s based on the length of time a lawyer has spent with the firm.
A particular lawyer’s premium will be lower in their first year with a firm (step one), and will gradually increase over the next few years.
The rate typically reaches its maturity in the sixth year. The system is used to quantify the possible exposures that occur as a lawyer has more and more cases behind them.
Continuity of Coverage
The continuity of your professional liability coverage is another factor that insurers are very interested in when they are calculating premiums. Usually, insurers will keep increasing rates over the first five years. Once a law firm has been with the same insurer for five to six years, the carrier will consider it a mature law firm and stop increasing its premium on a yearly basis.
However, that certainly doesn’t mean that your insurance rate won’t ever increase after the first five years. It simply means that a lack of continuity with your insurance provider will not be one of the reasons for an increase in premium.
Your Firm’s Location
Every state is assigned a minimum premium requirement per attorney by insurers. There are also individual rates that every state will set based on areas of practice. That’s why insurance rates often change year over year depending on how many claims are being filed in the state based on areas of practice.
Legal professional liability California coverage, for instance, may be more expensive compared to other states due the laws in place there. Even more granularly, the county you are located in could also affect your premium. Insurers do this to protect themselves and keep the firms they are working with happy at the same time. For example, if they notice that a majority of claims are coming from a particular county, the insurer can increase rates for that county to make up for losses without increasing premiums on a state level.
Amount of Coverage
The higher your policy limit is, the higher the premium will be. Most smaller firms would purchase a $1 million limit. However, this limit may not be adequate for your firm, as the cost to defend and the cost of any settlements are combined under the limit. The typical maximum limit is $10 million.
Amount of Deductible
The amount of deductible is defined by how much the firm will have to pay for costs related to claims and indemnities before the policy payout kicks in.
A higher deductible means lower premiums. As limits increase, insurers will typically demand higher deductibles. However, insurers will limit deductibles to what they believe the insured party can pay, typically based on the prior year’s revenue figures.
Firms that demonstrate solid risk management systems will have lower premiums. What exactly does this mean?
Some of the things that go into accessing risk management practices for law firms include the firm’s client selection process, whether they use any type of scheduling or conflicts-checking tools or software, whether it is in the practice of sending engagement and disengagement letters, and if the firm has recently sued clients for unpaid fees, for example.
Annual Hours Worked
If your firm has some lawyers who only work part-time, you could pay less for insurance. It’s not something that is incredibly common since most firms employ lawyers that work regular 40-hour work weeks or more, but those that do offer part-time employment can see reduced insurance rates because of it.
In most states, lawyers that work less than 1,000 hours annually are considered to be part-time employees, which would afford the firm a part-time premium. That’s why it’s important to calculate the number of hours your attorneys are working and report part-time employees if you have them when applying for insurance.
As we’ve already discussed, the frequency of claims is important, but the severity is much more important to insurers. If you have many claims reported against you but none of them are paid out, then you can expect your premium to be steady.
However, any large claim that is paid out will have a very direct impact on your insurance rate as a lawyer. If the claims are both frequent and severe in terms of loss, the insurer might even refuse to provide coverage for you in the future.
It’s also important to note that not reporting claims to your insurer simply won’t work. The insurance company is there to work with you and protect you. That’s why informing them of all claims and potential claims is the best thing to do for all parties involved.
How to Save On Legal Malpractice Insurance Cost
The value you receive from an insurance policy like this one tends to be quite obvious. You’re paying either a few hundred or a few thousand dollars a month, but you are buying yourself peace of mind and the ability to go about your business without worrying that every possible claim filed against you could financially cripple your law firm.
However, human psychology dictates that we always be wary of paying for something that we never use, even though never using it is obviously a good thing in the case of insurance.
Lawyers who have purchased legal malpractice insurance and see claims arise against them are fully aware of what they are paying for and why they have purchased coverage. The lucky ones who don’t experience claims but continue to pay for insurance might start to question the investment.
In the end, it’s hard to argue against the benefits of malpractice insurance. You might not have to report claims on a regular basis, but when you do, you’ll be very happy that you have purchased a policy.
So while we can’t recommend foregoing coverage, we can give lawyers and law firms tips related to things that they can do if they want to save on their legal malpractice insurance premiums.
Limits and Deductibles
Purchasing the maximum coverage limit that is available can bring you comfort, but it’s not something that every law firm must do. When purchasing legal malpractice coverage, law firms need to consult expert brokers who are very familiar with their area of practice in order to figure out what the best option is for them.
Many times, especially for law firms that don’t operate in high-risk areas of practice, lowering your coverage limit and not paying for the maximum amount should pose absolutely no problems.
As we’ve already covered, the deductible is the amount of money that your law firm is going to absorb before your professional liability policy kicks in to provide coverage. The higher your deductible is, the less you will pay for the policy.
Limit Prior Acts Coverage
Professional liability insurance is a claims-made policy, which means that it only responds to claims for events that occurred and were reported while the policy was active. For this reason, many professionals choose to purchase endorsements such as tail coverage or prior acts coverage to extend coverage back so that you’re covered for claims that might have originated from events that occurred before your current policy was active.
When you purchase a prior acts policy, you will have a retroactive date, which you can change in order to save on the cost of your insurance. For example, you could have switched insurers 8 years ago, but if you worked for a law firm that dealt with very low-risk cases for the first three years, you can amend your retroactive date to go back only five years.
Obviously, it’s important to consult with your broker before you make such a decision since in the end, having the best possible coverage for your needs should always trump the ability to save a bit of money on it.
Implement Risk Management Best Practices
Many insurers offer risk management training that your law firm can complete in order to receive a discount on insurance. Even if there is no such training being offered by your insurer, it’s important to have a risk management plan in place. This goes not just for avoiding and preventing malpractice claims but other risks such as your law firm’s cybersecurity and being able to successfully securing your professional documents.
Insurers will certainly access your law firm to see what you have been doing in terms of risk management and prevention before determining your premium. Here are some best practices that can go a long way in terms of improving these processes within your law firm.
- Engagement and Fee Agreement Letters: Make sure that your engagement and fee agreement letters are as detailed as possible. By having the terms of your services clearly written and explained in these documents, you are helping yourself, your defense team, and insurer if a claim does occur. These letters help clients understand what to expect from you and what is expected from them as well.
- Declination and Disengagement Letters: Declination and disengagement letters are equally important. Declination letters are used by law firms when they want to make sure that there is a written record of cases that they didn’t take, with a clear explanation as to why. Disengagement letters provide a record of why your law firm has decided to stop representing a particular client. Even if you have successfully worked with a client, your law firm should send a detailed disengagement letter to the client as soon as their case has been completed.
- Implement a Central Docket System: You’d be surprised by how many professional liability claims against lawyers are related to things such as missed deadlines and meetings. That’s why every law firm should install a secure and reliable central docket system to keep track of important meetings, court dates, statutes of limitations, and more. These systems can also be used to manage billing so that your firm always has accurate records of who paid you, when, and how much. Your docketing system could be a shared online calendar or a professional docketing software solution; whatever works best for your law firm.
The Potential Cost of Being Uninsured
Not buying legal malpractice insurance, or “going bare” in the insurance parlance, appears to be an attractive option for many firms that are looking to cut expenses as much as possible. Not every state makes carrying legal malpractice insurance mandatory, and many firms believe that they can avoid claims by being vigilant, aware, and careful in their work.
However, even if an attorney is incredibly careful, legal malpractice claims are part and parcel of the profession. All it takes is one disgruntled client that objects to the firm’s work to spark a claim. And even if the claim is unfounded and you win the case, there are still going to be legal expenses to pay.
The legal profession is a stressful one in which mistakes and oversights are often unavoidable no matter how diligent, experienced, and careful the law firm or attorney.
Legal malpractice insurance is a “peace of mind coverage,” one which you must thoroughly examine in order to make sure that your legal firm is getting the right coverage at the best possible price.
We hope that understanding the factors behind how insurers calculate premiums will help you get protected without overpaying for insurance. If you have any questions or need any help, feel free to reach out to the expert brokers from our law practice.
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