6 Things I Wish Lawyers Understood About Malpractice Insurance

Look. I get it. Insurance policies aren’t the most interesting reads out there. No policy is ever going to hit the New York Times bestseller list. That said, the reality that an insurance policy doesn’t read like a great suspense novel shouldn’t be an excuse for not knowing a few things about what these policies say. With this in mind, I thought you might appreciate having someone like me make it a bit easier. Here is a short list of a few things I wish more lawyers understood about malpractice insurance, all driven by common questions we hear year after year.

Why wouldn’t there be coverage for this? Don’t malpractice policies cover me for everything I do as a lawyer?

Actually, no. A malpractice policy doesn’t cover you for everything you do as a lawyer. In general, these policies only cover you for work you do in an attorney-client relationship that is also done on behalf of a client of the named insured, which is your firm. This has all kinds of ramifications. Here are a few examples. If you are a partner at firm A and also of counsel to firm B, you will need to be on two policies because you are providing services to clients of two different firms. If you are an associate at a firm, but also do a little moonlighting on the side, the coverage you have at your firm will not extend to the moonlighting work because your personal clients are not clients of the firm. If you leave your firm in order to go solo during the middle of your firm’s policy year, you will need to buy a new policy for your solo practice if you wish to have coverage in place for your solo work.

But this work will be done for clients of my firm. Why are you saying there still wouldn’t be any coverage?

Malpractice policies provide coverage for professional negligence, again not for everything you do. Yes, coverage will generally be in play when you are providing legal services.  However, if you also happen to offer ancillary services of any type to your clients, in almost all situations your malpractice coverage would not cover any of those services. Common examples include consulting, selling insurance or other investments, acting as a real estate broker, and managing client assets. Note that policy language will differ between insurers, so it’s important to take the time to review and understand what the definition of professional services is and what the specific exclusions are in any policy you are considering purchasing.

We move a fair amount of money on behalf of our clients each year.  Will our policy cover that?

Most of the time, the answer is no.  While some insurers may offer limited coverage under certain defined circumstances, typically under something like a cybercrime endorsement, most malpractice policies provide no coverage for the loss of funds regardless of what occurred. So, for example, if someone is tricked into wiring funds to a scammer, there would be no coverage for any of that loss under your malpractice policy. Yes, such losses occur as a result of negligence. The problem is they just don’t occur as a result of professional negligence.

Here’s a tip worth remembering: Every single loss of funds due to a scam situation that I have been aware of could have been avoided with one simple step. All the firm needed to do was conduct an out-of-band authentication of the wiring instructions. Problem solved. If you have no idea what an out-of-band authentication process is, additional information can be found here.

I’m about to leave my firm to go in-house with one of my clients.  Can I buy a policy to cover me for this work?

Yes, you can; but it won’t be a traditional malpractice policy because these policies exclude coverage for work done in an in-house setting. Because you will no longer be in private practice, the type of coverage you now need to look for is called employed lawyers professional liability coverage. Your current malpractice insurer may or may not be able to write or place this kind of coverage so you may need to shop the market a bit in order to find appropriate coverage.

Why is my premium so much more expensive than that of other lawyers I know?

There are all kinds of reasons for differences in premium, many of which have something to do with the risk an individual lawyer represents.  Think about it this way. An insurer takes on a higher risk when agreeing to insure a lawyer who has a personal injury plaintiff practice in Las Vegas versus agreeing to insure a criminal defense lawyer who practices in Laramie, Wyoming. Personal injury lawyers simply get sued more often than criminal defense lawyers and lawyers, in general, get sued more often in Las Vegas than in Laramie. In other situations, even though policy limits may be exactly the same, if one policy has placed defense costs inside policy limits and the other has placed them outside of policy limits, there would be a significant difference in premium. Placing defense costs inside limits saves premium dollars because those policies offer much less coverage when compared to placing defense costs outside of policy limits. Policies with defense costs inside of policy limits are called self-cannibalizing policies for a reason.

Why won’t you insure me if I advertise in this fashion?

Lawyers can get highly creative in the ways they advertise. If there is a significant difference between how lawyers are holding themselves out to the general public and how they are actually operating, finding an insurer willing to write a policy may be problematic and/or if you do obtain coverage you may come to find that the policy you purchased doesn’t afford the coverage you thought it did. For example, two solos and a small two-lawyer firm advertise under a common firm name yet all plan to operate as separate and discrete practices. They then go out and purchase a policy that lists the common firm name as the named insured. With that completed, as new clients come in the two solos and the two-lawyer firm have their respective clients sign engagement agreements with their separate and discrete firms. See the problem? The policy they have will cover them for work they do on behalf of clients of the named insured. Unfortunately, none of the work any of them will do will be on behalf of a client of the named insured. All of their documentation will state otherwise.

Making matters even more challenging, suppose it’s only the small two-lawyer firm that wants to purchase a malpractice policy because the two solo lawyers simply aren’t interested.  In light of the common marketing campaign, some insurers will refuse to offer coverage in this situation. Yes, I understand that the lawyers are operating as independent firms behind the scenes, but the presentation to the public is one of being a firm of four lawyers. From an insurer’s perspective, it’s like we’re being asked to insure part of a firm and that’s not a risk an insurer wants to knowingly take on.

While some insurers will bring such problems to the attention of the lawyers and not offer a quote unless the problems are addressed upfront, others won’t. They will simply choose to rely on policy language to protect them should a claim ever arise. All I can say is don’t run with assumptions, irrespective of how you have structured your practice. Ask the right questions before you make the purchase. It’s the only way to make sure the policy you are about to buy will actually provide the coverage you think it will.