A Practical Guide to Legal Malpractice Insurance for Small and Medium-Sized Law Firms

Don't let a single misstep or oversight threaten your firm's future. Understand your malpractice risks and how the right insurance can protect you.

As a fellow attorney, I understand the challenges and risks you face in running your law firm. That's why I'm sharing this comprehensive guide to demystify legal malpractice insurance and help you secure the right coverage.

Core Policy Clauses and Features

Legal malpractice policies are typically "claims-made" contracts, meaning they cover claims made during the policy period, regardless of when the act or error occurred. This structure introduces key clauses like retroactive dates and tail coverage, which determine how past or future claims are covered.

Retroactive Date & Prior Acts Coverage

Most policies have a retroactive date, which is the start of covered prior acts. Prior acts coverage extends protection to claims arising from services rendered before the current policy's inception, as long as those acts occurred after the retroactive date. Gaps in coverage can be dangerous, as they can result in a new retroactive date and loss of prior acts protection.

Extended Reporting Period (Tail Coverage)

Often called a "tail," an Extended Reporting Period allows you to report claims after a policy ends for acts that occurred during the expired policy period. Tail coverage does not cover new acts after policy expiration.

Limits of Liability

Malpractice policies have a per-claim limit and an aggregate limit. Each claim's defense costs and indemnity payments erode these limits.

Defense Costs: Inside vs. Outside Limits

Review whether the policy treats defense expenses "inside" or "outside" the liability limits. Under a typical policy for small firms, legal defense costs are deducted from the policy limits, leaving less available to pay a settlement or judgment. Some premium policies or endorsements provide defense costs outside the limits.

Deductibles and Self-Insured Retention

Malpractice policies typically require the insured to pay a deductible when a claim occurs. Choosing a higher deductible can lower your premium.

Exclusions

Every policy has exclusions, which are specific situations or circumstances that the insurance will not cover. Common exclusions include:

• Intentional/Dishonest Acts: Claims arising from fraudulent, criminal, or intentionally malicious acts are typically excluded.
• Bodily Injury/Property Damage: LPL insurance focuses on economic loss from professional services, so physical injury or property damage claims are generally excluded.
• Insured vs. Insured Claims: Most policies exclude claims by one insured against another, such as one partner suing another.
• Business Interests (Owned Equity): If a lawyer has a significant ownership stake in a client's business, claims arising from that representation may be excluded.
• Fee Disputes and Fee Suits: Some insurers exclude coverage for any claim that arises after you sue a client for fees.
• Prior Knowledge of Claims: All claims-made policies exclude any claim or circumstance that the insured knew or should have known about before the current policy period.

Consent to Settle and Hammer Clause

‍Most policies include a "consent to settle" provision, meaning the insurer cannot settle a claim without the insured lawyer's consent. However, this often comes with a "hammer clause," which gives the insurer leverage if you refuse a recommended settlement.

‍Supplementary Coverages

‍Many policies automatically include supplementary benefits outside the main limits, such as:

• Disciplinary Proceedings Coverage: Pays for legal fees to defend you in attorney disciplinary complaints.
• Subpoena Assistance: Covers costs to respond to subpoenas when you're not a party to a matter.
• Loss of Earnings: Reimburses lost income if you attend a trial or hearing at the insurer's request.
• Crisis Management/Public Relations: Some policies offer a sublimit for hiring a PR firm to mitigate reputational damage from a high-profile claim.
• Cyber Liability Endorsements: Some malpractice policies add a small first-party cyber coverage endorsement.

Common Malpractice Risk Areas and ConsiderationsUnderstanding your greatest risks is crucial for both prevention and insurance purposes. Some common risk areas for small and mid-sized firms include:

• Missed deadlines and calendar errors: These are the number one cause of malpractice claims.
• Conflicts of interest: Representing adverse interests can lead to claims.
• Failure to know or apply the law: Errors in legal judgment or lack of knowledge are a common risk.
• Inadequate investigation or discovery: Failing to discover key facts or evidence can lead to claims.
• Poor client communication and documentation: Misunderstandings and lack of documentation can contribute to claims.
• Breach of fiduciary duty: Misusing client funds or failing to disclose information can lead to claims.
• Cybersecurity and data breach risks: Failing to protect client data can result in malpractice claims or disciplinary actions.

Special Focus: Cyber Exposure and Insurance for Law Firms

‍Cybersecurity is a critical malpractice issue. Law firms are prime targets for hackers due to the sensitive client data they handle. Key cyber risks include:

• Data breaches: Unauthorized access to client information can lead to significant financial and reputational damage.
• Ransomware attacks: Malicious software can encrypt your data and hold it hostage until a ransom is paid.
• Email wire fraud (social engineering): Hackers can trick firms into wiring funds to fraudulent accounts.
• Network outages and data loss: Server crashes or software failures can disrupt operations and jeopardize client matters.

How Malpractice and Cyber Insurance Intersect

‍Traditional malpractice policies may provide coverage for claims arising from a cyber incident if it was caused by your negligence. However, they typically do not cover the first-party costs of a cyber event, such as notifying affected clients or paying for credit monitoring.A stand-alone cyber liability policy is highly recommended to cover these first-party costs and other cyber-related exposures.Strategies to Optimize Coverage and Reduce Premiums

• Embrace risk management: Implement and document strong risk management practices, such as:

• Using reliable docket and calendar systems
• Having a formal conflict-checking process
• Using engagement and disengagement letters
• Setting clear client communication practices
• Implementing quality control measures

• Maintain a clean claims history: Avoid suing for fees unnecessarily and resolve grievances quickly.
• Choose coverage limits and deductibles strategically: Right-size your limits and use deductibles to save on premiums.
• Periodically shop and leverage group programs: Compare quotes and explore bar association programs or group purchasing options.
• Consider practice scope adjustments: Evaluate your mix of practice areas and consider specializing or referring out high-risk cases.
• Don't skimp on coverage quality: Choose a policy that provides comprehensive coverage and is backed by a reputable insurer.

‍Legal malpractice insurance is an essential safeguard for your law firm. By understanding the policy clauses, recognizing common risks, and adopting strong risk management practices, you can protect your firm from potentially devastating financial and reputational damage.