Monterey insurance broker Joanne Monroe tells of her client, a local intellectual property and patent attorney with no claims against him, whose malpractice insurance premiums soared from $8,000 last year to more than $30,000 this year when his former carrier declined to renew his policy. An eight-attorney southern California patent firm has halved its limits - from $4 million to $2 million - and doubled its deductible - from $25,000 to $50,000. Nonetheless, the cost of its premium went from $60,000 last year to $95,000 this year, says the firm's broker, Brian Ahern, president of Ahern Insurance Brokers of San Diego. "That's pretty typical for the copyright area," he said.

A harder market and the departure of at least nine underwriters in the last nine months have placed many California attorneys in an expensive bind, facing increases in their malpractice coverage of anywhere from 20 to 400 percent. "I don't think anyone would call it a crisis," says Sacramento attorney Kevin Culhane, co-chair of the State Bar's Committee on Professional Liability Insurance. "We're seeing rates going up across the board in the state. It's just a question of how much. We see moderate rate increases and we see drastic increases for programs that were underpriced."

Ahern said in general he is seeing rates go up from 40 to 200 percent. "That's a shocking figure, mainly because when we entered the first part of the year, we anticipated rates would go up 10 to 15 percent, maybe up to 50 percent. So the increases have doubled beyond what our expectations were."

In an industry which is cyclical in nature, a 12-year-long soft market, characterized by competitive pricing offered by more than 20 carriers, has ended. For years, insurance companies were able to write business at a loss because they were more than making up that loss on investments in the stock market, explains Dick O'Regan, vice president of Marsh Affinity Group Services, the managing general agent for the State Bar's insurance program, which insures about 7,000 lawyers.

In the area of professional liability, he said, it takes from three to five years for a firm to determine if a program is profitable. In a soft market, if one firm withdrew from California after finding its program was unprofitable, "there always seemed to be another company to come in and take its place," O'Regan said.

In addition to investment losses, insurance experts say several other factors contributed to this year's rising costs. The reinsurance market began to soften about a year and a half ago, a process that was drastically accelerated by the events of Sept. 11. The terrorist attacks had a significant impact on capacity. Insurance companies can only write so much premium, based on their surplus, O'Regan explained. That surplus has been affected by Sept. 11 payouts, and "they have to write fewer premiums if they have less surplus."

In addition, California is considered a high-risk state by the underwriting community. Although claims have not increased significantly in the past three years, California is still considered one of the most litigious states in the country. Ahern added that markets in California for the most part have not made a profit or have had a very poor loss history. "The companies that have not been able to regroup have left and those that are still here that want to remain in the market have had to raise their rates," he said.

Factors to be considered

In addition to the nature of the industry, underwriters look at several factors in malpractice rates: prior acts, under which the insurer could be liable for acts that occurred 20 years ago; claims experience, usually for the past five years but some carriers consider any claims; a firm's internal controls, such as data control, conflict of interest checks and management systems; and the number of years an attorney has been in practice.

A key factor is type of practice, with plaintiffs personal injury, wills and estate planning, securities, entertainment, real estate, environmental, and patent and intellectual property topping the list of risky practices in the eyes of insurers. In some cases, such as copyright, although there may not be much litigation, the severity of the claim can be great.

Large law firms in Los Angeles and the Bay Area formed buying consortiums years ago in an effort to use their size to negotiate reasonable rates and to keep rates fairly stable. While they may not pay the cheapest rates, they generally experience less dramatic price fluctuations and they receive continuity of service.

Doubled, tripled, quadrupled

So the current cost upswing is hitting small firms and solo practitioners the hardest. Monterey broker Monroe says she has clients who are opting out of the market. "The five and under firms are really hit hard," she said. "To be paying out 10 percent of what you're making for insurance is tough," she said. "For most of my clients," says Monroe, "the premiums have doubled, tripled, quadrupled. They're lowering their limits, raising deductibles, trying to survive."

Robert Chong, a solo San Marino lawyer who handles employment and business litigation, saw his rates climb from $2,500 to $4,800 even though his practice areas are considered fairly low-risk. A bankruptcy attorney who practices in a two-person Los Angeles firm received a non-renewal notice, despite having no claims or incidents on her record. She received four quotes, ranging from a 25 percent increase to more than 100 percent. Her new premium offers the same coverage as the old, a limit of $500,000 per occurrence and a $1 million aggregate, and a $15,000 deductible. But it costs $8,000 instead of the old $6,000 rate.

Both O'Regan and Ahern said few of their clients have opted to "go bare" because it's simply too risky. "We think it's a dangerous thing to do," said O'Regan. "If they let their policy lapse, they have no coverage. If they decide to buy in the future, the fact that they've gone bare could show questionable management and could cause the rate to go up even higher."

Culhane suggested several rules of thumb for lawyers in the market for insurance. A program should be responsibly underwritten by an admitted carrier authorized to do business in California. Culhane said the company should have a claims department located in California, preferably with a long-term presence.

Although lawyers are not required to carry malpractice insurance in California unless they are part of a professional corporation or Limited Liability Partnership (LLP), the fact that one in six attorneys are sued every year puts the uninsured at risk. Says Robert Chong, "It's too risky to go without. It's a business decision. Is it worth it to have a little less profit and be able to sleep at night? Probably, but it's a difficult decision. It makes people think about not practicing in certain areas if you want to avoid risk."