Jettison high malpractice premiums

Rule 3-410 of the California Rules of Professional Conduct requires attorneys to disclose to clients if they do not hold professional liability insurance. As such, malpractice insurance is becoming more and more common for attorneys and law firms in California.

Despite popular opinion, law practices can do things to lower the cost of their legal malpractice insurance. The key is to first understand how insurers rate law practices. Firms must then make sure that the law practice's insurance submission is accurate and complete. Firm should avoid mistakes and ambiguities that unnecessarily cause higher premiums and should take full advantage of other opportunities, such as credits, to lower the premium.

The single most important document that insurers use to calculate a law practice's legal malpractice insurance premium is the application. Applications generally ask a variety of questions, most of which focus on four important aspects of the firm: (1) size; (2) practice areas; (3) geographical reach; and (4) claims experience. Though these topics seem quite basic, they are not as straightforward as they appear.

Insurers usually calculate a base premium by multiplying the number of attorneys in the firm by a rate schedule based on the specific practice area and geographic location. Using this formula, the question is whether law practices submitting applications can improve their situation within these base rate factors. The answer is yes.

Size

The first question for purposes of calculating the base rate for legal malpractice insurance is "What is an attorney?" In insurance actuary parlance, insurers consider every full-time attorney to be one attorney rating unit for purposes of calculating the base premium. Many insurers do not consider attorneys "of counsel" to be a full rating unit. Other insurers distinguish among attorneys, contract attorneys, retired attorneys, and paralegals. Some insurers distinguish even further, drawing a line between partners and associates.

Not surprisingly, the risks associated with a retired or part-time partner and an of counsel or a non-practicing contract attorney are different than the risks associated with a full-time, practicing attorney. Insurers recognize these distinctions and factor them into their calculations. Law practices should follow this logic.

While some of these distinctions may be blurry at best, they can have a significant impact on the calculation of a law practice's base rate for purposes of determining its legal malpractice insurance premium. For law practices interested in reducing their premiums, the distinctions between attorneys should be well-defined and accurate. An ancillary benefit is that such steps help clarify roles within a practice and minimize the risk of legal malpractice claims.

No law practice enjoys making the difficult call of defining which attorneys will serve in which roles. However, the failure to do so carries a price. The result can artificially (and unnecessarily) inflate total attorney rating units, which can translate into a higher-than-appropriate premium. The better option is for firms to accurately define, determine, and report their firm size.

Practice Areas

The second half of the equation involves the application of rates based on practice areas and geographic locations. As with the number of attorneys, law practices should focus carefully on these two factors.

Insurers evaluate practice areas based on two criteria: (1) frequency, or how often claims are made; and (2) severity, or how bad the claims are. Some practice areas, such as residential real estate, plaintiffs' personal injury, and collections, have dramatically higher frequency of claims. Other practice areas, such as oil and gas, securities, and environmental law, have substantially higher severity of claims.

Along with frequency and severity, insurers also consider those practice areas that result in claims that are expensive to defend and resolve, such as admiralty, marine law, and intellectual property. These practice areas involve the worst combination of all factors: high frequency, increased severity, high defense costs, and expensive settlements.

For a premium-sensitive law practices, the question is why the law practice would engage in a non-core practice area that falls within a high risk category. For example, a five-person defense firm would ordinarily pay a lower premium because it has a lower number of attorneys in a lower risk practice area. However, taking on a single plaintiff's personal injury case or adding a part-time or of counsel attorney can change premium calculations drastically. Instead of reporting zero for the percentage of plaintiffs' personal injury cases, the law firm must accurately report some number greater than zero. The impact is then multiplied by the extra attorney. The net effect is a different and likely higher rate.

There are good reasons other than a firm's legal malpractice insurance premium to limit the types of cases a firm accepts. One of the more significant risks of a legal malpractice claim occurs when attorneys move outside of their area of expertise. For instance, real estate attorneys delving into litigation matters, or defense attorneys handling an intellectual property matter, often spell trouble. The safer course is to define the law practice's areas of expertise and then stick to them.

Firms with open "one off" files should carefully consider whether the potential gain from the representation outweighs the additional premium costs and legal malpractice risks. If the risks outweigh the rewards, the best course of action is to transfer the matter to a law practice that specializes in handling those kinds of matters.

Geographical Reach

The same is true for considering where a law practice has offices. There are some law practices that house nearly vacant offices in other cities for the sake of saying they have offices there. But the number of offices and the geographic areas in which those offices are located can have an impact on the rate charged to a legal malpractice attorney. Insurers have determined that having an office in certain locations increases the risks of a legal malpractice claim; consequently, firms in those locations often have a higher base rate from the insurer's schedule.

By accurately defining and reporting the number of attorneys, a law firm can improve its base premium. And, by limiting practice areas and geographic locations, a law firm can further improve its overall rate.

Premium Credits

Once insurers calculate the base premium, they consider other factors to determine the final premium quote. Often, these factors involve the exercise of some discretion in adjusting the premium or, more likely, the application of premium credits.

For instance, many insurers make adjustments in favor of renewal business. After all, these are law practices that have already earned their confidence, and the insurers want to keep the business. A positive claim experience - and particularly, the absence of claims - can result in a positive adjustment of a law practice's premium. The converse is also true, however: a negative claims history can result in a negative adjustment of the premium. Basically, insurers adjust their premiums based on the specific exposure and experience of a law practice.

Finally, some insurers offer specific premium credits. These credits generally involve risk management tools, such as docket control and calendaring systems, conflict resolution procedures, standardized client intake procedures, and formalized billing practices. It is most important that law firms reach out to find out what credits are potentially available and then to determine if it is feasible for the firm to qualify for them.