The most common question I get as an insurance broker from new lawyers or new law firms is why did my premium on my professional liability insurance increase especially when we haven’t had any change at all in our areas of practice? And probably more important, we haven’t had any claims, but yet my premium goes up by 20%? What’s the deal? How did that happen? 

Well, the simple answer to that question is, step rating.  Step rating is really nothing more than the carrier’s attempt to price your increased exposure as you practice year to year. 

As an example, the very first year that you, the lawyer, purchase a professional liability policy is probably going to be the least amount that you ever pay for professional liability insurance. The reason for that? You have no baggage, the carrier is basically covering you from the effective date of your policy, day one, going forward, there’s nothing in your past that actually is going to impact the premium, or gives the carrier concern that there might be a claim out there waiting to happen. 

Your first renewal, the carrier not only is going to price it for everything that you’ve done in the past, you know, which is one year, however, they also have to price it for what you’re going to do for the next 12 months. Therefore, their exposure basically doubles. Therefore, they have to increase your premium to capture that risk. 

The same holds true for the third year, not only is the carrier going to insure you for everything that you’re going to do for the third year, but they’re also insuring you for everything that you did in year two and year one. Basically, their exposure is tripling – they have to capture that risk by again, increasing your premium. 

The good news behind step rating is that there is a cap to it. It’s not going to increase your premium for the next 30, 40 years. Depending on the carrier, step rating could cap at five years, could cap at six years, could cap at seven years. Again, it depends on the carrier that you’re insured with. But again, the good news is that it does cap, it doesn’t continue on and on and on. 

If you have a legal malpractice policy or have been looking for one, I’m sure you have heard the term “Hammer Clause:”.  It has been and is a widely discussed term. Well what is a hammer clause anyway? Great question!

Simply put, the hammer clause which is located in the consent to settle provision of the policy is the carrier’s ability or attempt to force you to settle a reported claim.  In its strictest form, you, the insured, must accept the negotiated settlement of the carrier.  You have no input. 

Over the years, the consent to settle provision and hammer clause have been revised and modified. Today, some carriers state that they will not settle any claim without the consent of the insured, who’s consent shall not be unreasonably withheld.  What’s unreasonable right?  It is not defined in the policy.  

Other carriers state that you, the insured, can refuse to settle a claim agreed to by both the claimant and the carrier.  However if that claim continues and settles for a higher amount than what was originally agreed to by the carrier and the claimant, you are responsible for the difference! Yiokes, that could be expensive.  

Still there are other types of modified versions of the “clauses.”  These versions allow you to reject a settlement the carrier and claimant agree to. and if that claim settles/closes for a higher amount than the original settlement agreed to, the carrier will agree to pay a certain percentage of the increased settlement.  You will be responsible for the rest.  This is kind of a middle of the road hammer clause.

The best type of consent to settle provision for you, the insured, is to have no hammer clause.  Some, not many carriers do offer this.  They give the insured the absolute right to refuse to settle with no consequence or hammer!

How do you know what you have in your policy?  Best way to find out is to read the policy and discuss it with your broker.