Starting a New Law Firm: Considerations for What Your Legal Malpractice Policy Means

In this blog post, we'll explore some considerations for evaluating your legal malpractice policy needs when starting a new law firm.  The Claims Attorneys at ALPS frequently encounter insureds who have never read their legal malpractice policy, and who thus seem surprised to learn what coverage their policies do, and do not, provide.  Don’t be one of those attorneys; deliberately consider your policy needs as you start your new firm. 

Legal Malpractice Insurance: The Basics 

Legal malpractice insurance, also known as legal professional liability (“LPL”) insurance, generally provides defense and indemnity coverage to law firms and their employed attorneys (and other employees) for claims of negligence, errors, or omissions that may be asserted by clients or third parties.  When looking to safeguard a new law firm, it’s crucial to consider what coverage your firm needs and what the coverage does and does not include. 

Coverage: Retroactive Date, Policy Limits, Claim Expenses, and Supplemental Benefits 

Some attorneys start a new firm fresh after passing the Bar, while others with years of prior practice experience may hang their own shingle or start a new firm with other attorneys.  Regardless of the scenario, legal malpractice coverage typically dates back to the policy’s or the insured attorney’s “Retroactive Coverage Date.”  For freshly licensed attorneys purchasing a policy for the first time, the retroactive date will typically be the same as their policy’s initial effective date.  For an experienced attorney starting a new firm, the retroactive coverage date generally will be either: (i) the earliest date from which the attorney has been insured continuously (i.e., without interruption) under a prior legal malpractice policy/policies; or (ii) the new policy’s initial effective date.  Consider getting the earliest retroactive coverage date you can.  Also, make sure you understand the effect of your retroactive coverage date in a “claims made and reported” policy (which most legal malpractice policies are). 

Policy limits are one of the most critical considerations for your legal malpractice coverage when starting a new firm.  Legal malpractice policies typically provide at least $100,000 of coverage, but could provide limits up to $10 million or more, depending on the size and nature of the practice.  When evaluating how much coverage your new firm needs, consider the complexity and the top-end value of the types of cases or transactions you handle, and the value of your and your firm’s assets you hope to protect. With those considerations in mind, purchase a policy with limits sufficient to cover your new firm’s risk profile. 

Claim expenses are also an important consideration in evaluating legal malpractice coverage needs when starting a new firm.  Claim expenses – i.e., generally the attorney’s fees and costs incurred to defend a claim – may also affect your policy limits.  Claim expenses may be “within the limit of liability” (a defense within limits, or “DWL” policy) or “outside of or in addition to the limit of liability” (a defense outside limits, or “DOL” policy).  In a DWL policy, claim expenses are applied against and reduce the policy limits available to pay a covered claim.  In a DOL policy, claims expenses are outside of, and do not reduce, the policy limits available to pay a covered claim.  Understanding the difference between these policy features is an important consideration when evaluating your new firm’s legal malpractice coverage needs. 

Aside from ensuring your new firm’s legal malpractice policy provides coverage for “standard” professional negligence claims, consider whether your firm would like any additional coverage for other risks, such as loss of earnings, defending against bar/ethical complaints, or responding to a subpoena or testifying at a deposition or trial with respect to a matter involving one of your clients.  These “supplemental coverages” are an additional feature of some ALPS’ policies.  Taking time away from your practice to testify in a matter, to gather documents in response to a subpoena, or – worse yet – respond to a bar/ethical complaint, can be costly and stressful.  Supplemental coverage to assist you with such matters may save you some money and provide added peace of mind.  And it may even help you significantly reduce your risk of facing a “full blown” malpractice claim. 

Exclusions: What’s Not Covered 

In evaluating your new firm’s legal malpractice insurance needs, understanding what is not covered is just as important as understanding what is covered.  All legal malpractice policies will include some exclusions and limitations on coverage.  For example, most policies exclude dishonest, fraudulent, criminal, malicious, and intentionally harmful conduct.  Most legal malpractice policies also exclude coverage for bodily injury, emotional distress, property damage, and harassment/discrimination claims.  While many exclusions and limitations are essentially “common sense,” others may warrant deeper consideration with an eye toward how they may affect your new firm’s risk profile.  

ALPS Can Help 

Starting a new law firm requires careful evaluation of your legal malpractice coverage needs. By understanding the basics of malpractice insurance and the fundamentals of coverage and exclusions you can safeguard your practice and position your firm for success. 

So, if you’re starting a new law firm and would like assistance evaluating your legal malpractice policy needs, ALPS can help you navigate that process.  We’re available to talk at (800) 367-2577, via email at customerservice@alpsinsurance.com, or chat. Give us a holler – we’re here to help.