The Many Facets of Legal Malpractice Insurance Premiums
Law firm size, area of practice, and geographic locations are all issues that directly affect the cost of legal malpractice insurance. Larger firms, because of their greater assets and stability, often obtain lower rates than do smaller firms. This is especially so for smaller law firms in small communities, whereas law firms that are well known nationwide may pay a lower rate than the small, local firm.
In general, claims practices will affect rates . The more a firm tends to be sued, the higher the rate will be, and a firm’s history of losses can have a significant impact on the firm’s premiums.
Some insurers use detailed rating systems in determining proper premiums; this includes formulas for accounting for the number of lawyers in a firm, the types of services provided, and the geographic location of the firm.
There are many factors that go into determining the cost of a legal malpractice policy, and different insurers will use different determining factors or weightings for those factors.
The Average Legal Malpractice Insurance Costs
The average cost of legal malpractice insurance varies by law firm size and the state where the firm is located. Generally, the legal malpractice insurance policy is eligible for a 30% discount if the firm has been claim free for the past 3 years. In a report by the Swiss Reinsurance Company, December 2005, it was reported that the average cost per attorney for malpractice insurance was $4,190 in 2003. About 20% of respondent in the survey indicated that they expected the premium to go up again in the coming year. The chart below reflects the premium range per number of attorneys and corresponding firm size:
Number of Attorneys: Premium
1 $2,000-$5,000
2 $2,250-$6,250
3 $2,500-$7,500
4 $3,000-$8,750
5 $3,500-$10,000
6 $3,750-$11,250
7 $4,500-$12,000
8 $4,750-$13,500
9 $5,000-$15,000
10 $5,500-$17,500
11-15 $6,500 – $18,750
16-25 $7,500-$21,250
26-50 $20,000-$50,000
How to Determine Your Premium: A Guide for Lawyers
To arrive at an estimate for your current premium, your broker will review your claims history, the legal areas you practice in, the limits of your insurance and any reports you’ve submitted indicating a potential claim. Other factors that may help generate a quote include the full-time equivalent of attorneys you employ, along with your state bar number, and how long you have been practicing law.
It’s important to have a full understanding of your policy limits and your deductible amount. Some states require a minimum policy limit, but most require a deductible of at least $3,000. In general, as your deductible decreases the amount of your premium will increase—and many states do not require at least $25,000 for your deductible. You need to fully understand the potential amount you could pay over the duration of your policy to make the most informed decision. If you’re a solo practitioner and you have a part-time employee or contract attorney working for your firm, both will generally be covered by your policy if there is a claim against you and your firm. Other staff may be covered by your policy but may have different premium costs, such as for paralegals. Plus, some policies even cover legal consulting done by your associates.
It’s always recommended that you be honest with your insurance agent about your current staffing, claims history, and other relevant facts about your firm, so they can be asked questions that may affect your premium.
How to Save on Malpractice Insurance
It is common knowledge that shopping around for malpractice insurance can help lower costs. But just as important are risk management practices, which have the dual benefit of reducing malpractice exposure and minimizing insurance costs. Notice that we are not advocating for avoiding competent legal services. It goes without saying that avoidance and reduction of claims is the best way to minimize malpractice insurance cost. Obviously, if a law firm has a high number of malpractice claims, the law firm will pay substantially higher malpractice insurance rates, if it can obtain malpractice insurance at all. Given that more than half of all the claims reported to the American Bar Association are for missed deadlines, both statutory and ethical, it is probably a good idea to instill in law firm staff the importance of calendaring deadlines, and strictly complying with all calendar checks and reminders. Similarly, establishing and maintaining sound conflict-checking procedures will help to reduce insurance costs . Most importantly, employing the latest in technology to assist in tracking the status of all active matters and deadlines will drastically reduce the number of malpractice claims. If an attorney does not have a close to perfect claims history, he or she will pay considerably higher malpractice insurance premiums, and may, or may not, be able to obtain malpractice insurance at all. Just as a law firm practices legal malpractice avoidance by demonstrating what is too often a fondness for dismissing potentially liable parties, it should be noted that insurers do extend graceful treatment by considering the number of prior claims when determining premium amounts. Therefore, if a law firm can show that the number of its errors is declining over the years, the law firm will have a better chance of qualifying for a lower premium. Lastly, one must be mindful that it is becoming more common for attorneys to be personally liable for malpractice acts, and some insurers look favorably upon those attorneys who choose to purchase personal liability insurance.
Shopping Around: How to Get the Best Value
With many different factors at play, it can be difficult for attorneys to decide on the best malpractice insurance policy for their firm and make the best decision for their financial future. When shopping for a provider and a policy, it is important to compare coverage limits, exclusions, costs, and customer service. These basic factors will help an attorney find the right coverage for his or her firm. Especially in the first year of business, it may be difficult for new attorneys to find affordable coverage since they will not have a long history in the industry. When a firm has been in business for longer than two years, they will generally be able to apply for a policy with higher limits that a newly opened firm, as long as their claims history is strong. As a firm becomes more established, it will also be able to apply for a policy for a standard limit. Newer firms will likely have to apply for a lower limit policy, such as $300,000 or $500,000. The costs of malpractice insurance will vary depending on the limit of coverage, the firm’s claims history, who the firm’s clients are, and how many attorneys are in business. The location of the firm will also play a role in the cost of malpractice insurance. Generally speaking, larger plaintiffs’ firms pay more for malpractice coverage compared to transactional firms or solo practitioners. Not all providers will cover all practices of law. When attorneys shop around for malpractice insurance, they should find a provider that is familiar with the type of law that they practice. Firms can speak to other firms in their area for advice and recommendations, and it is recommended to get multiple quotes before deciding on a carrier.
Learn about Policy Exclusions and Coverage
As we will explain in a moment, there are a pretty colossal amount of exclusions in a legal malpractice insurance policy, and it is vital that you understand them all, and insist that your policy be reformed to bring within the plain English meaning whatever damage done to whom is the result of your error, or your civil liability.
Malpractice insurance policies are packed with exclusions. For example, is the failed closing, the drawn up will, the lost cause solely based on your error, covered? or not?
Is the loss of civil rights through the enforcement of a statute, or arrest, or fine, or injury to person, property etc. that is refuted by your error in the trial, covered?
Malpractice policies are loaded with exclusions and a determination of coverage by an insurer is an interpretation that promises to hand them to the defendant attorney-defendant on a proverbial silver platter. In fact, it is often read as an exclusion to what is otherwise covered .
Determination of coverage vs. determination of liability. We refer to how difficult this is.
You must be vigilant and know when cross policy coverage applies, and when professional liability insurance, if available, is the only coverage.
You must make sure that the policies are not inconsistent, and that they are agreeing with each other, and that your level of exclusion under both is not compounded, and that you are not subject to greater excess under both than either by itself would pose.
You must also know what isn’t covered. Are personal acts of malfeasance, or action taken outside the scope of employment, what is covered? Are they excluded from coverage? Are punitive damages coverage? (the standard policy excludes punitive damages).
In short, it is wise to commit the provisions of the policy to memory. It is wise to read the language carefully and thoroughly before you render your final decision.