5 Key Factors in Determining Your Professional Liability Insurance Premium
Within the field of risk management, using insurance is an important step to hedge your potential losses. When working with an insurance broker in establishing your professional liability insurance premium, it’s important your application accurately and effectively reflects the professional practice of your company. That’s because when assessing risk, the insurer will want to understand the probability and consequence of something bad happening.
Here are five key factors that your broker or agent will need to know about your company.
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- Billing Volume
In the architectural field, there is a direct relationship between the number of projects an organization has in a year and the exposure of that organization to insurance claims. Small architectural design firms are 14 times more likely than large firms to have a claim paid by an insurer, according to data from the Architect’s Handbook of Professional Practice. That’s because those smaller firms tend to work on a high volume of smaller projects. As a result, the premiums of their professional liability insurance reflect high probability of risk.
On the other hand, the severity of claims by larger architectural design firms is often six times as high as those from smaller firms. Therefore, the insurance contract of a larger organization must provide coverage for claims of higher value to reflect a high consequence or risk.
- Type of Services
The larger a company, the wider the range of services that that company can provide. It’s imperative that your insurance agent is aware of the full spectrum of services that your organization offers. A best practice is to keep separate billings for different types of services, so that not only you can track budgets more effectively but also that your broker can properly underwrite risk.
An insurer determines a professional liability insurance premium based on their estimation for the number, or probability, or risks. In the instance that your insurer feels that there are certain unknown risks or that you can’t provide a clear breakdown of services, the agent may add an “ambiguity cost” to the premium to cover potential effects of unknown risks.
- Claim History
Another key factor that determines your professional liability insurance premium is the full disclosure of your claim history. If your firm has a claim-free history, make sure to point this out to your broker because it’s a strong argument for a discounted rate. For example, Architect’s Handbook of Professional Practice reports that a design firm without any prior insurance claims could get as much as 25% credit off the standard rate.
On the other hand, if your company has a claims history, don’t leave any details out. While the definition of “good” and “bad” claim history varies across industries, there is no doubt that fewer claims are better than more. It’s very important to keep your claim history to a minimum because it might hinder your ability to sustain business. Besides having professional liability insurance, implement risk management practices to prevent contract disputes and hedge against losses. (For more details on risk management, refer to How to Implement Risk Management in Your Contracts).
Even when having several claims, don’t hesitate to renegotiate terms or shop around for better rates. especially during difficult economic times, because insurance companies tend to loosen their standards as they want to write business to bring in cash.
- Geographic Location
Firms in low-risk states pay lower premiums than those in high-risk states. While you have no control of the claims data, you have control of selecting projects in states with a risk level that allows you to keep insurance costs in check.
While any company isn’t required by law to stay with a single professional liability insurer, it’s a savvy business practice to stay with the same insurer as long as possible. Not only can your company increase its chances in lowering its premiums but also in receiving additional discounts when adding new services or bundling other types of insurance.
Your application for professional liability insurance should reflect your actual practice. While the insurance broker is responsible for doing their due diligence, you can provide key details, particularly in these five criteria, to help them develop a more accurate picture of the necessary coverage to cover your business practice.