United States: Tips For Cutting The Costs Of Professional Liability Insurance

As published by The Daily Report

A premium-sensitive law practice may look at these statistics and consider whether it is worth it to continue engaging in a noncore practice area that falls within a high risk category.

Legal malpractice insurance is, for most law firms and practices, an absolutely necessary expense. However, not all law firms review whether they are getting the best price from their insurer.

The single most important document insurers use to calculate a law practice's legal malpractice insurance premium is the application. Applications generally ask a variety of questions, most of which focus on four important topics about the firm: size, practice areas, geographical reach and claims experience. Although such questions may seem routine or even innocuous, they often have great impact on how premiums are calculated.

Most law firms will take care to answer the application for insurance accurately, not only because the failure to do so could put their coverage at risk, but also because it can help ensure that the insurance is properly priced. Indeed, by avoiding mistakes and ambiguities in the application, the firm may be able to reduce the premium.

Who is an 'Attorney'?

For many calculations, insurers will price a law firm's premiums based on the number of full-time attorneys the law firm employs. Some insurers distinguish among "of counsel," contract attorneys and retired (or reduced schedule) attorneys. Other insurers will price differently depending on how many partners or associates the firm employs.

Not all law firms will ask questions about the insurance application. If the application only asks for the number of attorneys, it may be worth asking whether more detailed information would be helpful. Indeed, the risks associated with a retired or part-time partner and an of counsel or a nonpracticing contract attorney are typically different from the risks associated with a full-time, practicing attorney. Insurers may recognize these distinctions and factor them into their calculations. It may also be to the law firm's benefit to specify these different roles, as some insurers will price coverage for "of counsel" or other part-time attorneys differently. Being up front about these issues may help lower premiums and also ensure more comprehensive coverage.

Law firms seeking to benefit from such detailed review can consider conducting their own detailed review as to how they classify attorneys of different levels. For example, law firms may consider officially giving new titles to semiretired partners, which could then support the firm's request for an adjusted premium based on the number of full-time attorneys. Adopting well-defined and accurate distinctions may be beneficial not only for the purposes of evaluating premiums, but also generally for purposes of risk management.

If a law firm treats all of its attorneys the same, without regard for each attorney's different role or schedule, that may come with a price. Indeed, including a number of "attorneys" on the application without any distinction for the types of attorneys may artificially (and unnecessarily) inflate total attorney rating units, which can translate into a higher-than-appropriate premium.

Practice Areas

Insurers generally evaluate the risk of insuring specific practice areas based on two criteria: frequency (how often claims are made) and severity (how bad the claims are). Some practice areas, such as residential real estate, plaintiffs' personal injury and family law, typically are known to have higher frequency of claims. Other practice areas, such as intellectual property, securities and environmental law, generally have a higher severity of claims.

A premium-sensitive law practice may look at these statistics and consider whether it is worth it to continue engaging in a non-core practice area that falls within a high risk category. For example, a five-person defense firm would ordinarily pay a lower premium because it has a lower number of attorneys in a lower risk practice area. However, taking on a single plaintiff's personal injury case can change everything. By reporting to the insurer that even some percentage of the firm's practice relates to plaintiff-side personal injury cases, the effect may be a different and likely higher insurance rate. 

Separately, firms that dabble in a noncore practice area may also increase their risk for legal malpractice claims generally, which can also impact insurance pricing. The risk of practicing in a high-frequency or -severity field, plus the risk of practicing in an area in which the firm is not expert, could lead the insurer to view the prospect of insuring the firm as somewhat high risk.

Firms with "one off" practice areas can give some thought to whether the potential gain from the representation in attorney's fees outweighs the additional cost (in premium) and risk (for legal malpractice).

Credits for "Good Behavior"

 In addition to the above semibiographical information, insurers may also adjust the cost of premiums based on their history with the law firm or the application of premium credits. For example, many insurers make adjustments in favor of renewal business, particularly for those firms with a relatively positive claim experience. 

In addition, some insurers offer specific premium credits tied to the law firm's efforts at risk management. For example, if a law firm can show dedicated use of risk management tools, such as docket control, conflict resolution procedures, or formalized billing practices, that may cause the insurer to discount the firm's premiums.  

By taking stock of the firm's internal risk management procedures, the law firm may implement additional risk management tools, such as in-house training or written procedures. The benefit can be twofold: implementing such procedures may reduce the likelihood of receiving a claim and additionally may help the law firm advocate for a discount on premiums.   

In building a business relationship with their insurers, law firms can determine what benefits or opportunities for reductions in premiums are available to them.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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