Step Rating is not defined in legal malpractice policies. Step rating is the major premium increase cause in the first one to five years of continuous claims-made insurance coverage.
With claims-made coverage the only policy that you can report a claim to is the current inforce policy. Maintain the established prior acts date at inception of the 1st claims made policy need for subsequent renewals. The prior acts date determines how far back the current insurer will cover.
Legal malpractice insurance policies use a ‘claims-made’ policy form. Legal malpractice insurance claims-made policies are Step Rated. Each claims-made policy covers claims made and reported during that policy year. At policy inception of a law firm’s 1st claims-made malpractice insurance policy there is no coverage for past acts. Given this, with only the inception year’s covered acts exposure, malpractice insurance premiums are relatively inexpensive. Although possible, few claims are made during the inception year of a malpractice policy.
During the first few years of claims-made continuous coverage the exposure increases with each successive renewal. As the claims-made policy covers increasing exposure years of past acts. The rates increase matching the exposure over those first few years. A term used to describe this process is commonly called Step Rating. A good rule of thumb is that over the 1st 3 to 5 years the premium will double from the 1st year’s premium. This is true for legal malpractice insurance policies issued by any insurer and happens even when you switch insurers. Step rating stops once the policy is ‘Fully Rated’. The policy will become fully rated in 5 to 7 years.
Once the firm’s policy becomes fully rated, the only changes in premium should be because of the firm’s claims history; changes in the firm’s areas of practice; number of attorneys; and/or changes in the general insurance environment.
Good news is that as you maintain your continuous claims-made coverage even if you switch insurers, the step rating does not start over.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080