How do claims affect my Professional Liability premium? This is a tough question to answer because the bottom line is it all depends on all of the factors of your application and the claims history frequency and severity.
First it is important to understand what claims frequency and severity mean. Frequency is the amount of claims your design firm has had. Severity is the dollar amount associated with one or all claims your firm has had.
When an insurance carrier is assessing the overall risk of your firm they do look at the claims history. Some carriers look at a history of five years and some look back ten years. It depends on the carrier and the size of your firm as to how far back they will look. If your firm hasn’t had any claims this makes your firm a desirable risk based on the claims history alone. If your firm has had one claim and the amount paid out was $100,000 in indemnity and expenses (severity) the carrier will then assess with what’s called a loss ratio. A loss ratio is determined by the total of the claim and the premium that has been paid to the carrier. Every carrier has a different determination of what loss ratio is acceptable for their program. Another scenario that can happen is your firm has three small claims (frequency) but the total of expenses and indemnity paid out is $25,000. Again, the carrier will still determine a loss ratio to determine what the premium will be and if they are able to offer a quote.
The insurance carriers may also ask for claims details and not just look at the numbers. There are occasions when the carrier may be able to offer a quote but may want the background of the claim for further detail.
The other item the carriers will ask for is lessons learned from the claim. How will your firm do things different going forward after a going through a claim?
The more detail that you can provide an insurance carrier with regards to claims the better informed the carrier will be to assess your firm.
There isn’t an easy answer as to how a claim can affect your premium. There are so many factors that are considered when your policy is quoted. The best thing your firm can do is have good risk management in place so that a claim doesn’t take place in your firm.