Insurance is one of the only products where the final cost is not known at the point of sale. In the case of claims-made types of policies, such as Lawyers’ Professional Liability (LPL), the final cost may not be known for many years.

So, how is premium pricing figured?

Insurance company actuaries will look at historical averages of claims paid in the past. Using historical patterns, they develop what’s called ultimate losses. Ultimate losses are then broken down by the dollar amount and percentage of claims by size of claim (small claims versus large claims), the dollar amount and percentage of claims by age at closure, and the amount of claim (severity) and frequency of claims by areas of practice generating claim.

Knowing what areas of practice give rise to the largest number of claims and the most severe claims, allows an insurance company to project the premium that’s right for your particular practice. While an individual law firm can’t control the overall historical experience in size or frequency of claims, a firm can control the accuracy of their LPL application. This should encourage all attorneys to pay particular attention when completing the areas of practice grid on the application, as a mistake could make a huge difference in the premium you pay.