How Limits and Deductibles Shape Your Liability Insurance Premium and Coverage

In this episode, we examine how policy limits and deductibles directly affect your professional liability insurance premium and the coverage you get. Several factors contribute to determining your premium, but limits and deductibles are among the most important.

It's key to recognize the relationship between these factors and your liability insurance costs, as well as how certain decisions may increase your out-of-pocket expenses.

Understanding these dynamics is crucial for making informed decisions about your lawyers' liability coverage. While it may mean paying more for adequate protection, doing so or adopting financial risk management practices helps safeguard the financial health and stability of your law practice.

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More Resources:

How to Minimize Your Lawyer’s Professional Liability Costs and Maximize Your Benefits

Claims-Made and Reported Policies 101

Prior Acts Coverage 101

Price vs. Value: Making Informed Choices When Shopping for Lawyers Professional Liability Insurance

Calculating Adequate Coverage When It Comes to Limits of Liability

Key Questions to Ask When Shopping for Professional Liability Insurance

Understanding The Step Rate Factor

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Transcript

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Welcome to another episode of the Lawyers Learning Center with DHIA podcast. Our goal is to help attorneys improve their professional careers, grow their law practice, and navigate the insurance market to make informed, confident decisions. We are here on Thursdays. Be sure to catch every episode by signing up for email notifications or hitting the notification bell on your favorite podcast platform. Please leave a comment or review with your feedback so we can better serve you. And don't miss out on more resources linked in the show notes of each episode. Today, we are discussing how policy limits and deductibles influence your professional liability insurance premium and coverage. There are many factors and variables that shape premiums. And limits and deductibles are leading factors. Understanding how they affect your liability insurance premium is important, but it's also crucial to recognize that paying more for adequate coverage can protect the financial health and stability of your law practice. Let's dive in. Policy limits primarily influence premiums because they represent the dollar amount a carrier will pay to defend and indemnify a legal malpractice claim. For example, an offer of$100,000 per claim,$300,000 aggregate limits will have a much lower premium than a$1 million per claim,$1 million aggregate offer. However, it's important to note that while the annual premium may be quite lower for the$100,000 limits, the coverage per claim for the higher premium is$900,000 more. So before deciding, weigh both the premium costs and coverage options. Where you get your limits matters. Insurance is the transfer of risks. Insurance pay a premium to an insurer to accept and cover their liability exposures. That's what insurance is. The carrier that you place your coverage with matters for two key reasons. One, the prices vary between carriers and budget is important. Two, your policy's quality is dependent on the carrier's strength and stability. Well, what does that even mean? Imagine that you have two offers for$1 million,$1 million limits. The first carrier's offer costs only$1,000, but it is a B-rated insurer and relatively new to the market. The second carrier offering terms is an A plus rated insurance company with strong financial strength and deep roots in the industry, but their policy costs$1,600. Take a moment to think what that$600 difference is offering you. A common oversight is that many carriers that lower prices to outcompete others can't maintain their programs long term and may exit the market or go bankrupt. When this happens, many insureds lose valuable coverage they've paid into with their carrier, leaving law firms and legal careers exposed. When looking beyond price, you can see the security and advantages of paying a higher premium. Not to say that all great policies have high premiums. Insurance providers vary with different plans, premiums, and benefits. It's all about lifting the price veil to understand what you're truly paying for. It's a surprise to many attorneys that the deductible doesn't have a substantial impact on premiums of liability insurance. The main difference isn't seen until a claim strikes and that deductible is due. The premium difference between a$1,000 and$5,000 deductible could be as little as$200. The consideration attorneys should weigh is whether the small savings is worth the$4,000 risk. If you do choose a high deductible, you should make sure that you have the funds to pay it without issue. While some may be able to rely on high cash flow for a surprise deductible bill, it's not a sustainable contingency plan for paying high deductibles. To prevent a cash flow or debt concern in your law firm, consider a dedicated savings account to pay a high deductible when needed. And make sure you keep that account full each year, or maybe even slowly add to it to start stacking more than just one deductible amount. Now, when choosing the limits and deductible for your professional liability insurance policy, there are a few things to know and a few to consider. Things to know. The limits and deductible chosen at renewal generally apply retroactively, meaning that you could have had$1 million limits back in 2018, but if your current policy has$500,000 limits, that's the limit of liability that will apply to a reported claim, even if the error occurred in 2018. The limits and deductible and all the coverages on the current policy will typically apply to any acts, errors, or omissions protected back to the policy's prior acts date. Second thing to know is that the limits apply to the entire firm, not each attorney, unless it's otherwise stated in the policy. So if you have a$100,000,$300,000 policy for a three-attory firm, the policy will not provide$100,000 for each attorney involved in a legal malpractice claim. The limits of liability on a policy applies to the entire firm or named insured. Things to consider. One, the carrier's financial strength and stability. This matters because you want to invest your premium into a carrier that can fulfill promises and be around long term. A strong carrier also typically has a strong defense counsel, which is what you want when a disgruntled client comes after your firm reputation and legal career. Two, limits that adequately protect your law practice. If your insurance policy does not adequately protect your law practice, you will be financially responsible for any expenses incurred or indemnity due outside your policy limits. Or if the policy doesn't cover the reported claim due to policy exclusions or retroactive dates, you will be fully responsible to manage, defend, and pay for the claim. The third thing to consider is your budget for liability insurance. Every business has a budget. Know yours. But also know what you need for insurance so that you can find a suitable option that checks your primary boxes and hopefully your bonus boxes that's within your financial budget. If your budget is too tight to secure limits that you need with a quality carrier, or you choose a higher deductible option so that you can afford the limits that you need, consider a savings account solely for claims. This risk management tactic can help you secure a high-quality policy today and protect your business financially. Know what you need and what your budget is. Be curious about the options available. Ask questions, and make sure that you are getting the coverage you need at a price you can afford. But don't just have it on your mind. Speak with your agent and be open about your insurance needs, wants, and budget. This way you can both work as a true team so you can secure quality coverage you can afford. To recap today's episode, policy limits play a major role in setting liability insurance premiums because higher limits offer more coverage and come with increased costs. The choice of insurance carrier also matters. Carriers differ in price, financial stability, and reputation. Undercut priced options may come from less stable insurers, which can pose risks if those carriers leave the market or go bankrupt, potentially leaving law firms uninsured. Investing in a more reputable carrier often means better security and defense resources. Deductibles usually have less effect on premium costs compared to the limits. The difference in premium between low and high deductible is often small, but higher deductibles lead to greater out-of-pocket expenses when a claim is filed. When choosing coverage, keep in mind that limits and deductibles set at renewal typically apply retroactively, and that limits usually cover the entire firm, not each individual attorney. Important factors when choosing coverage include the carrier's financial stability, sufficient limits to protect your practice, and alignment with your budget. Setting up a dedicated savings account for potential claims can help mitigate risk and maintain financial stability and security. Remember, each premium is an investment in the protection of your law practice and legal career. Who you insure your firm with matters. You should carefully evaluate your needs, ask questions, and work with your insurance agent to secure quality coverage at an affordable price. Thank you for tuning in to the Lawyers Learning Center with DHIA podcast. We are so glad you can join us and hope that you found today's episode helpful and informative. We invite you to subscribe and share it with others. We would love to hear your thoughts. Please leave your comments, ask us questions, or suggest topics that you'd like us to cover in the future. Your feedback is invaluable in helping us improve and expand our content to better serve you, which is why we're here. Your input truly means a lot to us. Subscribe to the podcast and click the notification bell or sign up for email reminders at dhia.comslash podcast to make sure you catch every episode.