Not Your Father’s LPL

At the November 2011 Professional Liability Underwriting Society Conference inSan Diego, the message was that in 2012, underwriters would start taking rate increases. Sure enough, they were true to their word and we saw rate increases from long-term LPL carriers take rate increases on average from 5 percent to 10 percent. After 8 years of decreasing premiums and expanded coverage terms, this was a change firms were not used to and one that continues in 2013. We're in a firming insurance market, which means premium increases and in some cases, restricted terms and decreasing limits. On the other hand, from the newer entrants in the marketplace, with immature books of claims, we haven't seen the rate increases we've seen from long- term writers of LPL insurance.

But we're not in a “hard” market. In years past, this implied carriers pulling out of the professional liability marketplace. With the number of carriers writing LPL insurance, and plenty of capacity, it's hard to believe we would ever see a hard market in the near future.

The market is firming because insurance carriers can only write a multiple of their capital/surplus base. As their capital grows, prices drop, coverage and limits are easily attainable and underwriting standards loosen a soft market. As capital shrinks and claims are paid out faster than premiums come in, prices increase, coverage becomes scarce, and underwriting standards tighten to a firming or hard market.

So why is LPL loss experience increasing? It's being driven by both indemnity and defense. The financial crisis has had a trickle-down effect to the lawyers. Transactional claims and real estate claims have been on the rise. As deals have gone bad, clients blame their lawyers and other professionals. The complexity of matters has increased and it's taken longer to resolve claims in the courts. It's not just the damages, but the cost of defense that's increased, as e-discovery, the cost of experts, and overall expenses have driven the total incurred cost of claims to an unprofitable level.

What has a firming market meant for LPL insurance in 2013? Premiums have risen as carriers have taken across-the-board rate increases for their entire books of business. Average rate increases have been in the 5 percent to 10 percent range and, in some cases, double-digit increases. Underwriting has tightened, which means more declinations as underwriters become more selective on the firms they wish to add to their portfolios.

More surplus lines paper is offered and more surplus lines carriers are quoting for pricing flexibility, as confidence in the ability to determine profitable rates seems to be slipping. There's an increased interest in writing excess layers, as more carriers are tentatively entering the marketplace on an excess basis, unwilling to sit at riskier primary levels.

As carriers seek to control defense costs, choice of defense counsel on policies to defend claims has been more tightly controlled. Firms with mutual choice of counsel on their policies have been asked to agree to their requested counsel at the inception of the policy, rather than have the discussion when claims are made, allowing carriers the time to pre-negotiate defense cost rates.

In spite of all of the above, there is still competition for “new” business. Growth is still a priority for many carriers who still compete for low to average risk and claim-free firms.

At the same time law firms also have struggled for profitability. General counsels have become more demanding and cost conscious of the firms they hire, while increasing their in-house professionals and staff. Organic growth has slowed and mergers and acquisitions are on the rise. Major large firms have declared bankruptcy, followed by litigation from trustees and creditors.

For brokers who want to increase their law firm books of business, the good news is that in all this uncertainty and change in the market, law firms have a greater need than ever for an experienced law firm broker. Just as we advise our law firm clients to not dabble in unfamiliar areas of practice, it's not wise for agents or brokers to dabble in this line of coverage. Lawyers are professionals who will recognize a broker who doesn't have the knowledge and relationships with markets, or an understanding of the challenges their firm faces.

Related: Read “Back to Basics with LPL“

A law firm broker needs to understand the marketplace, application questions, underwriting needs, coverage, risk management and the challenges law firms face in managing their practices.

LPL is a fluid marketplace. Understand the underwriting philosophy of the various carriers quoting LPL coverage. We keep a spreadsheet of the more than 40 carriers quoting LPL. Many carriers segment their distribution strategy by size of firm; appointing MGAs or MGUs for small firms and open brokerage for larger firms. Others will only quote firms over a minimum size. Still others will not quote firms over a certain size.

Carriers also are selective as to the areas of practice they will write. Some will not write firms that practice plaintiff class action work or patent prosecution work. Carrier capacity and the states they write in also is important. Research how each carrier writes firms based on size of firm, area of practice, maximum limits, states they won't write in, primary and/or excess, and admitted or non-admitted paper. On top of that, carrier financial ratings, history of writing LPL and LPL experience of the carrier management team is valuable information.

The completion of the LPL application is a time-consuming process for your law firm client and the broker, who needs to make a careful review of that application before releasing it to underwriters. Law firms don't always understand the importance of the disclosure of information on the application and the need for accuracy to prevent rescission of coverage from material misrepresentation. Explaining why a question on an application is important to underwriters can aid your law firm client in answering questions accurately.

Related: Read “Find and Crack New Markets“

If you've never been in the underwriting role, ask an underwriter to explain the information they use in rating a policy. Only by knowing what's important to underwriting will you be able to explain to a client why a premium increases or decreases. The location of the firm, number of attorneys, areas of practice, administrative policies and procedures and loss experience are the basics. Subjective factors leading to rate debits and credits can come into play as well, so counseling your law firm client to expand upon their strengths and quality of firm management is good advice.

Policy forms vary by carrier and the nuances can get you in trouble. Don't count on your law firm client to have read the policy form. It's imperative that you point out any material differences in forms and where they might have gaps in coverage or when changing carriers will make a material difference in the coverage. A comparison between the coverage and exposure on a complete new business application should reveal what coverage provisions are necessary. For example, if a firm has an international practice, you would want to ensure the policy form has coverage for claims brought outside the U.S. Knowing what endorsements are commonly used to expand coverage is a part of being an experienced LPL broker.

LPL risk management means understanding the cause of LPL claims and steps firms can take to prevent or reduce administrative, substantive, client relations, and intentional wrongs. Again, a close review of the LPL application is a good starting point for a risk management assessment of the firm, but underwriters can only go so far in evaluating a firm. Other areas of concern in preventing claims are client intake processes, firm communication and culture of risk management, conflict of interest resolution procedures, compensation and overall management structure. Advisement on these subjects and other developing issues affecting law firms is even more critical now that the economy has caused such a spike in claims against lawyers.

Finally, keeping up with changes within the law firm services industry will show your clients that they have a broker who cares about their overall financial health as much as the placement of their coverage. Law firms are struggling with a flat demand for legal services from their corporate clients, a world of unbundled legal services and a regulatory maze that is affecting both them and their clients. A knowledgeable broker will stay abreast of the state of the industry.

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