The market for lawyer’s professional liability (LPL) insurance is like any other market in that the price for the product is determined by the principles of supply and demand. But what are the factors that are unique to the LPL insurance market?
In the insurance world, either the market is deemed “hard,” meaning that premiums are high and coverage is limited, or “soft,” meaning that premiums are low and insurers offer coverage freely. In general, three variables affect the “hardness” or “softness” of the LPL market.
First and most obviously, claims affect the market’s character. If clients assert more claims against lawyers (referred to as frequency), or if insurance carriers have to pay claims of higher amounts on average (referred to as severity), then the cost of LPL insurance will rise.
The second variable affecting the LPL insurance market is interest rates. In insurance jargon, LPL insurance has a “long tail,” which means that usually a carrier doesn’t actually pay a claim until several years after the carrier collects an insurance premium from a firm. During this “tail period,” an insurance company invests the premium that it has received. If interest rates are low, then the income generated is likewise low. In those circumstances, an insurance carrier has to rely on its underwriting activities to make a profit. In other words, carriers typically make up for poor investment income by raising premium rates, decreasing coverage, or both.
The third variable that affects the LPL insurance market is the amount of surplus capital in the overall insurance market. Surplus capital increases as insurance carriers generate positive income and choose to keep it in their companies as retained earnings instead of paying dividends to their stockholders or policyholders, as the case may be.
How Your Firm Can Thrive in Any Market
In LPL insurance, there are several steps that you can take to position your law firm to thrive in any insurance market.
The easiest and often most overlooked way to improve your risk profile with LPL underwriters is to prepare a good application. Unfortunately, many LPL applications that I read appear as if they have been just “thrown together” by law firms. That generates an unfavorable first impression in the eyes of an LPL underwriter. Remember that LPL underwriters have the power to apply discretionary credits to your account. These credits are based on a carrier’s subjective evaluation of the quality of your firm. Therefore, it makes sense to present your law firm in the best light possible.
Be Honest but Assertive About Past Claims
Be sure to explain any incidents or claims on your application carefully. Resist the temptation just to attach the court documents themselves. First, an LPL underwriter will not wade through all of that paperwork. Second, the court documents themselves allow an LPL underwriter to read a plaintiff’s assertions about how negligent, ignorant, incompetent, and sometimes malicious your firm has been in handling a claimant’s legal matter. Rather, it is much more preferable to summarize a claim using an insurance carrier’s supplemental claims application.
Your Website is Read by Everyone— Including the Underwriter
You periodically should review your law firm’s website to make sure that it contains the most current information about your firm. Most LPL underwriters now review a firm’s website in tandem with its insurance application. If there are discrepancies, then an underwriter will want to know why. Most times when an underwriter spots a discrepancy, it is because a firm simply failed to update the content of its website.
Ownership Interest in Clients— Treasure or Trap?
You should know that ownership interest in clients among individual lawyers is a “red flag” for LPL insurance underwriters. If a client in which an attorney has a financial interest has asserted a claim against the firm, an underwriter will wonder whether the attorney acted in the capacity of an attorney or as a company shareholder. When a client asserts this kind of claim, the claimant’s attorney will try to make this potential conflict as meaningful as possible to prove that an attorney did not provide his or her client with unbiased advice. Although not dispositive, ownership issues tend to make claims more complicated, and thus, more expensive to defend.
Some Final Thoughts
As we move into 2018, it will be interesting to see how the insurance market reacts to changes in the world economy, interest rates, claims inflation and other factors. However, regardless of what the market does, the actions that you take now can better position your law firm for its next renewal. Lean on your insurance broker to offer you more in-depth recommendations suited to the particular needs of your firm.
Kevin J. Sullivan, CPCU, RPLU, is the program manager for the LawyerGuard program, having been in the professional liability insurance industry since 1985. Additional information regarding the LawyerGuard Program can be found at www.lawyerguard.com. Kevin can be reached @ (860) 756-7417 or KevinJ.Sullivan@WillisTowersWatson.com. For over 25 years, DRI has sponsored LawyerGuard for lawyers’ professional liability insurance for its membership.