Why Law Firms Need Insurance

At some point each year, your law firm endures the unsavory ritual of having to purchase or renewing its insurance. Each year means another application to fill out and each application means more time and energy away from running your business.

Why is it that buying insurance is so obscenely difficult, confusing, and expensive — especially for law firms? Could it be that most firms are underserved by their current insurance brokers? Maybe, but we’ll get to that later.

Today’s legal landscape is incredibly complex, which is why attorneys and law firms need professional advice and assistance when it comes to buying insurance, in order to make sure that their coverage is giving them the best possible protection from all possible risks.

What types of risks can insurance help lawyers mitigate? The most notable is legal professional liability insurance (after all, practicing law get riskier as society gets more litigious). Malpractice suits are only the tip of the iceberg. Just like all other businesses, law firms have clients and employees, which means that law firms need to be protected from a vast variety of risks that aren’t very different from the risks that businesses of any other industry face and are protected from with the help of insurance. In today’s day and age, cyber liability and cybercrime are a close second, and also necessary to protect. Adequate protection from a claim, warranted or not, can help ensure financial security, success, and longevity. Law firms, therefore, need to insulate with an impeccable risk management plan.

Finding the Right Coverage

The best way to insure your law firm is to do it carefully and with the guidance of real experts who not only understand business insurance but also understand the needs of your industry. Not every law firm needs the same policies and there are many factors that go into deciding what type of coverage your law firm really needs. Research is vital when it comes to getting the right coverage and you can really never be too careful about what types of policies you are purchasing. Make sure that you have an understanding of the limits and rules of the policies, what they entail, and what needs to happen in order for the coverage to be activated. Since you are an attorney or a team of attorneys, be sure you understand what the policies offer you in terms of representation. Can you represent yourself or does the policy require you to use a third-party law firm to handle the claim? Bottom line, make sure to be as informed as possible about what you are purchasing before you send the check.

Things to Consider

A lawyer’s premiums go up as their exposure to risk and claims increases.

A new attorney has a short legal history and therefore is less likely to have a claim made for past legal services. Experienced lawyers, on the other hand, tend to be more vulnerable to errors due to the complexity of cases, a longer history of cases, and generally higher stakes. According to the American Bar Association, lawyers in private practice for five years or less are targeted in about 3.5 percent of malpractice claims, compared to 37 percent for attorneys with 11-20 years of experience. This surprises many lawyers as they view themselves as more competent attorneys after years of experience.

When you recruit an experienced attorney to work at your firm, expect your firm’s insurance rates to increase. Also, the attorney billing 1,500 hours is far more prone to claims than the Of Counsel (OC) billing 600 hours. Some insurance carriers might even cover your part-time attorneys without charging you for the coverage.

Eventually, your rate per attorney becomes “mature” and each additional year of experience does not affect the premium. But don’t wait for that to happen. You can reduce premium costs right away by having a broker negotiate with carriers so that you are certain you’ll achieve the best deal year after year with little work involved on your end. A savvy broker who understands carrier underwriting is able to work these nuances in your favor.

Lawyers can be highly exposed to gaps in their insurance coverage for professional liability and other lines. Leaving gaps in their coverage is one way in which brokers often fall short of serving their clients, especially if they are inexperienced when it comes to finding the right insurance for legal professionals.

Is your broker willing to handle all lines of coverage for your firm? Having a broker who specializes in law firms provides you the confidence of leaning on them to properly cover all insurable risk factors at your firm. Make sure your broker can identify the gaps on your behalf with multiple insurance carriers and appropriate policies.

Deductibles apply separately to each loss. If several crimes are committed by the same person(s), the damages are grouped as a single loss subject to one limit and one deductible, regardless of how long the crimes went on before discovery.

What Insurance Policies Do Law Firms Need?

Every law firm has a specific set of insurance needs depending on its size, profile, and other factors. However, there are certain insurance policies that most firms should consider as a mandatory part of protecting their assets:

General Liability Insurance & Property / Business Owner’s Policy (BOP):

A staple coverage that will be able to protect you from most types of lawsuits, general liability insurance includes the very important premises liability, which covers injuries that could possibly occur on your property. General liability is often minimal for law firms since almost all business is conducted in the office and most communication with clients is handled via telephone and email. Property insurance covers your personal property including computer hardware and furniture. This policy provides protection in the event of a fire, flood, or other unexpected circumstance which can affect the building, your property, and ability to work. General liability and property are often combined into a Business Owners Policy (BOP)

Professional Liability Insurance:

Also known as errors & omissions insurance and legal malpractice insurance, this is typically the first insurance policy a lawyer or law firm will purchase. It is easily the most important type of insurance for law firms as this is the most likely area for a claim. Unfortunately, even the best attorneys are vulnerable to a legal malpractice suit. The scenarios are wide-ranging, from misinterpretation of the law, bad advice, missed deadline (statute), conflict of interest, to merely disgruntled clients looking to sue. Given the incredible ease of bringing a malpractice suit, it is astonishing that some lawyers do not carry this line of insurance or let it lapse. This coverage will be able to cover your legal defense costs and expenses related to trials (e-discovery, expert witnesses, etc.), as well as damages or settlements awarded against your firm. Notably, the policies rarely cover fines and penalties, but better policies may provide a defense in the event fines and penalties are being alleged.

Cyber Liability Insurance:

Law firms deal with a lot of sensitive information, so it’s no surprise that they are constantly being targeted by hackers. According to a recent report, 22 percent of law firms in the U.S. experienced a cyberattack or data break of some kind in 2017. Hackers are very interested in the type of highly sensitive data that law firms have at their disposal since this type of information can easily be sold to opposing legal parties, the media, or anyone else who could use this type of data to their advantage. More recently, law firms have become targets for cybercrime and phishing scams. Cybercrime often involves a criminal trying to trick the law firm into sending funds to a fraudulent account or hijacking the email of an attorney and directing clients to send funds someplace illegitimate. You may also hear this referred to as “social engineering.” This is covered under cyber insurance or a crime policy.

Employment Practices Liability Insurance (EPLI):

The need for this coverage grows in concert with the size of your firm. If you’re a solo attorney, then you obviously won’t need this one. However, as a firm adds employees, the issues become more complex and the personalities are less predictable. Any law firm that has employees, no matter how many, should get some EPLI coverage. EPL insurance will protect your firm from potential employee-related claims, including discrimination, harassment, failure to promote, and wrongful termination. Professional services firms are also strongly encouraged to get third-party coverage to protect against claims from outside the firm. If you are a large law firm with a high turnover rate, there is absolutely nothing to consider, you need to have EPLI.

Directors & Officers (D&O) Insurance:

As in most other businesses, D&O insurance for law firms will protect the firm against suits related to the mismanagement of the firm, causing financial harm. Law firm officers have a unique risk as the attorneys inside the firm could be amongst the most likely to bring a suit against the directors and officers of the firm. A policy must be tailored for a law firm as a normal D&O policy would not cover this exposure. Additional exposures include a botched acquisition, over-extending on partner lateral hires or tortious interference.

Workers Compensation Insurance:

Since this type of commercial insurance is required in just about every state, there’s not much to think about – your law firm needs to have it. Thankfully, workers compensation probably won’t cost your law firm a lot, since a law office is not a high-risk workplace. However, accidents will always happen and workers’ compensation will cover your firm if your employees ever sustain any type of injury at work (whether it’s at your office, at the courthouse, or anywhere else they may be representing your firm in a professional capacity.

What Does It Cost? Ready For A Quotation?

Not sure if you’re getting a fair deal? A frequent question we hear — and a common problem with insurance underwriting in general — is that no one really knows how an underwriter arrives at a premium. A law firm’s premiums are usually determined by number of attorneys, areas of practice, location, and claims. Most firms acknowledge this, but they still rarely understand how the price is actually derived. It’s important to note that cheaper doesn’t mean better and the only thing that is important is that your insurance program is covering the activities of your practice in the best possible way. Your prior claims experience is another factor that’s important when it comes to determining your law firm’s premiums. Here it’s not only just about the number of claims but also how much your claims cost, the nature of the claims, and the degree to which your law firm was at fault in these claims.