How Much Can You Expect to Pay for Legal Malpractice Insurance?
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 lawyers 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 legal malpractice 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 cost vs. benefits analysis that goes into the decision to purchase malpractice 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 the cost of legal malpractice insurance 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.
Main Factors Affecting The Cost of Legal Malpractice Insurance
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. Let’s take a look at some of the key factors that carriers look at when determining legal malpractice liability premiums.
Law Firm Size: The more lawyers a firm has, the more it can expect to pay for malpractice insurance.
Step Rating: 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.
Prior Claims: Past and pending claims will impact both the premiums and the eligibility of your firm. Any legal malpractice claims filed over the last five years will mean that you’re not eligible for an admitted policy, which is typically cheaper.
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.
Areas of Practice: Lawyers specializing in high-risk areas of practice (securities, intellectual property, medical malpractice, international law, etc.) can understandably expect to have higher premiums. Low-risk areas of practice such as criminal defense or immigration law will entail cheaper legal malpractice insurance. Insurers will look into which areas of practice your firm specializes in and the diversity of your caseload.
Territory: Law firms located in large urban centers such as New York or Los Angeles will pay a larger premium compared to those located in less-populated and rural areas.
Recent Malpractice Claims: You can expect to pay more for malpractice insurance if any of the lawyers in the firm have recently been sued for legal malpractice. How much this could increase your premium will depend on how many claims were filed and how much they ended up costing both the insurer and the law firm.
Risk Management Practices: 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, disengagement, and non-engagement letters, and if the firm has recently sued clients for unpaid fees, for example.
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 believe firms believe that they can avoid claims by being vigilante, 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.