Lowering your professional liability premium: How to correctly answer the four critical application questions.

As the managing or administrative partner, you have the annual, painful task of completing the lengthy professional liability application.  There are 30-100 poorly worded questions (10-20 pages) depending on which supplements are applicable to your practice areas.  Although there can be other landmines, particularly in the supplements, there are four questions that have the largest impact on premiums and what terms are offered.

1)      List of Attorneys – While appearing like the simplest question, the attorney roster can have a significant impact on your premiums.  It is in your best interest to provide the number of hours per week that each attorney is working for the firm.  Particularly with Of Counsels, or semi-retired partners, your broker can negotiate discounts for any lawyer that works less than 40 hours per week (full time) for the firm.

2)      The Areas of Practice Grid – It is critical that a partner spend some time on this section to break down the firm’s areas of practice.  We often see costly errors by non-legal administrative personnel due to their lack of legal knowledge.  The partner should work with their broker to go through this section carefully as each insurance company has their own definitions of the different sections and subsections.

3)      Avoid the All or None trap – There are several questions on the application that ask questions that contain the phrase Always or Never such as “Do you always send non-engagement letters”.  Despite the appearance of these questions only being answerable with checkbox answers (yes or no), on these important risk management questions, you must write a complete answer on the application or more details via an attachment to the application.  Some of the risk management questions to be careful about are those that ask about suing for fees, procedures, and client intake.

4)      Claims – Don’t attach the papers!  While tempting to do so for convenience, attaching suit papers will not elicit the best terms from insurers.  There are three parts of information that you should contain in your claims supplement: Loss reserves, what happened from your perspective and most importantly, what changes if any, were made at the firm to preclude a recurrence of the same types of claims.

The completed application is the “face of the firm” in the marketplace.  A well done application is a critical first step in obtaining the best terms available for your firm.  Your broker should preview the application with you and review your completed application.  With this solid basis, you are ready to shop for your coverage.

Five questions to determine if you need a new insurance broker


Having the right broker can be the most important decision in your firm’s insurance programs.  The wrong broker can recommend the wrong coverage designs, wrong companies, and cause you to overpay by tens of thousands of dollars.  Their expertise can assist you with valuable advice so that you have the right coverage and coach you in the process to obtain the lowest premiums.  Just like a Real Estate lawyer isn’t the right lawyer for a private placement offering, your broker has to specialize.

Side note: While not the topic in this post, having multiple brokers for the different types of insurance is inefficient and leads to many mistakes.

These are five questions that you can ask your current broker to quickly determine if they indeed have the experience and benchmarking knowledge to effectively advise you.  We’ve also given some perspective on the possible answers.

1)     All Brokers:  How many law firms like ours (size and specialty) do you represent?  Seven to ten similar firms is a good start.

2)     Professional Liability Broker:  What are some of their issues on the professional liability application and what have you done to lower their financial exposure with the structure of their policy?  They should have many examples.

3)     Professional Liability Broker:  How many insurance companies do you access for obtaining professional liability insurance?  If your broker uses one or very few companies, you will get skewed market knowledge and are exposed to getting sup-par terms.

4)     Health Insurance Broker:  What benefit designs are common for equity partners, contract partners, and associates at firms like ours?  Peer benchmarking is essential for best results.

5)     Benefits Broker:  How is your understanding of law firm partnership rules impacting your recommendations for the structure of our health insurance, disability insurance and other employee benefits?

Bonus Question:

6)     Property and Casualty Broker:  What are the key terms that my firm’s Employment Practices Liability Insurance policy must have?  Your policy has to reflect the new structure of law firms (equity, non-equity, of counsels, etc).

Changing brokers can be a difficult decision due to emotional or business relationships.  However, staying with the wrong broker can be costly and damaging to the financial health of your firm.

Partnership Agreement and Buy Out Insurance – What you wish you knew before your partner got disabled.

Well run firms take multiple steps to ensure the transition of leadership and revenues of the firm from the partners of today to the partners of the future.  It is commonly known that a Life Insurance Buy Out plan should be in place (in the partnership agreement and backed by insurance) for transition planning should a partner die pre-retirement. However, the far more likely to occur scenario for your firm (twice as likely) is the disability of one of your partners.  And ironically, while some firms have a Disability Buy Out Plan (in the partnership agreement), they do NOT have insurance backing up the promise.  They don’t have Disability Buy Out insurance.

When Disability Buy Out Insurance is effectively structured, the disabled partner is able to separate themselves from the firm with a fair buy out amount.  The firm alleviates the possibility of an untimely cash demand by the disabled partner.  And most importantly, everyone avoids a sticky situation of conflicting loyalties (firm and friends) that can sometimes lead to expensive litigation.

There are three key elements for your Disability Buy Out Strategy.  Each point should be addressed in your Partnership agreement and backed up by Disability Buy Out Insurance.

1)     Total Benefit: This number would be based on the market value of the firm and the percentage ownership of each partner. 

2)     Elimination Period: This is the length of time from when the partner becomes disabled until the policy will pay a benefit – in effect, it’s the policy’s deductible.  Most policies have an option of a 12, 18, or 24 month Elimination Period.  Most firms go with 18 months.  The strategy is to choose a long enough time to only be triggered when it becomes clear that the disabled partner will not be able to return to the firm.

3)     Pay Out Period: This can be a Lump Sum up to 5 years or some combination. The longer the pay out, the less expensive the policy.

The insurance premiums are not tax-deductible and any benefits paid to the company are free of income taxes. Funds paid to the disabled partner are taxed as a capital transaction, as the firm is buying their share out.

It is important that your insurance adviser has law firm partnership experience specifically to review your partnership agreement to make sure the promises and products are in sync.  Proper planning can plan for this unfortunate but common event.

How your professional liability broker might be robbing you in broad daylight. Did you overlook this?

On this blog, we are dedicated to writing risk management and insurance advice for law firm Managing Partners.  We teach you how to become better buyers and get the most out of your insurance programs.  I feel that it is important to deviate from our normal method to call out an underhanded business practice that we still see rearing its ugly head.

Professional Liability Insurance for your firm is an important business necessity to protect you and your firm’s assets.  It is typically an expensive product to buy and therefore frequently firms elect to finance the cost of the policy.

This is where the robbery may be happening.  The actual financing of policies are usually facilitated by your broker through a reputable financing company that specializes in premium financing.  Some brokers are guilty of charging an interest rate that is far above what is available in the premium financing market.

We have seen rates that exceed 12%.  With our current low interest environment, this is simply unacceptable.  Some Brokers are collecting as much as their commission in additional finance charges!  Aside from a nominal administrative fee, your broker should be passing along the lowest rates available.  The best practice is for your broker to use multiple financing companies to ensure the lowest possible costs for their clients.  In this past year, our clients have enjoyed rates between 3-5% reflecting the true low interest rate environment of today.

It is very important for you to take a few moments and read your finance agreement to see what the charges are going to be.  Too often, partners take the easiest path at that final sign off on the paperwork thinking that they already know the premium for the insurance and are prepared to make monthly payments.  At the end of the process, spend five more minutes to make sure that you are not falling for this abuse.

The top three office insurance errors for law firms. The fix is simple and inexpensive.

Business insurance packages for law firms are the least examined policies at law firms.  Since Superstorm Sandy, we have seen a small change in this, but over the years, this is an area of exposure that is significantly under-analyzed for law firms.  Lots of reasons for this – claims are less common than professional liability insurance and health insurance, and the annual premiums are much lower (irrelevant but it’s human behavior).

These are the three most common and correctable errors when our Law Firm Team onboards new firms:

1)     Employee Benefit Liability Insurance – Today’s employee benefit (health, life, disability, 401k, etc.) environment is complex and with the new regulations going into effect in the coming years, will become more complex and prone to errors.  The Employee Benefit Liability is coverage endorsed on to your office package (aka General Liability) that covers your liability for mistakes in the administration of your benefit plans.  Imagine the risk if you forget to add an employee or their dependents to a health or life insurance program, just before they get sick or die.  Insurance companies have become very strict in their timeframe for changes.  The cost for the insurance is very inexpensive (a few hundred dollars for most firms) for $1 million in coverage.

2)     Hired / non owned auto endorsement – This endorsement is added to your office package policy too. It is coverage for the firm when partners and employees, while on firm business, are either driving a personal auto or using a taxi (i.e. all autos non-owned). This coverage is inexpensive and should be added especially when there is a large amount of driving / traveling on firm business. You can also add a separate policy that includes coverage for physical damage to car rentals.

3)     Employment Practices Liability Insurance – Employment practices liability claims and circumstances are the most frequent legal claims against law firms today. The insurance policy for these claims, called Employment Practices Liability Insurance, is cheap compared to dealing with even one potential employer-employee situation and with the right law firm industry customization can protect these headline grabbing cases from turning into your worst nightmare.

While there is more you can do to correct your property and casualty insurance with your insurance broker’s full review, prioritize these three immediately.  It won’t take long and it won’t take a lot of money.  Need more?  Email me for our more detailed checklists @ uri.gutfreund@singernelson.com.

The four methods to determine your professional liability insurance limits. The most important but least deliberated annual decision.

What is the most important part of your professional liability policy?  Without exaggeration, the most important part of your policy is your limit.  All the bells and whistles won’t protect your firm and personal assets if you don’t have enough coverage. 

We spend many days and hours negotiating with insurance companies over the fine print points of every professional liability policy.  And yes, they are important: Are you financially exposed to defense costs?  What definitions and fine print are the best fits for your firm?  Is that the best premium?  All of these points consume our behind the scenes work to obtain the best insurance options for our clients.

But if the amount of insurance – the limit – is insufficient, the fine print won’t matter and having a good insurance policy (even a great one) will not adequately protect you. While there is no scientific method for selecting your limits, we present below the various ideas on how to calculate your limit.   

Four Methods:

1)  Average client – Purchase the amount of insurance that represents an amount near your average client exposure.  Especially for a firm that is primarily litigation, this method can be used by taking your average case value.  We assume that you will not commit malpractice on your largest cases as you will be committing your best resources to that client matter.  Some practice areas, like SEC work, high end Trust and Estates, and IP work values need specific attention with this method of analysis.  If you represent high net worth individuals, they tend to be litigious and not surprisingly, they are also litigious against their lawyers – be aware.

2)  Per lawyer – Half to ¾ a million per lawyer.  This is the roughest calculation.  This means that a 20 lawyer firm should consider 10-15 million in coverage.

3)  Cynical approach – The firm should purchase the minimum amount of insurance so as not to be the defendant firm (in a multi defendant professional situation) of having the “deepest pockets” but not too little that plaintiff attorneys pursue your personal assets.  There is anecdotal and logical evidence for this approach but it is especially important to constantly review these goals with your broker for specific advice to keep you abreast of the industry norms when it comes to insurance limits.

4)  Pure financial – Unrelated to your practice areas of risk and your average client size, the firm conducts a purely financial analysis of the value of current revenues compared to the cost of the insurance.  Regardless of the risk profile of your firm, the quotes are obtained for various limits and selected purely on the economics of the situation.  For example, a highly profitable $25 million dollar firm might purchase $30m -$50m in limits as the cost of the insurance might only be $200,000 (a small amount for a highly profitable firm). A similarly sized law firm but one that is less profitable with fee revenue of $10m might only purchase $10m.

 The best approach of all is to use a blended and educated approach to your limit selection.  The discussion with your broker should be annual and should consider changes in your firm and changes in the insurance market.  If you firm has grown or changed in practice mix, past limits might not be enough. In the past 10 years, excess insurance policies premiums have come down considerably so that what made sense financially even a few years ago, no longer is a prudent financial decision.  As with all important firm decisions, the analytical approach is the way to go when you decide your professional liability limits.

The Health Insurance Renewal Is Late Again!!! The timeline you need to get it right.

As the Managing Partner of your firm, you are responsible for the decision making when it comes to the firm’s medical insurance renewal.  It is more likely than not, that medical insurance is your single biggest expenditure after payroll.  So it’s all handled in an orderly and timely manner right?

Does this scenario sound familiar? 

You delegate the process to someone else.  Your broker shows up a month before the renewal date.  Some options are put in front of you and you have to pick something, usually with plan changes, to offset a rate increase.  You have an uneasy partner meeting where you summarize the options (get cross examined painfully by your partners) and pick the plan that seems right.

There is a better more organized way to make this crucial decision.  The renewal process should function on a timeline that begins six months before your renewal date:

180 days before the renewal – Your broker should be having a mid-year meeting with you to find out if anything has changed within your firm, how your business is doing and if you are hiring or laying off. S/he should also educate you on new products that are available, update you on cost trends and give you benchmarking of what other law firms are doing.

150 days before the renewal – Conduct (with your broker doing the work) an annual employee survey to determine satisfaction, plan usage and acceptable trade-offs in terms of plan changes.  This allows you to become proactive buyer rather than a reactive one.

120-90 days before the renewal – Behind the scenes, your broker should run quotes, or send a Request for Proposal to insurers depending on your size.  If you have more than 100 employees your broker is analyzing claims experience and reviewing the renewal calculation.  They should also be analyzing the survey results to determine what plans to recommend.

90-60 days before the renewal – All the data from the usage survey, and claims data if available, is being crunched and analyzed by your broker pulling everything together and creating spreadsheets and other analysis reports to present to you.

45-55 days before the renewal – Your broker should be meeting with you.  Their presentation should incorporate what was discussed at the mid year meeting and the results of the employee survey. These things should tie in with the broker’s recommendations and provide the rationale for which plan design(s) you should implement.

Working off of a six month timeline will make you a more informed and calmer insurance purchaser.  In this scenario, there will be time for employee meetings and a smooth transition should you decide to change insurers.

The four blunders that law firm partners make in buying health insurance. Are you guilty as charged?

When it comes to health insurance, and benefits in general, law firms frequently make crucial errors that result in significantly overpaying for their insurance policies.  Although law firms must be generous to retain their best assets (their employees), these common four mistakes while looking like generous strategies, do not provide any benefit to the employees.

Here are the four mistakes and of course, as this blog is about improvements for your firm, what you can do about it.

1)      Fear of the complex.  For regulatory and other non coverage reasons, there are better ways to skin the cat.  There are more sophisticated policy structures that enable firms to achieve meaningful financial savings.  HRA’s and HAS’s are the most common, but these are variations in the way the coverage is structured that do not diminish from an excellent and generous benefits package.

Solution: Focus on the big picture, not the monthly premiums.  Determine what level of health care you want to provide through insurance, and do not fear unusual structures if they meet your big picture financial goals / philosophy.  For more strategy information, see here  http://wp.me/p1XTS4-4h

2)      Commission problems.  There are some health insurance companies that sell very good insurance policies but not every broker is permitted to sell their products.  There are also some insurance companies that structure their commission schedule for virtually no compensation for the broker

Solution: Instruct your broker to leave no stone unturned including companies that pay little or no commission and to charge you an appropriate service fee.

3)      Wrong person involved.  Partners need to be involved at the beginning of your benefit process: at the strategy meeting, 5 months before your renewal (see here for often forgotten partnership issues in selecting health insurance http://wp.me/p1XTS4-q and at the final meeting with your benefit advisors, 3 weeks before your renewal.  All too often, Managing Partners delegate these responsibilities on this very important (and expensive) decision to an administrative person thinking that there isn’t much to be done anyway so why spend time on it.

Solution:  Reality is that benefits being a large firm expense, are important since they touch every single employee and are often the most tangible demonstration of your firm’s culture.

4)      The number one reason that firms overpay for their insurance is being reactive and not proactive in managing the process.  Most firms wait until they get their renewal pricing package (i.e. increase) from their current provider and only then explore alternatives.  This is too late to make the right decisions and have a smooth transition.

Solution:  The first strategy meeting with your advisor / broker should be 5-6 months in advance of the health insurance renewal.  Custom designing your healthcare needs should begin well in advance.

Our next post about benefits (in two weeks) will be your timeline template.  Planning an efficient and professional renewal will pay dividends in better healthcare options and happier employees.

How to fix your partnership agreement now so you don’t fight about insurance later

Your law firm partnership agreement is a working document for the firm as well as a guide to what would happen should the partnership end.  Most agreements lack direction when it comes to dealing with the professional liability insurance in the event of an ending to the partnership.

It is well accepted by firm partners that law firms need professional liability insurance to cover their practice.  As a matter of asset protection for the partners, the insurance policy and firm cash are the only protection between your client-turned-plaintiff and your personal assets.  It is less discussed and known that firms need professional liability insurance coverage after they cease practicing together as a firm to cover the trailing personal liability from the legal work completed during the life of the firm.  This coverage is issued as a policy endorsement called the Extended Reporting Period Endorsement, also known as the “tail policy”.

Having been involved as the insurance broker in many law firm closures (and related disputes), it is common for partners to disagree about the tail.  Your partnership agreement should clearly address the tail issue to short circuit needless disagreements, sleepless nights, and fear of claims chasing you into retirement or a career with another firm.

Your partnership agreement should state that in the event the partnership ends, the firm will execute all tail options available to be paid by firm assets.  This makes sense to all of the partners that the insurance coverage that was adequate during the active practice period should continue the needed protection for the subsequent personal liability in the post active practice years.  In rare circumstances, the tail options limits might not be enough insurance for the future liabilities, but as a rule of thumb and starting point, it must be agreed that as a minimum the firm will execute its available tail options.  Your professional liability broker can help you with that too.

What other law firm partnership issues related to risk management do you suggest for effective managing partners?  Post your suggestions below.

Five Filthy Flaws in your malpractice insurance—How to avoid and clean them

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.

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