Lawyer Insurance: How to Protect Yourself Against Claims
No one likes to talk about the possibility of getting sued.
It’s completely understandable that you’d want to do anything but plan for the potential of facing a lawsuit.
Unfortunately for lawyers, the truth is that having a malpractice lawsuit is nearly inevitable. According to the American Bar Association (ABA), four out of five lawyers will get sued for malpractice at least once in their careers. And 70% of malpractice claims are filed against small firms with one to five lawyers.
What’s more, legal malpractice claims payouts have skyrocketed in recent years and are expected to remain high even after the (eventual) end of the COVID-19 pandemic. A survey by insurance broker Ames & Gough revealed an increasing number of claim payouts exceeding $50 million in recent years. The period between 2019 and mid-2020 saw the highest payouts on record for legal malpractice claims, and there is an expectation that experiences during COVID-19 could fuel a wave of future malpractice claims.
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“The economic downturn from the pandemic may lead to more claims,” said Eileen Garczynski, a senior vice president and partner with Ames & Gough.
All of this is to say it’s important for lawyers to make sure they’re protected with legal malpractice coverage, also known as legal professional liability insurance.
Legal malpractice insurance isn’t just a nice-to-have, either. It could make all the difference whether your practice can stay in business if you face a malpractice claim.
Curious about what to know for protecting yourself against claims? We’ve got you covered. Here’s a look at what you need to know:
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, Oregon and Idaho are the only states that require lawyers to have legal malpractice insurance. However, it’s not that simple: 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 Malpractice Claims
As the saying goes: “To err is human.” But for lawyers, those errors can be costly. That’s because, most often, the cause of malpractice claims boils down to mistakes on the lawyer’s part.
Legal malpractice lawsuits often conjure thoughts of extreme negligence or fraud by a lawyer, but that’s not entirely accurate. 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.
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.
Some of the common mistakes that can lead to legal malpractice claims include:
Missed deadlines
Misuse of finances
Conflicts of interest
Inadequate research and investigation
Failure to apply to the law
Communication problems
Poor client relations
Errors in strategy or planning
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
After reading those common mistakes above, you might be thinking: “I never make those errors, I don’t need insurance.” But think again.
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.
That’s why having legal professional liability coverage is so important – it protects you from the unexpected.
And while the areas of practice with the highest risk for having a malpractice claim are personal injury-plaintiff, real estate, and family law, any lawyer in any area of practice is at risk of a malpractice lawsuit.
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 that choose to forego malpractice insurance, the fallout from a lawsuit could wipe out any savings and ruin the sustainability of a practice.
What Does Legal Malpractice Insurance Cover?
You already know that the basis of legal malpractice insurance is to protect against 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.
However, some situations aren’t covered by a legal malpractice insurance policy. For example, legal malpractice insurance won’t cover claims involving criminal, malicious, or fraudulent acts. Plus, many policies have an insured vs. insured exclusion, which means the policy won’t deal with claims between attorneys who work for the same firm.
Also keep in mind that since 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.
Consider D&O insurance as another layer of coverage to protect yourself and your firm from claims.
Tail Insurance Coverage
Lawyers know that the risks of a legal malpractice claim don’t end when a case wraps up or you know 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.
Even if you’re far from retirement, tail coverage still has benefits. For example, purchasing an extended reporting period is useful when a lawyer or firm changes insurance carriers. Since your new policy won’t cover incidents that happened while your former policy was active, tail coverage offers protection from claims during that transition.
What to Do When a Malpractice Claim Happens
If you do find yourself facing a malpractice claim, first remind yourself that 80% of lawyers are sued at some point in their careers. And then contact your insurance 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.
After you’ve spoken to your carrier about the situation, they’ll guide you on the next steps to take.
The Bottom Line
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.
