Information you need before you buy Lawyer Professional Liability Insurance (LPL)
All LPL policies from all companies are provided on a CLAIMS MADE basis. A claims made policy differs dramatically from other types of coverage, like automobile or homeowners insurance. The difference is very important to every lawyer who has an LPL policy.
A CLAIMS MADE policy provides you protection for claims made against you (and reported to your insurer) during the policy term. It is the policy in force at the time the claim is made against you that will provide you coverage rather than the policy that WAS in place at the time you delivered a legal service that eventually resulted in a claim. Statistics show that very few claims get presented within the same policy term (policies last only one year) as the legal service that instigated the claim. Most claims are made against lawyers 2 ,3 or 4 years after the legal service was provided.
In order for an LPL policy to provide coverage for you, you must have had a policy in place at the time you delivered a legal service, as well as having maintained uninterrupted, continuous insurance from year to year, policy term to policy term, up to and including, the time at which a claim derivative of that legal service is made against you. It is the policy in place at the time the claim is made against you (with its policy terms, policy limits, deductibles, etc.) that will apply to the claim made against you (not the policy terms in place at the time you delivered the legal service).
Continuous insurance is the key. You do not have to be insured by the same insurance company. However, you must maintain continuous insurance. If you change insurers from one to another, the new insurer must provide a policy that includes coverage for claims made against you arising out of legal services you delivered when you were insured by previous insurers. The new company must take over the position of the previous insurer and provide prior acts coverage for work done in the past on or after the Retroactive Date in your new policy. The Retroactive Date is the first date of your first insurance policy, and coverage must have been maintained continuously since that date with one or more insurance companies.
Since statistics show us that very few claims get made in the first year of coverage, the first year premium has been reduced commensurately. The premium will increase automatically each year for approximately 5 years after the first year. It is like walking up a set of price stair steps. The percentage of increase each year varies a bit from company to company but you can count on at least a 20% increase each year for the 5 years following the first policy term. These price increases have a formal name. They are called Claims Made Step Factors.
Why does the price increase automatically for each of these years? Here’s why: Statistics reveal that few covered claims get made in the first year of insurance. The first year price reflects that and is low. The second year of coverage is protecting you for claims made in the 2nd policy year for claims derivative of the legal services you provided in the 1st policy year AND the 2nd policy year. Since the potential for presenting a claim is higher in the 2nd policy year, the price is higher as well. As the potential for claims to be presented in subsequent years continues to increase, the price continues to go up as well. For example, the premium charged in the 3rd policy year contemplates the potential for claims to be made in the 3rd policy year, generated out of legal services provided in the 1st, 2nd & 3rd policy years.
These percentage increases do not continue forever. After the last claims made step factor is reached (usually after the 6th policy year) these automatic step factors cease. Your premium will continue to be affected by other factors such as the % of work you do in a particular area of practice, or if your policy limits or deductible changes. Also, there could be a rate increase for all of the lawyers in your territory. Several factors ultimately determine the premium from year to year. The claims made step factor is just one of them.
We encourage every lawyer to understand how professional insurance works. If you would like to call for a one on one discussion of anything raised out of the information we have provided, of have any other questions, please call one of our agents here at Mainstreet. Thank you.