Several large insurers of legal errors and omissions have pulled out of the market for small firms this summer. Thousands of organizations with ten or fewer practicing attorneys will be receiving non-renewal notices over the coming year – ending an almost decade long stretch of increased insurer competition, lower prices and broadened terms.
The pullback of insurers from the legal malpractice space has been going on since 2012 but until recently each carrier exit was met by a new entrant to the space. Many low risk lawyers will be struggling in 2015 to find competitive terms for the first time in years.
The three primary reasons for this are lack of proper controls, the inability of small firms to take large deductibles and prices being pushed to an unprofitable level by increased capital.
Lack of Controls
After an organization faces a claim they generally put controls in place to reduce the likelihood of the event happening a second time. Large firms see many more mistakes due to their scale and have invested heavily in risk management. Many small businesses, no matter the industry, mistake skill for luck when they haven’t faced a lawsuit. E&O insurance applications list dozens of controls insurers expect, from duplicate docket controls to utilizing formal declinations of representation. As the remaining insurers increase their underwriting scrutiny those small firms who invest in risk management have the best chance of securing favorable terms in the changing market.
Deductibles too Low
All legal malpractice insurers have reported a significant uptick in the number of claims being filed. Most small firms have very low deductibles on their policies, which causes the carrier to incur expenses on the most trivial of allegations. Larger firms have increased their retentions to self-insure expected defense costs but it’s infeasible for a small partnership to match the hundred thousand dollars or more a large firm can afford to pay on each claim. Losses have mounted across the industry but larger firms are in a much better position to raise their deductibles accordingly. Most states will hold insurers responsible for the deductible amount if an insured cannot pay, giving them reason to avoid issuing large retention policies to smaller firms wanting to retain the risk.
Cut Throat Competition
The recent economic uncertainty has caused institutional investors to seek alternative investments that are not correlated with the economy, with many deciding to flood money into the insurance marketplace. Many insurance companies have used this capital to push into the professional liability space and undercut the established underwriters to gain market share. The established players pulled out and when unexpectedly high claims started to develop for the newer carriers, many exited the market as well. Professional liability claims take years to develop, the settlements being paid now can be from incidents five or more years ago. Because of the time between when premium is paid and claims are settled the market has an inherent volatility that is difficult to quickly smooth. The premiums being paid today may be more than adequate to pay claims but the actuaries won’t see proof of it for some time.
ProtectLawyers.com is run by an independent broker with access to a number of insurers continuing to write small firms. Contact their professional liability experts to discuss errors and omissions insurance options for your firm.