Attorney malpractice insurance is an absolute necessity. But not all law firms are getting the best value for their money. The attorney malpractice application is the single most important document insurers use to calculate a law practice’s insurance premium. Applications ask questions that focus on the firm: size, practice areas, geographical practice, and claims experience. The answer to these questions impacts the premium. As with their being no common attorney malpractice policy, insurers use different algorithms to determine the premium. This can make it difficult for a law firm to find the best value for their dollar.
Law firms need to answer the insurance application accurately. Failing to do so puts coverage at risk. An accurate application ensures that the insurance is properly priced. Avoiding mistakes and ambiguities in the application may reduce the premium. Finding the insurer that best matches the law firm’s practice is essential to getting the best bang for the buck.
Insurers price a law firm’s premiums based on the number of full-time attorneys the law firm employs. Insurers may distinguish between “of counsels,” contract attorneys and retired (or reduced schedule) attorneys. Insurers may solely base the price on the number of partners or associates the firm employs.
If the application only asks for the number of attorneys, it may be worth asking whether more detailed information would be helpful. Insurers may or may not rate based on the length of time that an attorney has been with the firm. Given that one insurer may charge for attorneys differently than another insurer, knowing how the insurer rates may save you money.
Specific practice area insurance rates are set based on claim frequency (how often are claims made) and claim severity (how large are the claims). Certain practice areas such as residential real estate, plaintiffs’ personal injury and family law have higher claim frequency. Intellectual property, securities and environmental law have higher claim severity. Because severity is harder to predict an insurer may refuse to write policies for firms that have certain practice areas.
Law firms should consider whether it is worth engaging in a noncore practice area that falls within a high-risk category. Taking on a single plaintiff’s personal injury case can change everything. By reporting to the insurer that even a small percentage of the firm’s practice relates to plaintiff-side personal injury cases can impact rates and likely increase premiums. Years ago I asked a firm partner how a criminal defense firm ended up with a $1 million family law claim. One of the partners decided to help a friend with a divorce. It did not go well. Practicing in practice areas in which the firm is not an expert is an issue. Insurers do not like firms that dabble. Dabbling will increase your premiums. Normally law firms should stick to their knitting.
Liability limits play a significant role in the premium. Be careful, too low a limit may save you money, but one claim with inadequate limits could cost your personal assets. Claims expenses inside or outside the limits are also a consideration. But carrying a large deductible may not save the firm as much money as you think. Unlike insuring property where the loss may be a partial loss, an E&O claim can easily run over $100,000 especially if it goes to trial. Insurers know these things.
Law firms that are claims free may qualify for premium credits or reduced deductible costs. And if a claim does occur a long history with the insurer may prevent a non-renewal or large premium increase.
Law Firm risk management application questions help qualify a firm for premium credits or with certain insurers a lack of risk management may disqualify the firm for insurance. Docket controls, conflict resolution procedures and formalized billing practices may reduce premiums or determine acceptance with a specific insurer. Firms that engage in client fee suits and/or have large past due accounts receivable will pay more. An insurer offering lower rates for a quality risk may not even offer terms for a firm lacking good risk management controls.
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Lee Norcross, MBA, CPCU, CPIA
Managing Director, CEO
(616) 940-1101 Ext. 7080