When I asked why my lawyer’s professional liability policy premium went up, the agent stated that it was because of “step rating”. What is step rating and why did my premium go up?
Lawyers Professional Liability policies are Claims Made Policies. Most Claims Made Policies are Step Rated. If your 1st policy written has no prior acts coverage you can expect that in years 5 to 7 that your policy premium will double. The premium increases for your Lawyers Professional Liability policy in years 2 through 5 will see most of the rate increase. Somewhere between the 5th to 7th years your policy will become “fully rated” Once the policy becomes fully rated, then the only premium changes that should occur are because of claims history; the insurance carrier changing rates; changes in the areas of practice; and/or changes in the general insurance environment.
What if I switch Lawyers Professional Liability insurance carriers, will step rating start all over again with the new insurance carrier?
The short answer is “No.” One of the reasons that most insurance agents ask to see the Lawyers Professional Liability Insurance declarations page and any prior acts endorsements is to make sure that the agent is quoting and writing you a new policy that matches current prior acts date coverage. The reason this is important is the new carrier will be picking up the exposure for past acts and looks to the prior acts date for any claims reported, even if the current carrier was not on the risk at the time the error was alleged to have occurred. Your old carrier, once coverage expires normally is not liable for claims being reported after the policy coverage has expired.
Now that you understand what “step rating” is, why is this done?
At the beginning of the 1st policy for Lawyers Professional Liability insurance, it would be very difficult for an attorney to commit malpractice and report a claim during the 1st year that the policy was in existence. Errors and claims have been reported in the 1st policy year but it is hard to do. The reason for this is that only acts committed after the prior acts date (the inception date of your first claims made policy that has been continuously renewed) will be covered. Even though an error by an attorney may have occurred, it generally takes a period of time for those errors to be discovered. Depending on the services performed the allegations of an error made can range from just a few days after the services are performed to many years later. As the lawyer’s body of work performed under the Lawyers Professional Liability Policy grows, so does the exposure.
I understand this, but I do not like paying so much, why can’t I just shorten up my prior acts date?
Shortening up the prior acts date creates exposures that may not be covered. For most states the statute of limitations starts from when it would be reasonably expected for an error to occur to be discovered. And if you are dealing with minors, it could start when the minor turns 18. Given these long time periods, reputable insurance carriers and agents will refuse to knowingly shorten up a law firm’s prior acts coverage. Even if the lawyer is willing to accept the risk, the insurance agent/carrier does not want to open up their errors and omissions coverage to this exposure.