Most lawyers and law firms that want to protect their practices from the potentially crippling financial losses that can result from professional liability claims understand that they need to purchase a lawyers professional liability policy. That much is clear.
However, one aspect of buying this insurance policy that lawyers often don’t understand fully is LPL step-rating. What is step-rating and how does it affect your LPL premium?
Step-rating is a pricing method that insurers use when selling LPL products to lawyers and law firms. In this pricing mechanism, the costs of an LPL policy will increase incrementally during the initial years of coverage.
If a law firm isn’t familiar with this methodology, seeing their premiums rise by up to 35% upon renewal could be a rather unpleasant surprise, especially if they haven’t experienced any claims and no major changes occurred with their practice over the course of the year.
Understanding the Logic Behind Step-Rating
Professional liability policies are written on a claims-made basis, which means that a firm with one year of experience has less exposure than a firm with five years of experience. With claims-made policies, the law firm will be covered if both the event and the claim arise while the policy is active and is reported during that time period.
The insurer “step-rates” the policy to account for the increased exposure in prior acts, which is standard practice for professional liability policies. Your premium is relatively low the first year as the risk that a claim will arise for the services rendered during the first policy term is rather low.
However, the biggest jump in premium occurs from the first to the second year of the policy, since claims tend not to arise until a couple of years or so after the legal work was performed.
Step-rating is calculated on a per attorney basis, so new attorneys will start out at the discounted rate. The premium will continue to increase until the attorney is fully mature.
Attorneys are considered fully mature once the insurer has determined that additional years of exposure no longer increase the likelihood of a claim being filed against them.
What Factors Affect LPL Step-Rating?
Lawyers can think of each policy renewal as an extension of every expired policy before that creates a continuous chain that can’t be broken. Each year, the new policy covers an additional year of the legal work you’ve performed going all the way back to the original retroactive date.
Since the carrier is covering an extra year of your work, or “prior acts,” they step-rate (increase the price) to reflect the increase in risk they are taking on.
Think of each year as a chain link. The date is carried over from each renewal, giving you more protection for prior work and creating a longer chain. If the policy is canceled or if there is a lapse in coverage, the chain is broken.
You are then forced to start over with a new retroactive date. This gives you no protection for prior work and is now a shorter chain. The critical benefit of carrying continuous coverage is that it provides you with protection for work performed previously.
Losing the retroactive date effectively cancels the protection afforded by earlier coverage. The retroactive date is a provision in claims-made professional liability policies that eliminates coverage for claims arising from professional services performed prior to a specified date.
For example, if your retroactive date is January 1, 2021, and you made a malpractice error while providing professional services on December 31, 2020, this incident would be excluded from coverage.
In other words, it’s the inception date for when coverage begins. Typically, the retroactive date is the date the insured first purchased insurance.
How Do “Full Prior Acts” Affect Step-Rating?
“Full prior acts” is a feature added to a professional liability policy that removes the specified retroactive date. Instead, the insurer agrees to provide coverage for claims arising from professional services performed at any point in the past, even if the alleged error occurred while the insured was covered by a different insurer.
The full prior acts feature is usually only offered if an insured has maintained continuous coverage since first purchasing the policy. Since it can take a long time, sometimes years, for a malpractice error to become known and/or result in an official claim, having full prior acts can be very beneficial for law firms.
That said, it’s always important to immediately notify your carrier of any incidents as soon as you become aware, as claims can still be denied for having prior knowledge of an incident and not reporting to the carrier in a timely fashion.
Other Factors Insurers Consider
When it comes to step-rating, insurers also take into consideration factors that they’ll look at regardless of step-rating when determining how much your law firm should pay for a legal malpractice policy, based on the level of risk associated with your firm.
Some of these factors include the size of your firm (number of attorneys), how long each lawyer has been working for you, the areas of practice that your law firm specializes in, liability limits, and the deductible.
Other factors that affect step-rating, and premiums in general, include increasing or decreasing the number of attorneys employed at your firm, your revenue, claims history, as well as inflation and interest rates.
It’s important to remember that insurers will typically calculate both a premium for each attorney you employ and the firm in general, and then blend these two together in order to reach a final premium number.
And while solo practitioners will pay lower premiums compared to firms that employ several attorneys, a solo practitioner’s step-rate usually increases more drastically.
How Long Does the Step-Rating Process Last?
Usually, step-rating ends after five years, at which time the law firm or lawyer is considered “mature.” However, it’s important to remember that this is only true for firms or solo practitioners who are not adding new lawyers to their policy.
If your law firm is constantly adding new attorneys to the policy, the step-rate increases will continue as long as you continue growing your firm. Multi-lawyer firms will experience step-rate increases for each new attorney that is in between year two and year five of their employment with the firm at the time.
If all of a firm’s attorneys are mature in their full prior acts coverage, the firm will no longer incur a step-rate increase. However, the other aforementioned factors that dictate premium prices for law firms could still cause an increase in premium costs, despite the maturity of your firm.
It’s important to keep in mind that step-rating is an industry-wide practice that is performed with the end goal of helping insurers provide better protection to the law firms that they insure.
And while it can be shocking or frustrating to see your law firm’s LPL premiums significantly increase year over year, knowing that the goal of the process is to make sure that you are properly covered can assuage some of the frustration that comes with having to shell out more money for your coverage.
If you’re still not completely sure about step-rating practices and would like to speak to an expert broker who can explain the nuances of the process to you, feel free to reach out to our experienced and dedicated law practice at any time to learn more.