How Legal Malpractice Insurance is Priced
The Factors Impacting Attorney Malpractice Insurance Rates
The annual cost of a law firm’s malpractice insurance policy can vary greatly from firm to firm, due to several factors. The main factors that impact legal malpractice insurance rates include a firm’s area of practice, location, size, years in practice, prior claims, desired coverage limits, and risk management discounts.
Your Firm’s Area of Practice
Your firm’s area(s) of practice and caseload within each area are primary considerations in determining your malpractice insurance policy’s annual premium.
Certain areas of practice, such as intellectual property, class actions, securities, real estate, corporate tax, entertainment, and civil litigation-plaintiff, experience higher-than-average claim frequency and severity, which typically yields a higher annual premium compared to other areas of practice.
“The lowest rates are typically for defense firms,” said Ryan Fox, an underwriter at Aon Attorneys Advantage. “Typically, such firms are among the lowest risk of being sued.”
While defense attorneys may not experience as many malpractice suits, they are still advised to carry insurance due to other risks. “Instead, we see a lot of disciplinary complaints,” Fox said. “If your client is in jail and feeling vindictive, it doesn’t cost them anything to file a complaint with your state licensing board.”
Your Firm’s Location
The state in which your firm practices, and in some instances the location within the state, contribute to your policy’s annual premium. One factor that typically varies from state to state is how much your firm charges for services rendered on an hourly basis, with law firms in metropolitan areas typically charging more than firms in rural areas. Firms that charge higher rates typically see higher claims.
“As a result, an attorney living in Los Angeles is going to pay more than an attorney living in rural Iowa,” Fox said. “Some states have multiple underwriting territories. In Florida, our primary program has three underwriting territories, with law firms in the Miami/Dade County area paying more than attorneys in other parts of the state.”
Some insurance carriers may limit their exposure in certain states due to the performance of their book (how many claims they have paid out in that state). They also may not write in certain states due to filing restrictions, as an admitted insurance program is required to be filed in every state in which it is available.
Your Firm’s Size
Unlike other professions, whose annual malpractice premiums are determined based on a firm’s annual revenue, law firms are rated according to the number of attorneys in the firm.
“This is because of the way attorneys bill by the hour,” Fox said. “For an insurance carrier, including those carriers that work with the Aon Attorneys Advantage program, it’s easier to judge the amount of risk they are accepting by the number of attorneys in the firm, and the number of cases each is handling.”
Your Firm’s Prior Claims
Past and pending claims can impact not only the cost of your firm’s policy, but also your eligibility.
Firms with prior claims in the past five years are f not eligible for an admitted policy and would need to seek coverage through a non-admitted carrier, which typically charges a higher premium for similar coverage. The Aon Attorneys Advantage program works with both admitted and non-admitted carriers to ensure a range of coverage options for our clients’ diverse risk profiles.
Your Firm’s Desired Level of Coverage
Another rating factor is your firm’s desired level of coverage. While smaller firms typically purchase $1 million limits, our admitted program writes limits as high as $5 million. Deductible limits range between $0 and $15,000, with higher deductibles yielding lower annual premiums.
“Our admitted policy offers additional claim defense expenses paid outside
the policy limits,” Fox said. “The amount of additional defense expenses included with the policy depends on your coverage limit.” For example, a $1 million policy includes up to $250,000 of additional defense expenses, and a $5 million policy includes up to $500,000 of additional defense expenses. There is no additional charge for this feature. The benefit of this type of coverage is that it leaves more coverage for any potential settlements. Conversely, if a policy pays defense costs inside
the policy limits, it eats away at the limits available for any judgements against you.
Risk Management Discounts
Your legal malpractice insurance rates can be reduced by several factors. If your firm has been claims free for the last five years, you may be given a discount. If you can demonstrate the use of risk management practices in your firm, including engagement/disengagement/nonengagement letters, docket control, and conflict of interest avoidance waivers, you may also receive a discount. You may also receive a discount if you take continuing legal education courses.
“The percentage of these credits varies by state and by the size of the firm,” Fox said. Firms in our admitted program are encouraged to use the three free CLE credits provided annually by the policy to help reduce their rates.
Most lawyers’ malpractice insurance policies are offered on a claims-made
“A feature of a claims-made policy is that it is step rated,” Fox said. “Because a new attorney just starting out in business generally has few clients, their risk is lower than a more established firm. So, an insurance carrier offers a reduced rate in the first few years of such a policy.”
In most states, our admitted policy has six steps. In the first year of your policy, the step increase can be anywhere from 30% to 50%. Each year the percentage of the step increase goes down, until the policy matures in the seventh year and you are paying the mature rate.*
“This is one of the most misunderstood features of a claims-made policy,” Fox said. “It leads some attorneys to believe they’re getting hit with a rate increase every year for six years. As you build your client base, your risk increases, you experience a step increase and your rate goes up.”
The Cost of Going Bare
“Going bare” is insurance jargon for going without insurance. While carrying malpractice insurance is not mandatory in every state, having coverage can serve as an important layer of protection. It also says something about the professionalism of your firm.
While you may never have been sued, it can happen. All it takes is one client unhappy with the results of your work. Even if you didn’t make a mistake, you can still be sued and would need to mount a defense. As an attorney, you know better than anyone how much a lawsuit can cost in time and money.