April 24, 2017
Deciding what policy features you want in your legal malpractice insurance among all the carrier options can be enough stress to make any sane person throw up their arms and say, "Yeah, whatever you recommend Ms. or Mr. Carrier!"
But how do you know if they have your best interest in mind when determining your coverage for your unique situation?
What if I told you the type of deductible or a specific deductible provision in your policy can greatly increase its value?
I’ll be sharing with you a unique Deductible Abatement Provision offered to specifically save you money on deductible payments!
I’ll also cover more common deductible variations so when it comes time to renew or shop for your insurance you will have a better understanding of the value you can receive from your policy.
But first, let’s cover the basics:
A deductible is an agreed, uninsured sum of money that the policyholder pays before the insurance company will pay any money toward a loss payment or claims expense. Refer to our previous article on help to prevent legal malpractice claims.
Before we go into types of deductibles, let’s dig further into why deductibles even exist.
The bottom line...
...Deductibles keep premiums lower
In a nutshell, deductibles help make insurance more affordable, because when the policyholder shares some of the claim costs, the insurance company doesn’t need to charge more in premiums.
Deductibles are the responsibility of the Named Insured under a legal malpractice insurance policy which is usually the business entity. If the business entity ceases to exist, then the business owners are looked to individually to pay the deductible.
The deductible doesn’t increase or "stack" if multiple insureds are named in the same claim.
Deductibles are also useful for keeping the cost of insurance low because the policyholder can choose the amount that they want to absorb and resolve small nuisance claims within the deductible without the insurance company using their resources to resolve the matter.
The higher the deductible selected, the lower the premium...
...but do the math.
The premium savings may not be worth the added risk you are assuming with a high deductible. It can take years of claims free experience under a high deductible to realize a savings.
Just how much savings vs the deductible difference can be seen in the 3 examples below:
For the exact Per Claim Deductible and Annual Premium example pricing, please hover over the bars on PC or click on phones and tablets.
The American Bar Association in its Profile of Legal Malpractice Claims 2012 - 2015 reports that the number of claims resulting in no loss or expense payment dropped significantly between 2011 and 2015.
In 2011 almost 60% of claims closed with no loss or expense payment
In 2015, only 43% of claims closed without any payment.
Deductible amounts that you can qualify or vary with expected annual revenue and financial stability of the policyholder.
Lower deductibles cost more in premium but are more easily funded in the event of a claim. A “Per Claim” deductible is usual with most legal malpractice insurance policies, but some insurers will offer an annual aggregate deductible that caps the amount of deductible you have to pay per year in the event of multiple claims.
Small Law Firm Example:
A solo law firm typically starts out with a deductible of $1,000 or $2,500 and can increase as the firm’s financial resources grow. Solo practitioners can carry a $5,000 or $10,000 deductible, but usually no higher.
Large Law Firm Example:
Larger firms are often required to carry higher deductibles in legal malpractice insurance. The typical underwriter is thinking $5,000 per principal or owner. Some insurance companies only want to write the larger firms and will impose a minimum deductible of $25,000 or more.
Want to know how an underwriter thinks? Check out an article I wrote on knowing what makes a legal malpractice insurance underwriter second guess you. You can believe it, I was an underwriter for over 30 years!
Some legal malpractice Insurance companies will offer an annual aggregate deductible for an additional premium.
The aggregate deductible caps the Insured's deductible outlay in any given policy year at a maximum regardless of the number of claims reported in the policy year.
The annual deductible refreshes each policy period.
This feature can be used to attract larger firms that want or are required to carry a larger per claim deductible.
Some insurers will add an aggregate “cap” to a larger per claim deductible for an affordable additional premium.
Some insurers offer a loss only deductible on a per claim or annual aggregate basis to low risk customers:
Low Risk Customer - is a preferred customer who is expected to have low, or no, claim frequency in any given policy period.
This optional policy feature, sometimes referred to as a first dollar defense deductible costs more in premium, usually 10% or 15% more than the usual loss and defense deductible.
It is only payable by the Named Insured if a loss payment, settlement or award of damages made payable to the claimant occurs.
Since most claims are resolved just with the cost to defend the allegations and no loss payment, a loss only deductible is a really nice policy feature to have in a legal malpractice insurance policy.
Another deductible reducing policy feature common today in legal malpractice insurance is the Reduced Deductible for Early Claim Resolution.
Because claims are cheaper to defend if they are resolved quickly without a lawsuit, some Insurance Companies Incentivize policyholders to report claims early and settle them via mediation within a specified period of days after being reported.
With this policy feature, if the claim resolves via a mediation proceeding within 365 days of first being reported to the insurer, then the deductible payable by the policyholder is reduced in half and usually by no more than $25,000.
Variations can allow for up to $12,500 if the claim is settled within 60 days by adjudication in a court of law, summary judgement or binding arbitration.
Policy features discussed above vary by Insurer and may not be available in all states. Underwriting qualifications may also apply.
Is there anything else on deductibles you’d like me to cover?
What are your thoughts on the listed deductibles?
Or maybe you have another question?
Leave a quick comment below right now.
Cindy Wiedman, founded Wiedman Insurance Services, LLC (LiabilityPro Insurance Advisors*) August 1, 2014. Cindy is a Registered Professional Liability Underwriter (RPLU) and has designed and administered professional liability insurance programs over a 35-year career working for various insurance administrators in the Midwest such as Shand Morahan & Company, Kirke Van Orsdel, Marsh and Lockton Affinity.
*Serving non medical professionals in Iowa, Nebraska, Minnesota, Kansas and Illinois