Why Professional Liability Premiums Change: Factors that Affect Pricing
Here at The Clausen Agency we receive a lot of questions about our policies and one of the most common ones regards the yearly change of professional liability insurance premiums.. Since we try to be transparent and open, we wanted to release several articles where we explain the main reasons why premium costs fluctuate. We’re dedicated to helping you understand why premiums costs vary in order for you to be able to take better decisions when shopping for coverage.
In the article below we’re going to address the lawyer class factors and also the number of insured lawyers since they can have a major impact on premiums. It’s also important to note that rare are the cases when 1 factor can influence premiums.
The Number of Insured Lawyers
The lawyer is practically the rating unit for every attorney professional liability insurance policy out there.
Premiums are usually a function of the number of lawyers times the rate per lawyer, rate that usually needs to be adjusted. What this means is that your premium is affected by how many lawyers are out there (whether they increase or not) from year to year.
Prior to letting you know more about what the lawyer class factors are all about, it’s very important that you know what the actuarial concept of exposure is all about and the various kinds of coverage forms. In order to reward your patience so far, I’ve also added a very funny actuary joke at the end of the article, one that I hope my actuary friends won’t be offended by. After all, they’re a lot smarter than I am.
About ninety five percent of professional liability insurance premiums were occurrence form policies until the late seventies. Regarding occurrence form policies, when a certain event occurs (defined as the failure of rendering legal services) it will eventually trigger the contractual obligations of an insurer, regardless of the time the claim is reported to the insurer or made against the insured party. In theory, after an event takes place, the insurer is permanently obligated based on its policy’s terms of service when the event took place. What this means is that the policy is open to any potential future claims based on the event that took place while the policy period was active, regardless if those claims are made after the policy expired.
On the other hand, claims made policies are exactly the opposite in that they only cover incidents or claims that were reported while the policy period was active. These claims need to have stemmed from omissions or acts after or on what is usually known as a prior acts date.
It’s not the occurrence of an event that triggers the coverage under the claims made policy, but the reporting of the incident or claim that arose from that specific occurrence. It’s important that the event took place after or on your prior acts date. Also, it’s vital that the incident or claim is reported to the insurer while the policy period was active.
Be sure to check your insurance policy for the complete conditions, exclusions, definitions and insuring agreement.
In his first year of coverage, the premium of the insured party will receive a great amount of credit in order to reflect that only the omission or acts in that first coverage year can impact the chances of a claim being filed against them. However, the chances of this happening are low, at least from a statistical point of view.
In the second year, the premiums for the same insured party are going to be higher, since the applied credit is reduced. The reason the latter is true is due to the fact that the policy covers omissions or acts in both the 1st and 2nd year of coverage. Because of this very reason getting a policy in the 3rd year is going to cost you more money. The reason this happens and will continue to happen is because as each year passes, the chances of an act of omission being reported that is based on the prior or current policy period are much higher.
Taking your insurance policy into consideration, if you started out with a 1st year claims made policy, premiums are going to be impacted over a 72 month period. After this period, you’ll be regarded as completely mature (it has nothing to do with emotional or physical maturity) and no more increases are going to take effect. Extra years of exposure won’t impact the losses in our stats, based on our actuaries.
Should you want to know more or need some further explanations about what you read, then be sure to get in touch with us. We’ll be more than happy to answer any questions you may have.