How big a deductible?

Risk management extends into all areas of a practice's management.

None more so than the management of the firm's professional indemnity insurance.

In recent years, insurance premiums have risen owing to issues outside the profession's control, such as the impact of the 11 September 2001 terrorist attacks on global insurance and reinsurance markets.

Many firms have cut back the scope of their cover to help manage costs.

In many cases, this has involved increasing deductibles - the amount of each claim to be borne by the practice before its insurance cuts in - or by reducing the total amount of cover the firm buys.

A reasonable level of deductibles can bring benefits.

If the partners and support staff know that the firm will have to account for, say, the first 50,000 of any negligence claim it will focus everyone's mind on avoiding risk.

However, the key is to ensure that the level of deductibles is right: too low and professional indemnity premiums will be high, while a high level of deductibles could put a firm's financial viability at risk.

However, there is no 'correct' level, and it will depend on the firm's size, practice area and financial resources.

Levels of deductibles accepted by law firms range from zero to much more than 1 million.

This year, it is likely that premium levels will stabilise as more insurance capacity enters the market.

Firms with low-claims experience and excellent standard of risk management may even see their premiums drop.

However, rather than simply accepting the improvement, now could be the time to review the firm's insurance and ensure that limits of cover and deductibles remain appropriate for the firm's needs.

This article was prepared by Alexander Forbes Professions, a division of Alexander Forbes Risk Services