Do contributions matter? Part II

Do contributions matter?  Part II  How to lower health insurance costs by providing incentives.

When advising firms on contribution strategies (how to share the cost of health insurance with employees) many firms are making a huge mistake. While nobly intended, the firms that pay 100% of health insurance premiums, for single and sometimes even for family coverage are wasting money. These well intended policies have the unintended consequence of increasing your participation rate by an average of 10%. Meaning on average, 10% of your employees are eligible for better and cheaper coverage through other plans (spouse plan, retiree, or government qualified) but if your policy is to give it for free, they will accept the coverage. This is a waste of money since in an era still dominated by network copays for most services, there is little financial benefit for your employee to participate in double coverage, but as there is no cost to them, 10% of your people will double dip – participate in two plans. With single coverage being approximately $5,000 per year, firms are wasting tens of thousands of profit dollars.

There are two fix strategies to get these people off of your health insurance dime and still maintain a benefit friendly work environment:

1) Replace your simple 0% contribution with a policy that continues to be a 0% contribution plan with an official Buy Out plan. If your employee elects to not take your coverage you will through your official Buy Out plan, give them $100 per month. The $1,200 annually is enough for your employees to be financially incentivized off of your plan. It will likely cover much of their out of pocket costs (copays, etc.) that they will experience on the other plan.

2) Charge 10-15% for the coverage. This should be sufficient to incentivize your double dippers to not take both plans, but still low enough to deliver a benefit friendly environment.

Lastly, this year’s renewal discussion will inevitably include analysis of cost sharing plans (plans with in network deductibles and coinsurance). Discuss with your broker how these plans may or may not fit in with your firm contribution strategy. Since these plans are different in the user cost experience, they need to be analyzed in a contribution and tax efficiency prism for the complete picture.

Something else working in your firm?  Email the Guru at

7 Habits of Highly Effective Professional Liability Insurance Applications

Your professional liability application is the single largest piece of information that insurance company underwriters use to determine what premiums and terms they offer.  As brokers, we spend a considerable amount of time helping our clients put their firm in the best light possible with their application.  This is a time consuming process for all involved but delivers large returns on the investment of time.

1)  Area of Practice.  There are broad areas of practice categories that are viewed by insurance companies as the riskiest, i.e.: SEC, IP, Plaintiff, etc.  What you might not know is that within those categories, some areas of practice are NOT viewed as risky.  For example, within the broad SEC category, private placements are not charged as a high risk practice.  Go though each of these areas with your broker to provide further information where needed to make sure that you are not overcharged unnecessarily.

2)  Claims Questions.  Make sure that you answer all of the questions here.  Do not just attach the legal papers and say, “see attached”.  Underwriters do not read the papers.  Most importantly, explain what you’ve done to avoid claims in this area of practice.  This will help your broker make the argument that this type of claim is less likely to recur.  Bonus tip: read the time period requested carefully.  Some applications ask for 5 years of claims only.  If so, don’t send in 6 or 7 year old claims.

3)  Expand the questions.  Though most of the questions are Yes or No – feel free to explain.  For example if the question asks, “Do you send Declinations to all potential clients?”  Though the answer might be NO (since you don’t do it for ALL potential clients), you should provide when you do provide declination letters.  For example, many firms do provide declination letters to potential matters if they met in person with the prospective client.

4)  Executive attention.  The trend emerged in the 90’s for law firm executives to delegate the application to non-executives.  This resulted in many costly errors and too high premiums for law firms.  Executives and Partners are the best equipped to understand the intent of the questions and fully answer the questions and categorize the areas of practice most efficiently.  They are also best able to work with your broker on the claims information (see item 2. above).

5)  Of Counsels.  When counting the number of attorneys the question is usually a general one – “How many Of Counsels are there at the firm?”  Even if the question is generically written, it behooves you to further explain this position in your firm.  Are they full time or a few hours a year?  Most insurance companies, if they are told about it, will discount if your Of Counsels are non-full time attorneys.  No need to pay full rate for a part timer

6) Application should be typed.  Sounds silly, but this matters.  Underwriters are human and interpret a hand written application as a firm that is not sufficiently technology savvy to run a modern law practice.

7)  The application must match your website.  If your website says you do something, you should proactively explain why your application says something else.  Many underwriters do look at your website and get uncomfortable if they don’t match what you wrote in the application.

Upgrading your application is the single best way to improve your professional liability options.  In today’s economic climate, the best run law firms are working with their broker to leave no application stone unturned.

The 5 shopping steps for your professional liability insurance

The timeline for shopping your professional liability insurance is the bedrock foundation of the shopping process.  Waiting to start shopping until you receive your renewal quotes can be disastrous.  Therefore, philosophy number one is ASSUME that your renewal quote will be terrible.  Be prepared for the worst case scenario.  Many times, your renewal quote will be competitive for your consideration, but just in case you need to be ready for the worst.  Below, we summarize the five steps in the timeline that your broker must coach you through for effective shopping.  Each step summarizes your role and your broker coach’s role:

Step 1 – 90 days prior to your policy expiration

Your broker should apprise you of any major changes that you will need to anticipate.  For example, is your current insurer leaving the market, becoming pickier than in the past?  Is your claims history now better or worse than it was in the last application cycle?  Armed with this information, you will start completing an application: renewal or new business application where applicable.  Note: do not go to next step with a limited renewal application.  Some renewal applications do not contain enough information for other insurance companies to provide quotes.

Step 2 – 60 days prior to your policy expiration

Your rough draft of the application should now be reviewed by your broker.  They should be reviewing it for mistakes, missing information, and broad evaluations if the completed application puts your firm in the best light possible.  The broker / client conversation here should improve your application.  It is important that you relate efficiently (email is good for working together on documents) and timely with your coach to move on to the next step.

Step 3 – 45 days prior to your policy expiration

Final application should be submitted to all of the insurance companies.  Remember, the broker needs to shop the policy ASSUMING that the current insurer will not be competitive.  Therefore, you will need a plan B, C, and D in order to be prepared for that possibility.  As in the previous step, you might be contacted by your broker to provide quick answers and follow up documentation that is requested by each insurance company during their underwriting process.

This is the important time when your broker needs to work hardest.  All insurance companies need to be negotiated with simultaneously.  It is currently a great market for law firms purchasing insurance.  Fierce competition from insurance companies has led to the lowest premiums and the most beneficial terms in 10 years.  But a true competitive market needs to be created by your broker.  Your current insurer needs to know that the broker is shopping the policy aggressively.  Sometimes your current insurer will match the market and sometimes they will not.

Step 4 – Two weeks prior to your policy expiration

Your broker will meet with you to discuss your options.  If switching insurance companies is prudent, new applications or other paperwork might need to be provided.  Policy options need be scrutinized for the obvious and not so obvious terms that differ among policies.  Each potential policy language needs to be read and compared by your broker to properly advise you.

Step 5- One week prior to your policy expiration

Your decisions need to be made and the coverage bound by your broker.

Like any good coach, your broker isn’t doing their best job, if they “let you” slack off.  Together with your coach, follow these five steps to shop effectively.   In our next post, we’ll discuss the most common mistakes in applications and how to fix them to put your best foot forward.

The One Big Thing – Why shop and how to do it right

Over the next few weeks, we will be posting a series of strategies to help law firms improve their professional liability insurance policies.  These ideas improve the terms offered and lower the premiums.  We’ll cover the small stuff and the big stuff.  Today, we’ll address the big one – shopping your professional liability insurance.

There are many insurance companies that are interested in insuring law firms: 8 major players, 4 minor players, and 5 very minor players.  Shopping your insurance policies can have a huge impact on your policy premium and the ongoing financial impact on your firm (ongoing deductibles, limits, etc.).  In our next post, we’ll detail the timeline and benchmarks for effectively shopping.

Why shop and how to do it?

Each year, you must approach all of the insurance companies and negotiate with all of them.  Many times we see law firms not shopping to the entire market.  The law firm’s broker goes to three or four of the insurance companies to “get a feel of the market”.  This thinking is wrong as in any given year, some companies will become aggressive for your business and some companies will now consider your practice areas as too risky for their most updated underwriting appetite.

What results can you expect?  The rate and terms differential in the marketplace is very diverse.  For the same limits and deductibles, pricing varies in excess of 100%.  A law firm can decide to pay $100,000 or $200,000 for the same coverage.  All things being equal, there is no reason to overpay to insurance companies.

When the first shopping round is completed, your broker should do a complete analysis of the choices comparing the premiums and terms offered.  With this analysis, your broker should negotiate with all of the competitive companies to get the best terms from the best companies.  The terms analysis needs to consider the companies: experience in lawyer’s professional liability insurance, financial strength, and reputation of the insurance company.

Top common misconception of why not to shop.

Waste of time – Not true.  True it takes significant time to shop, but most of the time should be your broker’s time.  That’ what they get paid for.  Insist on it or get a new broker.

Terms are the same anyway – Not true.  Differential could be huge between the options

Do you really gain leverage?  Absolutely.  Insurance companies will frequently drop their original premiums by up to 25% or match beneficial terms to keep accounts they know are profitable.

Do you agree or disagree?  Email the Law Firm Insurance Guru at

Same Page Risk Management

Over the years, we have noticed that risk management is taken seriously by management.  Managing partners and executive committees discuss with us and know what can get the firm into trouble and what reasonable steps are needed to minimize their exposures.  Simple examples include: monitoring receivables and being responsive to any hints of client dissatisfaction. Generally speaking, management has institutionalized policies and procedures (in manuals, memos, etc.) to match their decisions in risk management.

But something is not working.  There is a disconnect between management and non management lawyers (partners and associates) in this area.  We have observed that there are far more risk management mistakes made by non management lawyers than by lawyers in management even after adjustments for numbers (there are obviously far more non management lawyers than management lawyers).

This is dangerous for two reasons:

1) An environment of inconsistency can be used against you in court. Your attorneys (and the firm) will be held liable to your own standards in addition to the usual standard of care.

2) Failure to follow procedures and the ensuing problems undermine firm plans.  For example, if the firm decides to increase their litigation department’s average case size since they are comfortable with their docket / calendar system, failure to follow procedures to input data properly into that system undermines the firm’s strategy.  The added exposure in taking larger cases, might not make sense with the added exposure to the firm in extra professional liability claims and future premium increases.

What can be done?  Same Page Risk Management. All lawyers (management and non-management) need to be on the same page – know what the firm procedures are and then management needs to check and verify their compliance.  Come up with 10-20 simple questions that apply to your firm practices. A few docket, a few file retention, a few client service related, and a few billing related.  Have management answer the questions and then non-management answer them.  See where there are discrepancies and most importantly – get everyone on the same page.


Are Partners owners or employees of the firm? Don’t bet your firm on this one! PART I

There is a debate (the most recent being Kelley Drye – story here whether firm partners are considered owners or employees of the firm.  The firm’s position like Sidley Austin back in 2007 is that partners are owners of the firm and not employees.  Therefore, as owners most employment guidelines don’t apply to the treatment of owners so practices like mandatory retirement should be permitted.

The EEOC’s position on this issue (from the Sidley Austin case):  “…the EEOC administrative investigation revealed that, “except for a very few controlling partners at the very top, Sidley’s lawyers appeared to be ordinary employees not unlike their colleagues at parallel levels in the business community and, therefore, covered by the ADEA.”  In other words, except for the top partners at the firm, though called Partners in name, many partners act as employees and should therefore be protected as employees.

Now the insurance tip that EVERY law firm, regardless of your legal opinion on the above matter must do today.

Law firms, like many businesses, purchase Employment Practices Liability Insurance (EPLI).  This insurance policy provides defense costs and indemnity payments for employment related claims.  Most of these insurance policies follow the Kelley and Sidley definition, meaning that partners are owners and therefore the policies DO NOT cover partner’s claims.  If a partner brings a discrimination claim based on age or any other protected class, no coverage – you could lose your firm over this.

This problem is avoidable and fixable.  Have your broker confirm to you today that your EPLI policy has the full coverage, including partner claims.  The technical jargon is that you want a policy that includes coverage for partners as employees.   On this issue law firms should not argue the case, but rather insure both sides.

Update – EEOC wins round II – Kelley Drye & Warren has dropped its mandatory retirement policy

What happens when alternative fees benefit the law firm?

This  story, Kasowitz Sues Duane Reade for $7 Million ‘Success Fee in today’s New York Law Journal raises questions about what can happen when alternative fees end up benefiting a law firm beyond what they otherwise would have earned in fees under the traditional hourly fee arrangement.

The Journal writes that “Kasowitz, Benson, Torres & Friedman has sued longtime client Duane Reade for a $7 million “success fee” it claims it is owed as part of an alternative fee arrangement. The law firm represented the drugstore chain in a contract dispute that the company settled for an estimated $39.5 million without Kasowitz’s knowledge. Kasowitz claims the settlement included terms the firm negotiated during the course of the litigation. The suit comes as clients are increasingly pushing law firms to enter into non-hourly fee arrangements.”

How is your firm adapting and preparing for alternative fee arrangement requests and equally important, how are you preparing to collect these fees when they are unpaid?  Unlike traditional contingency cases, where the defendant frequently pays you and then you disburse to your client (think personal injury settlements), these alternative fee arrangements may not have settlement amounts going through the firm or may involve no settlement at all (think defense verdicts or dismissals).

It’s critical to think of these eventualities when you consider alternative fee arrangements.

Evaluating Health Insurance for Partners

It frequently makes big picture sense for health insurance plans to have plans with lower premium costs and higher health plan user costs like higher co-pays or deductibles. A major reason why this makes sense is that employees pay premium contributions with pre-tax money and also pay health plan user costs with pre-tax money using Flexible Spending Accounts (F.S.A.) or Health Reimbursement Accounts (H.R.A.).Conclusion:  If the firm is implementing health plans with large health plan user cost (co-pays, deductibles, etc.), partners will usually fare better in a properly structured H.S.A. plan or an insured Medical Reimbursement Plan.

The analysis, however, becomes cloudier for partners. Here’s why: Partners and business owners pay or get charged for their own health coverage and then deduct the cost of the premiums on their tax returns. So far, in the analysis its’ the same as employees, i.e. pre-tax money. But when it comes to claim paying, it’s not the same dollars since partners and business owners will be paying with after tax money because most partners (exceptions below) cannot participate in F.S.A or H.R.A. plans. So a shift that lowers premium costs and increases user costs has an automatic extra cost equal to the partner’s marginal tax rate. For every $100 in premiums saved that goes to the user cost side, the partner is paying an extra $30 penalty (assuming a 30% tax rate). It still might make sense but you can see how the taxes can make the less expensive plan into the more expensive total option.

There are three scenarios whereby partners can get equal treatment as employees and therefore the strategy discussed above can work:

1) In law firm structures where the partners are employees, as in a non S Corp PC, partners can participate like employees in the F.S.A. or H.R.A. plan. So both premiums and user costs are the same pre-tax dollars.

2) By selecting a higher user cost health plan that is compatible with a Health Savings Account (H.S.A.), partners can capture the same tax advantage as employees. There are H.S.A. compatible plans that if structured correctly, mirror the positive tax advantages of traditional plans and could even provide better overall claims exposure protection.

3) Purchase an insured Medical Reimbursement Plan with pre-tax premium dollars and use it a “flow through” policy to pay for unreimbursed expenses.


If the firm is implementing health plans with large health plan user costs (co-pays, deductibles, etc.), partners will usually fare better in a properly structured H.S.A. plan or an insured Medical Reimbursement Plan.

Don’t fall prey to this insurance scam against law firms!

Several times a year, we receive a call from a law firm managing partner. It goes like this:

“We have had a tough year and have had a number of claims (or potential claims) against us. Our malpractice insurance broker has told us that getting insurance is therefore tougher for us this year compared to the past and in fact our current insurance company is non-renewing / cancelling us.”

The client pauses, swallows hard and then explains the reason for their call.

“We used to pay X for our insurance per year for the firm. In light of our current situation [referenced above], the only way to get insurance is to buy two policies: 1) a tail policy from our old insurer and 2) a policy from a new insurer to cover the new legal work going forward. The problem is that the tail coverage is 2-3X (two or three times) our annual premium and the new policy will cost us about 2x (twice) what we used to pay too.”

So when the costs are added up, this law firm is going to pay four to five times their regular premium this year!

Why is this a scam on law firms? Because 99.9% of the time, there is a far less expensive way to purchase the insurance. The purchase of a Tail PLUS another policy rarely makes sense. Insurance brokers peddling this scam are either inexperienced in representing law firms (and don’t know better) or see their clients’ travails as opportunities to earn higher commissions. Why do law firms fall prey to this? They believe the story told to them and are often only told the grim news at the very last minute when the firm is desperate to lock in their coverage at any price.

The best protection against this trap is to interview another broker who specializes in law firms in your area. Bring them in, look them in the eye, and ask them point blank what they think of your specific situation and how they have helped their clients deal with your issues in the past. If they can’t answer to your satisfaction, interview another broker. Repeat your search until you have specific action plans from law firm insurance specialists.

Do Contributions Matter? PART I

As a law firm insurance advisor, we advise law firms on how to structure their benefit plans and their employee contributions towards those plans. As you can imagine, every firm has their own strategy on this unique to their firm culture (i.e. rich benefits vs. cheap benefits). We essentially help them make their benefits consistent with their firm goals.

A hot topic is employee contributions to the premiums. That is, how much and in which way, do employees pay premiums towards their benefit plans. Some are based on family structure (family vs. single) some are based on which plan the employees chose, etc.

We recently completed an analysis for a law firm that was contributing a fixed % (percentage) of the premium regardless of which plan the employee selected. So if the employee elected the “high plan” the firm paid a % and if the employee elected for the “low plan” the firm paid the same % amount. Not entirely surprising, under the current system, twice as many employees elected for the “high plan” than the “low plan”.

Now comes the NEW contribution model…

The firm will base their contributions on the “low plan” and if employees want the more expensive plan, the “high plan”, they can “buy up”, that is pay the entire premium difference to be on the upgraded plan.

Which plan will employee go to now? Will people migrate to the lower cost plan now when they have to foot the bill? We’ll see and I’ll update the blog when the enrollments are done in a few weeks.