Lawyer insurance: How to protect yourself against claims

Nobody wants to get sued, but unfortunately for lawyers, the risk of malpractice lawsuits comes with the territory. So, lawyers need to be prepared and properly insured. 

The best way for lawyers and law firms to shield themselves against potential claims is to invest in legal professional liability insurance, also known as malpractice insurance.

Legal malpractice insurance isn’t just a nice-to-have, it can be a primary factor in your firm staying in business if a malpractice claim comes around.

So, do you want to learn more about how to protect yourself from claims? Let’s take a look at everything you need to know about lawyer insurance and how it can protect your firm.

Are lawyers required to have malpractice insurance?

Let’s get to the most obvious question first: Are lawyers legally required to have malpractice insurance?

Currently, only two states require lawyers to have malpractice insurance: Oregon and Idaho. So, theoretically, most states don’t legally require firms to invest in malpractice insurance, but this doesn’t mean you are completely off the hook.

Some states have requirements about reporting your insurance status, along with other technicalities that affect your practice.

In recent years, several jurisdictions have jumped on the malpractice bandwagon by mandating malpractice disclosure rules. Lawyers who choose to go without malpractice insurance may be required to inform their clients or regulators (or both) that they’re practicing without coverage.

For example, in Ohio, attorneys are required to inform a client directly if they don’t have malpractice insurance, and those who neglect to communicate that bit of information to clients have been reprimanded and even suspended.

Proponents of mandatory malpractice disclosure rules argue that malpractice insurance is a crucial factor for people to consider when evaluating a potential attorney. Plus, without the disclosure rule, most clients assume their lawyer has malpractice insurance.

So, while not purchasing malpractice insurance may seem like an easy way to save a few bucks, that decision could cost you substantially by affecting your ability to attract and retain clients.

Common mistakes that lead to legal malpractice claims

Nobody’s perfect, and all humans make mistakes, but for lawyers, even a small error can be costly. The first thoughts that come to mind when thinking of legal malpractice lawsuits are generally extreme cases of negligence or fraud, but that’s not an entirely accurate depiction of such cases. In fact, an error doesn’t have to be significant to result in a claim — even the perception of a potential mistake puts you at risk of a malpractice lawsuit. This is because, often, the cause of legal malpractice claims boils down to mistakes on the lawyer’s part. Let’s take a look at some of the most common mistakes that lead to malpractice claims for lawyers.

Missed deadlines

When attorneys miss important deadlines for filing court or legal documents, they could be at risk of a malpractice suit. Failing to file court documents on time can lead to legal penalties and fines for clients and may even be cause for the judge to discard the case.

Misuse of finances

There are specific rules for how attorneys can use funds paid to them by clients. If an attorney is paid a retainer, they are legally required to place the money into a managed trust account until the services are provided, and the money is actually “earned.” If a lawyer transfers retainer funds to a personal or business account, this is considered a misuse of finances and is cause for a malpractice suit.

Conflicts of interest

In the legal field, it is extremely important for attorneys to push down their own interests and solely represent their client’s needs. A conflict of interest is a situation in which personal interests or relationships could potentially interfere with a lawyer’s ability to perform their professional duties. Attorneys must be careful and disclose any information that could be considered a conflict of interest. Here are some examples of situations that could be considered legal conflicts of interest:

• Personal relationship with an opposing party
• Representing two clients with different interests in the same dispute
• Previously representing an opposing client for a similar dispute, which could allow the lawyer to use confidential information in the case
• Financial stake in the outcome of a case, such as owning shares in a company they are defending, which could cause bias in their legal advice or strategy

Inadequate investigation or discovery

If a lawyer fails to uncover crucial evidence or information, resulting in a weakened case or an adverse outcome, this neglect can be seen as a breach of the lawyer’s duty to competently represent the client — and the affected client may have grounds for a malpractice suit. This type of malpractice claim is really difficult to prove unless the lawyer made obvious missteps in obtaining evidence to give the plaintiff a winning shot in a case.

Errors in communication

One of the most common reasons that lawyers are sued for malpractice is lack of communication. It is an attorney’s duty to report situations to clients and inform them of what is going on in their case. If a lawyer fails to update clients and does not provide important or essential information, their clients may sue them for malpractice.

Every practicing lawyer can make a mistake, meaning every practicing lawyer is also at risk of being held liable. Unfortunately, that comes with the territory of practicing law.

Being proactive and mindful of these situations can help mitigate unnecessary stress, but you’ll still want to protect yourself from potential claims. That’s where legal malpractice coverage comes in.

Why every lawyer needs malpractice insurance

We know what you may be thinking: “I would never make those mistakes.” But think again. While malpractice is not always legally required, it is a policy that every lawyer and firm should have in place. Even the most diligent and experienced attorneys can’t completely avoid the risk of a malpractice claim. What’s more, even without an actual error, a disgruntled client could still file a baseless complaint.

After all, it’s no secret that legal malpractice claims come from unhappy clients. Say a decision or action that a lawyer made results in losses for a client. That client then decides to recoup their losses by filing a malpractice lawsuit against their attorney. It’s a tale as old as time. Let’s take a look at a few of the top reasons lawyers should always invest in malpractice insurance.

Protection from financial liabilities

One of the main reasons that attorneys should invest in malpractice insurance is to shield themselves from potential financial burdens and penalties. If a client sues for alleged negligence, errors, or conflict of interest in legal services, the insurance can cover legal fees and settlements, which could otherwise be financially devastating.

The repercussions of “going bare” — the industry term for a lawyer who practices without legal professional liability coverage — can be catastrophic for an attorney or law firm. For those who choose to forego malpractice insurance, the fallout from a lawsuit could wipe out any savings and ruin the sustainability of a practice.

It may be a legal requirement

As mentioned above, in some states, such as Oregon and Idaho, lawyers must have malpractice insurance in order to be bar-certified. In other states, such as South Dakota and Virginia, it is not a legal requirement to have insurance, but attorneys must disclose to their clients whether or not they are insured.

Attorneys with insurance are more attractive to clients

Clients tend to prefer going with insured attorneys as it shows professionalism and accountability. Having malpractice insurance provides clients with peace of mind and reassures them that if something goes wrong with their case due to attorney error, there is a means to seek compensation. This is excellent for the attorney-client relationship and helps to build trust.

What does lawyer insurance cover?

You already know that the basis of legal malpractice insurance is to protect against the cost of defense and damages for claims that arise during or after professional legal services.

But did you know that legal professional liability coverage will cover both a law firm and individual attorneys? With professional liability insurance, you won’t have to worry about the legal defense costs stemming from malpractice suits or damages that could be awarded against your practice.

So what kind of claims does it cover?

• Negligence
• Misrepresentation
• Conflict of interest
• Misguided advice
• Misuse of finances
• Missed deadlines

What doesn’t legal malpractice insurance cover?

While most malpractice claims will be covered by legal professional liability insurance, it does not cover all situations.

Criminal acts

Professional liability insurance is designed to protect against unintentional mistakes made by lawyers, such as negligence or errors. So, these policies will not cover deliberate or malicious claims involving criminal or fraudulent acts.

Claims against board members or partners

Legal professional liability insurance only provides coverage for your firm in legal capacities. Lawyers who are board members or business partners aren’t covered by this policy for any acts that lead to claims.

If your firm has individuals in these types of roles, it’s worth looking into directors and officers (D&O) insurance. This coverage will protect your practice if a claim is filed against directors or officers. Some of the common lawsuits that D&O insurance can protect against include misuse of company funds, misrepresentation of company assets, failure to comply with workplace laws, lack of corporate governance, and breach of fiduciary duty.

Bodily injury or property damage

These policies are specifically designed to address claims related to errors, omissions, mistakes, or negligence in providing legal services. Personal injury and property damage are typically covered under general liability insurance, which is intended to protect against physical or tangible harm rather than professional mistakes in legal practice.

Claims between attorneys of the same firm

Many professional liability policies also have an insured vs. insured exclusion, which means the policy won’t deal with claims between attorneys who work for the same firm. This exclusion is designed to prevent conflicts of interest and discourage intra-firm disputes from being covered by the policy.

Tail coverage for legal malpractice insurance

Lawyers know that the risks of a legal malpractice claim don’t end when a case wraps up or you no longer represent a particular client.

Suppose you retire and a disgruntled former client files a malpractice claim against you. The last thing you want to be dealing with in retirement is a lawsuit.

Fortunately, an extended reporting period, also known as tail coverage, can help. With tail coverage, you’re protected against claims involving situations that happened while a policy was active but only came to light after the policy ended.

Say you had a client three years ago who wasn’t happy with the outcome of their case. After dwelling on the matter for a few years, that individual decides to take action and files a malpractice claim against you. But in the three years since you had that client, you’ve sold your practice and are now happily retired. If you purchased tail coverage, it will cover costs and damages associated with a claim, leaving you to enjoy the rest of your retirement.

What to do when a malpractice claim happens

If you do find yourself facing a malpractice claim, know you are not the first lawyer to deal with this. In fact, around 80% of lawyers are sued at some point in their careers. But, it is important to know what to do and how to deal with a claim in the most effective way possible.

1. Contact your provider immediately

Whether you know you’ve made a mistake or a client has accused you of something, inform your carrier ASAP when you suspect that a claim is coming. It makes no difference if you think the claim is reasonable — you must notify your insurer if a client brings forward a complaint. This is very important to be mindful of because lawyer insurance coverage could be denied if there is a delay in reporting a malpractice claim.

2. Consult another attorney

Even though you are a certified attorney, it is NEVER a good idea to represent yourself. It is always best to hire someone else to take on the case. Your insurance provider may even provide you with legal counsel specializing in malpractice claims.

3. Cease representation of the client and avoid any direct communication

If you are still currently providing legal counsel to the client who raised a claim against you, you should immediately withdraw. In some cases, you may need court approval to formally withdraw from representing a client. But, this process is generally pretty simple in cases where a malpractice claim has been made. You should also avoid communicating directly with the client. Simply allow your attorney to do their job.

4. Reduce the impact and damages

Most legal malpractice cases are settled out of court. Taking a case to trial is expensive and can cause irreversible reputational and financial damage to a law firm. In some cases, you may be able to simply provide a disgruntled client with a refund and an apology, though others may fight hard for settlement payments. You and your legal team will work to lessen the damage of the lawsuit and likely prevent it from going to trial.

Tips for choosing the best lawyer insurance

There are hundreds of different legal professional liability policies out there, so determining the right option for your firm can be challenging, to say the least. Here are some of our top tips for narrowing down the best lawyer malpractice insurance options.

Assess your practice’s risks and coverage needs

Each law firm functions slightly differently and will have different risks associated with their business. Before investing in malpractice coverage, it is important to determine how risky your legal practice is. How many attorneys does your firm have, what kind of clients do you serve, and what is your firm’s legal area of expertise? For example, lawyers in corporate law, business transactions, and estates are at the highest risk of malpractice claims.

Choose the right policy limit

Your policy limit dictates the dollar amount that your insurance policy will cover before it cuts off. Individual lawyers or small firms generally opt for smaller policy limits, while larger law firms tend to invest in higher limits. As you might expect, the higher the policy limit, the higher the annual premiums.

Understand what’s excluded

As mentioned, legal professional liability insurance does not cover everything a lawyer may need. That said, some policies include more coverage than others. Always check to ensure that your malpractice policy includes “Prior Acts” coverage, which covers your firm for legal work done before the policy’s start date. You should also check if the policy covers defense costs.

Let Embroker navigate the options for you

It’s no secret that insurance policies are filled with legal jargon and can be pretty difficult to compare and contrast if you don’t know what to look for. This is where we come in. We specialize in helping lawyers find the best quality coverage for their needs. So, whether you are an individual attorney or a large firm, we have got you covered.

Our expert team takes the guesswork out of finding the right legal malpractice insurance, ensuring that you get comprehensive coverage tailored to your unique practice, all while saving you time and effort.

Additional coverage that lawyers need

Professional liability coverage is one of the most important insurance policies for lawyers, but there are several other policies law firms should consider. 

• General Liability insurance: Protects lawyers against claims of bodily injury or property damage that could arise from everyday business operations, safeguarding against potentially costly lawsuits.
• Cyber Liability insurance: Covers the costs associated with data breaches, cyberattacks, and other digital threats, which are increasingly common in law firms handling sensitive client information.
• Business Owners Policy (BOP): A packaged policy that combines general liability, business interruption, and property insurance into a single, cost-effective package.
• Workers Compensation insurance: Provides coverage for medical expenses and lost wages if an employee is injured on the job. Workers compensation is required by most states for any business with employees.
• Employment Practices Liability Insurance (EPLI): Shields law firms from claims related to employment issues, such as wrongful termination, discrimination, or harassment.
• Directors and Officers (D&O) insurance: Protects executives and directors of law large firms from personal liability for decisions made while managing the firm. This can include misuse of company funds, breach of fiduciary duty, and lack of corporate governance.

Don’t gamble on lawyer insurance

One of the biggest mistakes lawyers make when choosing legal malpractice insurance is basing the decision solely on price. While price is relevant, it’s not the only factor to consider. Take the time to find a policy that meets the unique needs of your law practice.

You’ve invested a lot of time and money into establishing and building your practice. It’s not worth gambling that investment by choosing to save a bit of money instead of purchasing malpractice insurance. If you have to deal with a malpractice claim, you’ll quickly find out that the benefits of having insurance coverage far outweigh the costs.

Ready to get a head start on protecting yourself against claims? Check out Embroker’s legal malpractice insurance offerings and get a custom quote.