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Legal malpractice insurance rates are on the rise after years of decline. As law firms renew their policies, many are paying premiums that top last year’s rates by 25 percent and more — sometimes much more. A solo practitioner in Virginia says he was outraged when his carrier notified him in January that his annual premium would jump from $1,200 to $1,750 — a 46 percent increase. “There had never been even a sniff of a claim against me,” says the lawyer, who spoke with a promise of anonymity. When he and his broker shopped around, the best rate they could find was about $2,500. So he renewed with American National Lawyers Insurance Reciprocal. “It’s the difference between dripping blood and gushing,” he says. Jeffrey Bouslog of Minneapolis had a little more warning. A partner at Oppenheimer Wolff & Donnelly, Bouslog has handled his firm’s insurance needs for four years and saw Chubb-Executive Risk increase its premiums slightly last year. This year it was hard to swallow a 27 percent rise — from a little less than $3,000 per lawyer for the 275-lawyer firm to about $3,800 — when the firm has essentially been claim-free for a decade. “We were certainly disappointed and frustrated by the increase,” he says. But he soon found it could have been worse: Other companies would have boosted the rate 50 percent to 100 percent. A decade-long buyer’s market has ended, and the reasons have little to do with legal malpractice claims. Insurance professionals say rates are going up on virtually all types of policies, including homeowners’ insurance and auto insurance. The reason, they say, is that insurance companies’ costs and risks are rising. The cushion that companies once could count on by investing premiums in the stock market is gone. And insurers face their own rising premiums, paid to the reinsurance companies that insure them, which were particularly hard hit by the Sept. 11 attacks. The upward trend will probably continue at least through next year, they say. As a consequence, underwriters can afford to be selective, forcing some firms to sweat just to get insurance. Carriers are either refusing, or charging much more, to insure practice areas they deem risky, like intellectual property, securities, plaintiffs’ personal injury and real estate. Large law firms that used to lock in rates for two or three years can no longer find companies willing to do so. Ronald Mallen, a lawyer who published a book on buying legal malpractice insurance that he updates annually, says he’s heard of rate increases of 50 percent to 300 percent. Many of the sharpest upturns are in California, says Mallen, a partner in the San Francisco office of Hinshaw & Culbertson, but the trend cuts across regions, practice areas and firm sizes. “I’ve seen hardening markets before, but nothing like this,” says Mallen. “The only question is, how long will it last?” Several insurance professionals acknowledge that such increases are real and may even be common. But most, they insist, are less dramatic. Interviews with brokers, agents and insurance executives who sell liability insurance nationwide reveal the following: � CNA, one of the country’s largest insurance companies and insurer of more than 200 large law firms, is raising rates at least 20 percent. � Brown & Brown, a broker that finds insurance policies for more than 15,000 lawyers in smaller firms, says its clients are seeing increases of 20 percent to 35 percent. � Bertholon-Rowland, managing general agent for about 10,000 small firms, has been raising rates by 10 percent to 20 percent (in addition to last year’s 5 percent jump). Twenty law firms told The National Law Journal that their premiums had risen an average of 27 percent, with a high of 40 percent and a low of 10 percent. Several of these firms are insured by the Chicago-based Attorneys’ Liability Assurance Society, which raised rates on Jan. 1 by 35 percent to 40 percent, depending on the policy limits. Boasting 260 firms nationwide with a minimum of 35 and an average of 200 lawyers (for a total of 52,000), it’s the country’s largest “risk retention group” — owned and run by member firms for the sole purpose of providing liability insurance. It’s also one of the few companies that charges every client identical rates. This year’s increase is the first “in a long time,” says Attorneys’ Liability Assurance Vice President and General Counsel Donald Breakstone. He says that premiums dropped a total of 35 percent for 1999 and 2000 and were unchanged last year. Even with the increase, 96 percent of the firms renewed — the same as past years, he says. Smaller firms are facing a similar situation. The Attorneys’ Liability Protection Society, a risk retention group based in Montana, covers 11,000 attorneys in firms that average 2.8 lawyers, mostly in rural areas of the 24 states it serves. It tailors premiums for each lawyer in a firm. CEO Robert Minto, a member of the American Bar Association’s standing committee on lawyers’ professional liability, says base rates will go up around 12 percent as lawyers renew during the year. The final figure will vary with a lawyer’s claim history, location and practice area, among other factors, so comparisons are problematic. Lawyers practicing in claim-heavy Las Vegas will likely see increases of 20 percent to 40 percent, Minto says, but the jump will be gentler in northern Nevada “cow counties,” where risks are lower. NO SPIKE IN CLAIMS ABA statistics and anecdotal information suggest the rate boosts were not usually caused by claim activity: Frequency has been flat and severity has risen only moderately over the past few years. Most observers point instead to market forces. “We’ve been in a seven-year cycle for 15 years,” says Katja Kunzke, vice president in charge of claims at Wisconsin Lawyers Mutual Insurance Co. During that time, many companies sold insurance below their costs, she says. They invested premiums in the roaring stock market and didn’t worry about claims, which often take years to roll in. It wasn’t until the economy slumped and the claims arrived that the true costs emerged with a vengeance. In the 2002 edition of his book, Hinshaw’s Mallen names 18 insurance companies that have stopped writing lawyers’ liability insurance or gone out of business in the past two years. The economy isn’t the only cause he identifies. The devastating losses of Sept. 11 hit insurers hard and reinsurers harder. As if this weren’t enough, the industry has been further rocked by the Enron debacle, which will eventually saddle it with billions more in losses. Yet, rates today are still below what lawyers paid 15 years ago. When Minto was practicing at a Montana firm in the early 1980s, his malpractice premium shot from $500 to $3,000. Jolts like that gave birth to risk retention groups, which offered lawyers insurance they couldn’t otherwise find or afford. The “soft market” that followed brought consistent reductions in premiums. So the Attorneys’ Liability Protection Society’s average premium, which Minto notes moved from $2,000 to $2,125 last year — and which he predicts will average $2,350 this year — will still be 25 percent lower than his rate of 20 years ago. Unlike the bad old days that Minto recalls, there are few stories today of lawyers who are forced to “practice bare.” Not all lawyers carry liability insurance, however. A national survey commissioned by CNA two years ago asked firms of 20 lawyers or fewer whether they had malpractice insurance. Among the 236 firms responding, 16 percent did not. They gave two main reasons, according to Stuart Pattison, CNA’s vice president in charge of large firm liability: Their practices didn’t require it, and they felt it would only increase the chance that they’d be sued. Several state bar associations conducted similar surveys. Most found about 10 percent of their lawyers lack insurance, though Pennsylvania’s number is 35 percent and Mississippi’s 27 percent. Rose, Klein and Marias, a 45-lawyer Los Angeles firm, has chosen for the past several years to set aside money for possible claims rather than pay for malpractice insurance. But there doesn’t seem to be a crush of firms eager to join it. In a climate in which insurance companies can afford to be choosy and law firms can find themselves spurned by carriers, the focus seems to be on finding the best policy, not doing without. This may be sparking a boom in the risk management business, which suits Hinshaw’s Mallen just fine. He often conducts risk management audits for firms that have been denied insurance, or fear they may be. Business, says Mallen, “has picked up dramatically.” Related Chart: Recent Rise

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