There is a right way and a wrong way to save money on your professional liability insurance. Here are the Five Filthiest economic mistakes law firms make in their malpractice:
1) Area of Practice Misclassification – The professional liability application is the face of the firm. A key part of the application is the area of practice grid where you indicate the areas of practice that make up your firm’s activities. Many firms misclassify their work, unknowingly into more expensive categories. For example, Litigation may be an appropriate category but Defense Litigation (a lower rate) would be more appropriate. There are countless of examples where drilling down (even when you have to write it in the margins, or explain via addendum gets the lower rate).
2) Deductible selection. Since in personal insurance it frequently makes sense economically to raise your deductible, some firms raise their liability insurance deductible to save premium costs. This almost always does not make sense in comparing the risk / reward (lower premium) in professional liability insurance. The pay back period in premium is frequently more than 15 years per claim!
3) Limit selection. The most important “big” decision on the insurance purchasing process is how much limit you should buy. There are various matrix methods for selecting the appropriate limit for your firm (case size, lawyer count, exposure analysis, etc.), but not using ANY method for this decision can be a big mistake. Within reason, the entire purpose of buying this insurance is to be able to practice law without putting your personal assets at risk. Excess insurance is the least expensive than it’s been in 20 years – find out the cost, and make an informed decision.
4) Term erosion. If your firm’s current insurance program has term enhanced policies, it is tempting to eliminate these improved terms to save premium. The most common term enhancements are improved coverage for legal fees such as – Defense Costs In Addition to your liability limits (aka Defense Outside) and Loss Only Deductibles whereby the firm is only exposed to pay the deductible in cases of judgment or settlement. This is a very valuable provision since a tiny percentage of claims actually reach the judgment or settlement stage – most malpractice costs to law firms are legal fees only.
5) Not reporting claims. In deciding not to report potential claims to your insurance company, you are putting short term pain (higher short term premiums) ahead of catastrophic pain should the non reported claim blossom into a claim and not be covered by insurance or the blossomed claim used against you by your insurer as an omission to void your coverage for another future costly malpractice claim. In today’s competitive market, the difference in a reporting firm philosophy (with no subsequent claims) will likely result in a 5% – 6% surcharge. In observing many claims situations at firms, premiums can be handled by current firm revenues, while an uncovered claim is far harder to manage.
Your insurance broker needs to properly advise you on these Five Filthy Flaws. If yours is not, mention this blog post and my team will provide you with a free analysis of one of the issues above. E-mail me at uri.gutfreund@singernelson.com.
