Key Takeaways

• Liability insurance protects law firms from financial losses due to malpractice claims, covering legal fees, settlements, and judgments.
• Policies vary in how they handle defense costs, with some deducting from the overall coverage limit and others treating them separately.
• Deductible structures can impact a firm’s out-of-pocket expenses, depending on whether they apply per case or annually.
• Experienced lawyers may face higher premiums due to larger client bases and longer case histories, but negotiation with insurers is possible.
• Comprehensive policies should include coverage for prior acts and cyber liability to ensure full protection against potential risks.

Practicing law inherently carries risks, from potential malpractice claims to data breaches. In an increasingly litigious society, liability insurance protects law firms, safeguarding against financial losses arising from legal claims and professional mistakes. Navigating the complexities of purchasing a policy can be challenging, especially for lawyers establishing their own practice. This guide comprehensively examines what law firms should consider when selecting liability insurance.

What Is Professional Liability Insurance for Law Firms?

Professional liability insurance, or legal malpractice insurance, protects law firms from claims alleging negligence, errors, or omissions in legal services. This coverage helps cover legal fees, settlements, and judgments, ensuring that firms can continue operations despite costly claims.

Why Every Law Firm Needs Liability Coverage

Without liability insurance, law firms face significant financial risks if a client files a malpractice suit. The costs of defending against claims can quickly escalate, making liability insurance a critical component of risk management.

Key Considerations When Purchasing Liability Insurance

Does the Policy Feature Eroding Coverage?

One of the first elements to evaluate in a liability insurance policy is whether defense costs are included within the policy limits (eroding coverage) or treated separately.

• Eroding Coverage: Defense costs are deducted from the policy’s overall coverage limit, potentially leaving less available for settlements or judgments.
• Non-Eroding Coverage: Defense costs are handled separately and do not reduce the available liability coverage unless they exceed a specific cap. Understanding this distinction is vital, as it can significantly affect the financial protection your firm receives.

Does the Deductible Apply to Defense Costs?

Liability policies may differ in how deductibles are applied:

• Deductible Applied to Defense Costs: Your firm is responsible for defense expenses from the beginning of a claim until the deductible is met.
• Deductible Applied Only to Liability: Coverage applies immediately to defense costs, and your firm only pays the deductible if there is a settlement or judgment. Additionally, consider whether the deductible applies per case or as an annual aggregate, as this can influence costs if multiple claims arise in a single year.

Factors That Affect Liability Insurance Premiums for Law Firms

Why Experienced Lawyers May Pay Higher Premiums

It might seem counterintuitive, but lawyers with more experience often face higher premiums. The risk of claims increases with a larger client base and longer case history. Insurers usually view experienced lawyers as more likely to encounter malpractice suits.

• Billing Hours Impact: Higher billing hours can lead to higher premiums, but firms can negotiate with insurers to modify this aspect, especially for multi-lawyer practices.

Policy Features to Look for in Liability Insurance

Are Prior Acts Covered?

Some liability policies include coverage for potential claims arising from past cases (prior acts), while others do not. Although policies excluding prior acts are cheaper, they may expose firms to risks from previous work. Assessing whether prior acts coverage is necessary for your firm is crucial.

Is Cyber Liability Included in the Policy?

Cyber liability coverage is increasingly essential, given the sensitive nature of client data held by law firms. If not included in the primary policy, consider adding a rider or purchasing a separate policy to protect against data breaches and cyber threats.

Understanding Defense and Settlement Provisions in Liability Policies

Who Controls Defense and Settlement Decisions?

Liability policies may transfer some control over defense and settlement decisions to the insurer. Important considerations include:

• Settlement Authority: Insurers may be able to settle claims without the firm’s consent.
• Choice of Defense Counsel: Some policies allow insurers to select and hire defense counsel, which may impact the firm’s defense strategy.

Final Thoughts on Liability Insurance for Law Firms

Choosing the right liability insurance policy requires careful evaluation of coverage options, deductibles, and additional protections like cyber liability. Law firms should thoroughly review policy terms and seek tailored solutions addressing their needs. By understanding the nuances of liability insurance, law firms can safeguard their financial stability and continue to provide quality legal services without undue risk.

FAQs

1. What is eroding coverage in liability insurance?

Eroding coverage means that any defense costs incurred during a malpractice claim reduce the available liability coverage. For example, if a policy has a $1 million limit and $200,000 is spent on defense, only $800,000 remains for settlement or judgment.

2. How does the deductible affect my liability insurance policy?

Deductibles determine how much a law firm must pay before insurance coverage begins. Some policies apply deductibles to defense costs, requiring firms to cover legal expenses from the outset, while others apply deductibles only to settlements or judgments.

3. Why do experienced lawyers have higher premiums?

Insurers consider experienced lawyers to have higher risk exposure due to more clients and cases over time. More interactions increase the likelihood of claims, leading to higher premiums. However, firms can negotiate premium terms based on specific circumstances.

4. Should my law firm include cyber liability in our insurance policy?

Yes, cyber liability is essential as law firms store sensitive client data. Without it, firms are vulnerable to data breaches, resulting in financial losses, reputational damage, and lawsuits. Add a rider or a secondary policy for comprehensive protection if not included in your main policy.