Why Professional Liability Premiums Change: Factors that Affect Pricing

At Lawyers Mutual, we are sometimes asked why professional liability insurance premiums change from year-to-year.  Since we strive to be open and transparent, we decided to publish a series of articles addressing a number of the major factors that can cause your premiums to fluctuate.  We want you to understand why your premiums change so that you can make educated decisions about your coverage.      

In this article, we’ll address the number of insured attorneys and “claims made step” or, as we refer to them, “attorney class” factors.  Both can have a significant effect on premiums.  Please note that it is rare that a single factor affects premiums.  Generally, a number of factors operate together to cause premiums to change from one year to the next.   

Let’s begin with the easier of the two factors to understand: the number of insured attorneys.  The attorney is the basic rating unit for virtually all lawyers professional liability insurance policies.  Premiums are generally a function of the number of attorneys (after certain adjustments, one of which we discuss below) multiplied by a rate per attorney, which is also subject to adjustment.  So, if the number of attorneys increases or decreases from one year to the next, your premiums will be affected.      

Before we proceed with our discussion of attorney class factors, you might find that a basic understanding of the types of coverage forms and the actuarial concept of exposure helpful.  In return for your patience in bearing with me throughout this article, I’ve included one of my favorite actuary jokes at the end.  I hope it doesn’t offend my actuary friends, who are, by the way, generally much smarter than me. 

Until the late 1970s, almost all professional liability policies were “occurrence” form policies.  Under occurrence form policies, the occurrence of an event (generally defined as an act or omission in the rendering of, or failure to render, legal services) triggers an insurer’s contractual obligations, independent of when a claim is made against the insured or reported to the insurance company.  Theoretically, once the event occurs, an insurer is forever obligated under the terms of the policy in effect at the time of the event.  That policy will continue to respond to future claims based on events that occurred during the policy period – even after that policy terminated.   

Conversely, claims made policies are very different animals from occurrence form policies.  Claims made policies cover claims or incidents reported during the policy period that arise from acts or omissions occurring on or after what is commonly called a “retroactive” or “prior acts” date.  The trigger for coverage under your claims made policy is not the happening of an event, but the reporting of the claim or incident arising from that event.  The event must have occurred on or after your prior acts date and the claim or incident must be reported to Lawyers Mutual during a policy period.  (Please consult your Lawyers Mutual policy for the complete insuring agreement, definitions, exclusions and conditions).  Extended reporting endorsements may provide an exception, but that is a topic for another article. 

In the first year of coverage, an insured receives a significant credit to their premium to reflect that it is only the acts or omissions during that first year of coverage that could give rise to a claim.  The credit in this year is the largest and is applied to reflect that Lawyers Mutual has exposure (an actuarial term) only for the acts or omissions occurring in that year.  In short, there is little chance, statistically speaking, that a claim will be made based on acts or omissions in that same policy year.     

Premiums in the second year for that same insured will increase because the credit applied decreases.  It decreases because the policy covers not only acts or omissions in the second year of coverage, but also acts or omissions during the first year of coverage.  And a policy in the third will cost even more, for the same reason.  Each additional year of “prior acts” coverage increases our statistical exposure to loss.  In other words, with each passing year, the likelihood of an act or omission being reported based on the current or prior policy periods increases.    

Under your Lawyers Mutual policy, if you began with a first year claims made policy, premiums will be affected over a six year period.  After six years, you are considered to be fully “mature” (not to be confused with physical or emotional maturity), and the claims made step factor increases cease.  Additional years of exposure no longer affect our statistical expectation of losses, as determined by our actuaries.

And now, the joke.  How can you tell if an actuary is extroverted?  Drumroll, please.  They look at your shoes.  Probably not worth the wait.    

We hope this article helped explain the concepts of “claims made” policies and “claims made step” or “attorney class” factors.  Our next article will discuss how areas of practice, deductibles, policy limits affect premiums.

If you have any questions, please contact us.  We’re always happy to answer questions that our insureds may have.