The Cost of Professional Liability Insurance
Have you ever wondered about the cost of professional liability insurance? Many law firms leave themselves uncovered because:
It seems like an unnecessary added expense;
You think your firm is too small to get sued;
You have great relationships with your clients so it will never happen to you...
…Or the complexity of it is just too overwhelming.
But these reasons vaporize immediately when your business is actually on the line. The truth is, most firms that have been sued didn’t predict it. It comes as a surprise.
Only you can determine your unique comfort level for exposure. Answer these questions for yourself. Can your law firm sustain a prolonged legal battle? Can your licensure and certification survive a lawsuit? Are your personal assets firewalled against a judgment?
Let’s say that you have bought-in to the idea of professional liability insurance. We’d like to give you a better understanding of why it costs what it does and what affects the cost. Pieces of the pricing puzzle include:
- Your area of practice
- The state where you are located
- Coverage limits and deductibles
- Claims history
- How long you’ve been in practice
- Whether you’ve been covered all, some, or none of that time
The good news is that you can understand these cost drivers in about 3 minutes. Let’s touch briefly on each.
Area of Practice (AoP)
Your area of practice leads the list of factors influencing cost. High-risk AoPs can expect double the premiums of low-risk specialties. Why?
Carriers have done the math to calculate their “appetites.” They prefer lower-risk AoPs to higher-risk ones. In the world of professional liability insurance, some higher-risk practice areas are:
- Patent prosecution
- Securities
- Class action
- International law
Practice areas considered lower risk include:
- Mediation/arbitration
- Family law
- Immigration
- Insurance defense
Carriers offer better rates to those that fall within their specific appetites. A good agent knows these different carrier appetites and can match you with the one best suited to your needs.
Location
Location can also affect your premium. Why? States like California and New York have a higher claims frequency than other states. Again, it’s just math. Expect higher rates in states with higher claims.
Limits
What limits do you need? Well, what would happen if your largest client sued you? Choose limits based on the specifics of your unique business.
The lowest limits are typically $100,000/$300,000. This allows for $100,000 per claim and up to $300,000 per policy period (if you have more than one claim). But is that enough?
How much would your legal defense cost? How about judgments awarded against you? You will want to select limits based on legal costs to defend your case and judgments. Both count against your total limit.
Claims History
Never had a claim? This positions you for lower premiums. Expect higher premiums if your history shows prior claims. Frequent claims history could even leave you ineligible for coverage. Working with a good agent can help keep you in good standing with carriers. They will advise you to tell your insurance carrier as soon as you suspect a potential lawsuit. That puts the insurance carrier in a better position to address the issue faster and minimize the claim. The more advance notice, the better.
How long have you been in practice?
Cost is also determined by how long you’ve been in practice. Most would assume that a newer less qualified attorney would pay more for his professional liability policy than a more advanced attorney with a perfect record. This is not the case. Newer attorneys will pay less initially because they have fewer prior acts for the insurance company to cover. The longer you’ve been in practice the more cases you take on. So, each year you stay in practice, the more potential there is for a lawsuit.
No Coverage vs. Continuous Coverage
Premiums are less for first-time buyers. Attorneys with continuous coverage typically pay more. This may seem counterintuitive until you understand coverage of your prior acts. Each year of coverage means you’ve got more prior acts requiring coverage. Most premiums rise each year for the first seven years and then level off.
Wrapping Up
You were probably hoping for a simple answer. We get it. But that’s the challenge with professional liability insurance. With so many factors driving cost, it’s not as simple as looking at a chart and giving you a number. We’ve created a checklist so that you can make sure you’ve covered your bases. Download this checklist by clicking the button below.
