Reduce your Law Firm’s Insurance Costs Without Compromising Coverage
Underwriters typically evaluate law firms according to several main factors including: the firm’s areas of practice (AOP), attorney roster, internal procedures, fee suits against clients, frequency and severity of malpractice claims, and the requested liability limits and deductible.
AREAS OF PRACTICE (AOP):
The American Bar Association lists failure to know or apply the law as the most common reason for a malpractice claim. Statistics have shown that as attorneys attempt to expand into other areas of practice, the probability of a claim increases exponentially. Typically, an application with small percentages listed under multiple areas of practice will either incur a high premium or even a declination from the carrier.
Be specific when describing the nature of your firm’s activities. For example, if your firm does a lot of intellectual property work, but minimal patent preparation, be sure to include that for a potential significant premium difference. If a certain area of practice, especially in a high-risk area, is nominal to your firm, consider dropping it. When taking on clients in unfamiliar territories, be sure to weigh in the risks for your firm.
Carriers have studied their claim data to determine which areas of practice result in a high frequency or severity of claims. Results vary, but typically the following areas of practice are considered high-risk:
- Intellectual Property
- Family & Divorce
- Estates & Trusts
- Real Estate
- Plaintiffs Personal Injury
Underwriters often look at previous insurance submissions and the firm’s website to verify accurate information. It is important to provide accurate information on your renewal and new applications that is consistent with what is on your website. Overestimating the areas of practice, especially the riskier ones, can result in an unnecessarily high premium. Stay away from including areas of practice you ‘plan’ to engage in on your application, and keep the areas of practice description to what you actually do.
INTERNAL RISK PROCEDURES
Underwriters appreciate documented procedures that reduce malpractice claims such as: calendar controls, docket management systems, engagement & declination letters, a conflicts of interest system, legal management software and more.
Missed deadlines and failing to file paperwork in a timely manner are leading causes of legal malpractice claims. Dual calendars are not only recommended, but typically required by most carriers. These calendars should be systematically checked by multiple people. Calendars should be stored on separate systems in case of a technical failure.
Malpractice claims often spring from a lack of communication between an attorney and their client. To prevent any misunderstandings, attorneys are advised to reach out to their client, documenting the conversation, regardless of the case progression, at least once per month. This can be effectively accomplished through various legal management software systems.
Often, law firms use legal management software to ensure deadlines are met and conflicts of interest are checked. Not only does this software ensure smoother firm operations, but some carriers will provide a discount for this software. Additional discounts are often provided for certain legal software applications, such as CLIO.
When accepting new clients, it is important for the stability of the firm to set the client’s expectations. If a potential client has unreasonable expectations, it is likely in the best interest of the firm to decline representation. Attorneys should avoid clients that will not be satisfied regardless of the work provided.
To protect themselves, experts recommend law firms distribute clear documentation in the form of engagement, declination, and termination letters to clearly describe the scope of representation. Contract language can be used to limit engagement risk or require alternative methods of dispute resolution.
When determining rates, carriers will also factor in how long the firm has had continuous claims-made coverage, and whether another insurance company is non-renewing their policy.
Suing a client almost always results in a counter malpractice claim for the firm. In fact, many underwriters are declining coverage, providing exclusions, or charging a higher premium for firms that sue multiple clients to collect fees. Firms should attempt to avoid suing clients to recover fees through vigilant billing, adequately structured retainers, and even terminating representation when necessary.
If multiple fee suits appear on an application, carriers will request a narrative of the procedures used when evaluating when to sue. Prior to suit, it is recommended that the firm nominates an executive committee to examine each file for the potential of a malpractice claim and they wait until the statute of limitations has expired in each case.
LPL coverage is claims-made, meaning the incident that caused a claim, occurred at a past date. This leaves the carrier holding the risk for every case your firm has worked on backdating to the retroactive date (A.K.A. prior acts date). That includes attorneys that are no longer working for the firm. While it is essential to ensure your firm has the proper procedures in place to catch and prevent errors, employing a detailed, knowledgeable, and thorough staff is the best way to avoid malpractice claims.
When evaluating a law firm, underwriters look at a few different factors regarding your attorneys. As the number of attorneys and clients increase, so does the risk of a claim. Not only are underwriters looking at the attorney count, but also the difference in attorney count from year to year. If they notice a multitude of attorneys leaving and joining your firm, a red flag is raised. They are also looking at the ratio of lawyers vs non-attorney staff. When there is a disproportionate number of non-attorney staff, underwriters assume the non-attorneys are performing the work of the lawyers, increasing the risk of error. Additionally, from an underwriting perspective, law firms with more full-time attorneys are less of a risk than firms with most of the attorneys working part time.
Underwriters want to know that all attorneys are up to date with their continuing legal education requirements. Discounts are frequently provided when all attorneys in the firm are current on their Continuing Learning Education (CLE) credits.
One of the biggest effects on LPL insurance premium is the frequency and severity of claims. In addition to the underwriter’s claim experience in your geographical area, rates are primarily determined based on the firm’s individual claim history.
Carriers usually require 5 years of loss history from the firm. Since these policies are claims-made, even if the attorney that committed malpractice no longer works at the firm, it still needs to be included on the firm’s history for five years after the close date. As the number of claims or payout amount from each claim increases, as does the risk for the carrier and therefore the cost of the LPL insurance policy. While the quality of the claim and the lawyer’s degree of fault are taken into consideration, even a frivolous lawsuit can cost both the carrier and the insured immensely.
Most carriers require the incidents that might result in a claim to be reported as a potential claim. Coverage might be denied if the potential claim was not reported at the time of occurrence or included on the annual application.
Most highly rated, admitted carriers tend to shy away from law firms with a major claim (including potential claims), a pattern of claims, or two or more claims within the past year. However, carriers with a lower AM Best rating, or even non-admitted carriers are an alternative option when necessary. Non-admitted carriers are not financially backed by the state, typically more restrictive in coverage, and charge significantly higher rates.
In the event a claim or potential claim arises for your law firm, be sure to include additional context for the underwriter including the fact pattern, mitigation steps, and prevention strategies to receive the best rates.