Almost every law firm and practice consider legal malpractice insurance essential, but not all of them actually check whether they are getting the best prices from their insurers.
The most important document that insurers use to calculate a legal malpractice insurance premium is the application. They usually ask various questions, most of which focus on four important things: the firm’s size, their practice areas, geographical reach, and their claims experience. These may seem routine questions, but they very often have a significant impact on how premiums are calculated.
Law firms generally put a lot of care into answering every question as accurately as possible, not only because it could otherwise put their coverage at risk, but also because they want to make sure that their insurance is properly priced. It’s true that by avoiding any mistakes or ambiguities in the application, a law firm could reduce the premium.
Different Types of Attorneys
For many of their calculations, insurance price premiums based on the firm’s number of full-time attorneys. There are some insurers which differentiate between “of counsel,” contract attorneys, and retired (or reduced schedule) attorneys. Other insurers set their prices differently based on the number of partners or associates a firm employs.
Not every law firm asks questions about the insurance application. If all the application asks for is the number of attorneys, it would perhaps be worthwhile to ask whether more detailed information would be of help. The risks associated with retired or part-time partners and “of counsel” or nonpracticing contract attorneys are indeed usually different from those associated with full-time attorneys, and insurers will usually factor these distinctions into their calculations. As insurers may price coverage for “of counsel” or other part-time attorneys differently, it may benefit law firms to specify these different roles. These details may help with lower premiums and they may also ensure a more comprehensive coverage.
A law firm that is seeking to benefit from such a detailed review may consider conducting their own analysis into how they classify attorneys of different levels. For example, a law firm could consider giving new official titles to semiretired partners, which might then support their request for an adjusted premium based on the number of full-time attorneys they employ. Having well-defined and accurate distinctions may not only be beneficial for the purposes of insurance premiums, but also for purposes of risk management.
If a law firm would treat every attorney the same, regardless of their roles or schedule, it may come with a price. Simply writing down a number of “attorneys” on applications, without making any distinction between their different types, may inflate total attorney rating units, which can lead to a higher than appropriate premium.
Insurers will typically evaluate the risk of insuring specific practice areas based on two things: the frequency of claims and their severity. There are some practice areas which are known to have a higher frequency of claims, such as residential real estate, family law, and personal injury. Then there are other practice areas that usually have a higher severity of claims, such as securities, environmental law, and intellectual property.
Premium-sensitive law practices may analyze these statistics and decide whether it is worthwhile to continue engaging in non-core practice areas that fall within a high-risk category. For example, premiums would be lower in the case of a five-person defense firm since they have a small number of attorneys in a lower-risk practice area but taking on just one plaintiff’s personal injury case can change everything. Telling insurers that even a small percentage of the firm’s practice relates to plaintiff-side personal injury cases can have a significant impact on their insurance rate.
Firms that also dabble in non-core practice areas may even increase their risk for legal malpractice claims, which can affect insurance pricing. Practicing in high-frequency or high-severity fields, as well as practicing in areas in which the firm is not expertly qualified, could cause insurers to see the firm as high-risk.
Law firms with “one off” practice areas can consider whether the potential gain from the representation in attorney’s fees outweighs the increased premiums and risk of legal malpractice.
Credits for Good Practices
Insurers may also calculate the cost of premiums based on their history with the law firm or the application of premium credits. For example, insurers generally make adjustments favoring renewal business, especially in the case of firms with a positive claim experience.
Additionally, some insurers may also offer specific premium credits based on the law firm’s efforts at risk management. For example, a law firm showing dedicated use of risk management tools such as docket control, formalized billing practices, or conflict resolution procedures, may receive discounts from their insurers.
Taking stock of the law firm’s internal risk management procedures may lead to implementing additional risk management tools, such as written procedures or in-house training. The firm can benefit from this in the form of a reduced likelihood of receiving claims, and it may also help with discounted premiums.
When building a relationship with an insurer, law firms can consider what benefits or opportunities for reduced premiums are available to them.