According to a November 2005 article published in the Insurance Journal entitled, “How to Write the Diverse Business of Lawyers Professional Liability,” between $1.5 and $2 billion is spent annually on Professional Liability coverage. With numbers such as these, it is important that any firm in the market for this insurance understand the factors affecting coverage rates.
Determining premium rates is a complex matter based on a combination of factors. However, there are two main factors insurers review when underwriting an insurance application. The first is your geographic location, because each state has a different risk assumption. The level of risk is measured by the number of suits brought against other lawyers in your area. The second important factor is your practice area(s). You can expect to pay more for coverage if you specialize in high-risk areas such as securities, banking and/or real estate.
Other factors that insurers consider include:
- Liability limits and deductibles selected
- Breadth of coverage desired (prior acts, extended reporting, etc.)
- Number of attorneys covered
- Personal claims history of your firm’s attorneys
- Length of time covered attorneys have been associated with your firm
- Number of malpractice prevention controls utilized by your firm
The length of time covered attorneys have been associated with your firm is important, because insurers typically use step rates to calculate premiums for a new attorney. Risk exposure increases during the initial years that an attorney practices as the number of potential plaintiffs increases with every new case. After a certain point, this risk flattens out. So premium rates on a new attorney will automatically increase in set steps until the risk exposure matures.
It is also important to realize the significance reinsurance holds in determining premiums. Insurance is a way of transferring risk. You transfer risks to an insurance carrier, and the carrier will often transfer some of that risk to another company. By reinsuring, a carrier increases its capacity to underwrite more policies. When reinsurance rates rise, the increased cost can be transferred to you in the form of higher rates.