Legal Malpractice Insurance 101
Since this is a new Nielsen Blog, it is appropriate to start with the very basics. I thought a little legal malpractice insurance 101 would give you some insight into what we are all about over here.
Legal Malpractice Insurance is nothing but a safety net to protect attorneys from being sued for negligence, if they are. Legal Malpractice Insurance covers your mistakes in the practice of law. This means that if you forget to file something, to say, respond to a Complaint in time. Or, even worse, if you lose evidentiary material that produces our next section, causation. Which you missed the discovery deadline for. Or the client named you individually in the suit, so you were named multiple times in the same matter. This is where the pressure would light the fuse and the case would explode. Here is a great legal malpractice definition found on this Statutory-MalePractice-Malpractice.com page "Legal Malpractice Insurance is a risk transfer mechanism by which a law firm pays a premium in return for an assurance that the insurer will pay for claims covered by the legal malpractice policy.
This covers legal malpractice claims brought directly against an attorney and also claims for vicarious liability against the law firm itself. Legal malpractice insurance is generally written on a claims made and reported basis , meaning that the wrongful act must have occurred on or after the inception date and before the termination date of legal malpractice insurance policy. Timely notice of claims to an insurer is required as part of a claim made and reported policy, which usually allows a 60- or 90-day grace period. A claim made and reported legal malpractice insurance policy covers only those claims that are made against the insured and reported to the carrier while the policy is in effect. A claim is considered made when the injured party first provides written notice of the potential claim to the insured. Legal professionals have various options to purchase legal malpractice insurance. This includes individual lawyers and attorneys, large firms, small law firms and corporate in-house counsel who should be insured under a Corporate Counsel Policy.
What affects legal malpractice insurance rates?
There are several factors that determine the cost of legal malpractice insurance for a law firm. Some of these include practice specialties, geographic location, size of the firm, history of claims, and duration of career. Claims free firms are provided the most favorable rates, and as with any other insurance sector, losses and litigation expenses are considered in pricing of legal malpractice insurance.
The size of the firm, particularly the number of attorneys plays a major role in pricing. Larger firms pay more than small firms. This difference can be quite significant for smaller firms who are just above the minimums set by some insurers. These insurers tend to be quite conservative, and for firms with significant experience, premiums can vary quite wildly.
Smaller firms are often excited to see their premiums decrease after a number of claim-free years. As long as that firm does not suddenly have a larger number of associates in the year of renewal, the risk profile has not changed much, and the rates should continue to be lower than in the early years. However, legal malpractice insurers can be very unpredictable in their pricing, even for firms that should have stable pricing based on their claims experience.
How much are legal malpractice insurance rates different state by state?
The variation in legal malpractice insurance rates across the United States is a reflection of the differing risk assessments made by states based on their histories and legal environments. For instance, research consistently shows that the cost of doing business in nursing home care is lower in Southern states, presumably in part because of lower malpractice damages across all specialties. In short, the "cost of defense" is lower in the South. Thus, with fewer claims being brought and with the lower scope of damages being awarded, it’s probably not surprising to find that some Southern states have cheap insurance rates.
Physicians in Georgia pay the lowest premiums nationwide at an average of $2,343 per year. In Arkansas, the price is only slightly higher at $2,696, followed by Alabama ($2,832), South Carolina ($3,300) and North Carolina ($3,351).
At the other end of the spectrum are the states with the highest legal malpractice insurance premiums: Colorado ($15,630), Iowa ($15,150), Oklahoma ($15,035), West Virginia ($14,428) and Pennsylvania ($14,097). As is the case with nursing homes, premiums in these states are likely reflective of the state’s history of higher malpractice claims and larger jury awards.
Geography isn’t the only factor affecting the cost of legal malpractice. In general, the lower the number of attorneys in a state, the higher each individual lawyer’s individual risk of having defended against multiple, more expensive lawsuits. In this regard, some Midwestern states are particularly noteworthy. North Dakota, for example, has only approximately 8,500 attorneys, of whom only 1,873 (over 22%) are practicing law individually or in small firms of 10 or fewer lawyers. Compare North Dakota to New York, where there are approximately 174,000 total lawyers and nearly 40,000 in solo or small firm practice of 10 or fewer lawyers, and you can see why North Dakota lawyers’ risks may be more elevated than those of their counterparts in New York.
Indeed, even within the same region, you can see how differently legal malpractice premiums are priced. Both Pennsylvania (the 5th largest state) and New York (the 4th largest state) border the Great Lakes. Yet, as previously noted, Pennsylvania lawyers are looking at average premiums of $14,097 compared to New York lawyers’ average malpractice rate of $3,550 per year. This 4-times multiplier seemingly doesn’t make sense given the similarities between the two states. But, consistent with this, the Pennsylvania Bar Association Attorney Malpractice Insurance Comparison suggests that only 56% of Pennsylvania lawyers are insured by A-rated carrier, compared to 100% of New York lawyers.
How do you get reduced legal malpractice rates?
It is possible through several methods, to reduce legal malpractice insurance premiums. Risk management practices are one way. Carrying an amount of insurance which will require a smaller premium is another. Working with an insurance agent who understands your particular needs and your particular area of practice is a third.
Risk management practices: One way to save on legal malpractice insurance premiums is to maintain a proactive approach to the risks which may lead to claims. Many law firms maintain a risk management committee to focus on the support needed to eliminate or ameliorate risks. This may include hands-on training, written guidelines, and periodic consultation with experienced attorneys or a more knowledgeable law firm.
Carrying a larger policy with a smaller percentage of coverage. It is possible to change the mix of coverage in a way that reduces costs. For example, instead of maintaining a 50%/50% mix of $100,000 and $200,000 retroactive coverage, consider a 20%/80% mix. This will lead to a reduced premium.
Seeking group insurance plans. Many insurers offer group plans. These plans leverage the strengths of the insurers and provide a better rate. The groups may be organized by counties, types of practice, or by other logical means.
Legal Malpractice Insurance Rates & Coverage Limits
The coverage limits of a malpractice insurance policy are vital in determining the rate. The more coverage you buy, the higher the premium will be. If you have adequate coverage, and you feel you have an exposure that is not covered, you can always purchase more excess insurance to close the gap. However, if you are under insured, and have a gap in coverage, no excess insurance can fill the gap. We often see attorneys who buy a policy offering inadequate limits, and then look to purchase additional coverage with a policy issued by a different carrier, or through an excess program . This purchase of excess insurance, however, will only be effective where the attorney has purchased adequate primary coverage. Keep in mind that if you find yourself, or your client, on the wrong end of a large verdict or settlement, and you have no coverage in place to pay for it, excess insurers will deny coverage based upon the fact that you failed to adequately insure your law business, and therefore have no need for the excess insurance you purchased after the fact.
Impact of legal malpractice insurance claims history on rates
An attorney’s claims history can have a significant impact on their insurance premiums. Generally, if an attorney has a clean claims history, it can lead to lower premiums. This is the logic behind the fact that firms with larger numbers of attorneys will pay more for insurance than smaller firms even when the same percent of attorneys at each firm is observed to have had a claim recently.
By keeping your claims history and claims ratio low, you can secure better rates and have a lower cost of coverage. One way to do so is to be particular about the claims you file. While an insurance company generally needs to be notified of a claim as soon as possible, not reporting every complaint that is received may allow you to avoid hurting your claims history.
Choosing the right legal malpractice insurer
From reputation and reliability to customer service and policy options, law firms and legal professionals must consider a number of factors when selecting the right provider for their legal malpractice insurance. Reputation can be gleaned from years of industry experience, client reviews, and a marketplace track record of solid ratings with organizations like A.M. Best. Industry expertise is critical to your carrier’s ability to understand the marketplace and price coverage accordingly. When a carrier has an understanding of the market , they can help ensure you don’t pay for more coverage than your firm needs.
Like any insurance policy, it’s important to understand the intricacies of your coverage and conditions in order to make a well-informed decision about what your firm will need moving forward. It’s the quality of the service you’ll receive that will ultimately differentiate one legal malpractice provider from another.