DEAR INSURANCE CARRIER:
I am a sole practitioner who started a law firm a couple of years ago. I have been claims free, yet my legal malpractice insurance rates go up every year. This makes it hard to budget for my small business.
The first year it went up 25%. The second year it almost doubled. I’m still struggling to build my client roster and the startup costs for a small business have been more than I thought. Is it going to go up another 50%, 100% in year 3, year 4, year 5?
It also takes time to fill out the applications and shop the coverage. I’d rather find a carrier I like that doesn’t hike up my premium every year so I can focus on actually practicing law. Please help.
– FRUSTRATED LAWYER
DEAR FRUSTRATED LAWYER:
You are suffering from what all lawyers who start a practice go through. There is help for it — if you work with a carrier, like ALPS, that can explain what can affect premiums, so you can get ahead of the game and budget for coverage.
The first thing is all legal malpractice insurance carriers write claims made and reported policies. This means that if you have a legal malpractice claim, the carrier that responds is the one you have at the time you report the claim, as long as the claim occurred after the retroactive date on the policy.
The key to this is the retroactive date. When you start a legal malpractice insurance policy, you are a given a start date / effective date / retroactive date. That date will be your retroactive date for the life of the policy with your carrier. What this also means from the carrier’s perspective is that the more cases that are covered, the more years on a policy, the higher the premium. Some carriers call it step rating, some the maturity rating process. Most carriers have a 5-10 year maturity rating process, so your rates are going up the first 5-10 years you have a policy. A good rule of thumb is whatever your first year premium is (e.g. $1,000 / year), it will double by the end of the maturity rating process (e.g. $2,000 / year). Each carrier does this differently and the rates can fluctuate – it is not a simple 20% annual increase. Year 1, it might be a 5% increase. Year 2, it might be a 25% increase. Year 3, it might be a 15%, etc.
Claims can also affect the premium. If you report a claim to your legal malpractice insurance carrier and they hire an attorney to defend you, there is a cost associated with that. Claims for new lawyers typically happen around the third year in private practice.
A change in Areas of Practice (AOPs) can affect your premium. Each legal malpractice insurance carrier has an actuary or rating plan. Certain AOPs are rated higher than others. Claims history with the carrier or knowledge in the marketplace that certain AOPs are associated with higher dollar amounts meaning higher risk. A real estate attorney can be dealing with millions of dollars and one mistake can lead to a million dollar claim. If you tell your insurance carrier that you are doing 100% criminal defense law (lower risk) and then, in Year 2 it is 25% criminal law and 75% real estate law, the premiums will go up.
The last thing that can affect an attorney’s legal malpractice insurance rates is if the insurance company has an overall rate increase on their book of business. Most legal malpractice insurance carriers are in multiple states and have multiple lines of insurance. If one carrier specializes in home/auto and then gets into legal malpractice insurance, it is not their specialty. Often they offer a low rate with no expertise and when claims happen, they raise rates or leave the legal malpractice insurance market. I would suggest looking for an insurance company that specializes in legal malpractice insurance, like ALPS, and is in multiple states so they can spread the risk over their entire book of business.
Now that you have a better understanding of why and how rates increase, and what to look for in your legal malpractice insurance carrier, you can budget, plan and most importantly protect your practice.
There is hope. Contact me with any questions you may have!
ALPS Business Development Representative