There are many costs that come with the practice of law. So when starting out as a lawyer, it is of course advisable to save money where you can. Still, there are some areas where it’s important not to cut. One is legal malpractice insurance. It is always important to have robust insurance coverage in general, but professional liability insurance is essential to legal services. Given the importance of lawyers’ professional liability insurance, you should thoroughly review your options and make an informed choice when purchasing legal malpractice insurance.
Why you need legal malpractice insurance
80% of lawyers will face a malpractice suit over their legal work. Solo practitioners and small firms are the most at risk. 66% of legal malpractice claims are against small firms. Additionally, the monetary impact of claims is harder for small firms to shoulder. An average jury award in a legal malpractice case is $198,878, and 22% of jury awards in these cases are over $1 million.
There are several reasons why it is a good idea for any lawyer to be covered by malpractice insurance, regardless of the size of the firm. First, malpractice insurance protects the lawyer’s reputation in a malpractice suit because many insurance carriers will cover the cost of public relations and crisis management if the claim threatens the attorney’s reputation. Similarly, the malpractice insurance policy will cover costs of dealing with the claim, such as defense costs and some insurance covers the loss of earnings. The insurance will also protect the firm and all of its assets. If someone wins a claim against a firm that is not insured and the firm cannot pay the claim, the plaintiff could go after the firm’s assets.
Cost of professional liability insurance
There is not a uniform answer to how much malpractice insurance costs. The general range is $500 per attorney to up to $6,500 per attorney. For the average lawyer, it costs $2,500 to $3,500. The difference in cost is typically subject to the risk management in the area of law and the monetary amount that the lawyer needs in terms of coverage.
To determine the particular cost of insurance, legal malpractice insurers will look into how often an attorney is likely to face a claim and how severe the claim may be. Malpractice insurance providers make these evaluations based on historical information, such as the cost of the legal defense against a malpractice claim and what the company will have to pay out if the defendant loses.
Typically a private practice will pay more for professional liability coverage. Many factors will impact the professional liability policy. One is the firm’s size. Of course, the bigger the firm, the higher the premium. However, it is worth noting that larger law firms will typically get a discount per lawyer when the firm purchases professional liability coverage in aggregate.
Another factor is how long the attorney has been with the firm. In the first six years that an attorney is at the firm, their premiums will increase each year, but it generally plateaus in the sixth year. Similarly, a firm will face increases each year for the first five years that the firm has the malpractice insurance policy. Beyond these factors, a firm can pay more based on the monetary amount that the firm seeks, how much the deductible is, the number of hours the firm collectively works per year and the history of malpractice claims filed against the firm. Pro bono work will be covered by a firm’s professional liability policy if the work is directly connected to the firm and their practice areas.
Cost factors for a solo attorney
Regarding solo practitioners, the average insurance premium is $2,300. However, some insurance companies will offer a break in the first three years. As a result, many solo practitioners pay $500 to $1,000 for their first year of coverage. Many of the factors that apply to the price of insurance for law firms, will also impact the cost for a solo practitioner.
For example, location can increase premiums by 50% in places like New York and Los Angeles. Additionally, the practice areas, the cost of coverage and how many hours that someone works will also affect the price. Part-time attorneys will typically pay less for professional liability insurance. If a solo practitioner expands their law practice to more attorneys, they will pay more per attorney and the factors will become more complex, as attorneys may be located in more places or have different practice areas.
Purchasing legal malpractice insurance
In terms of purchasing a legal malpractice insurance policy, Oregon is the only state that requires lawyers to purchase insurance. But as discussed above, it is a good idea to have malpractice insurance to protect your financial liability for malpractice claims.
The American Bar Association (ABA) has a directory that lists different insurers. The directory provides information on what areas of practice these insurers cover and what states that they are available in. Typically a state bar will also have a directory.
When an attorney is seeking coverage, they will typically submit applications to several insurance companies. The attorney should be careful to fill out each application thoroughly and honestly so they do not later receive surprise rate increases after being far along in the process. These companies will ask about an attorney’s area of practice, how long they have practiced law, if they have had past malpractice issues, and whether they already have malpractice coverage.
Conversely, the attorney should find out the full extent of the policy, such as:
- Whether there are limitations on the liability
- What the deductibles are
- Who specifically in the firm the policy covers
- What the policy period is
- What legal services are covered
- Whether the insurance policy covers all of the firm’s professional services
- Whether there is prior acts coverage, which covers activity prior to the date that the policy goes into effect
Medical malpractice insurance vs legal malpractice insurance
The main difference between medical malpractice insurance and legal malpractice insurance is that medical malpractice insurance covers claims and associated costs against medical professionals for issues that result in harm or death of the patient, while legal malpractice insurance of course covers attorneys for malpractice claims against their practice of law.
However, there are more nuanced differences. First, while only one state requires malpractice insurance for lawyers, a majority of states mandate that physicians need to have malpractice insurance. Additionally, medical malpractice insurance is typically going to deal with more serious issues. While malpractice losing a case can be devastating, ultimately malpractice that causes a serious injury or death is more grave. Medical negligence is the third biggest cause of death in the US, leading to 250,000 deaths per year.
Additionally, medical malpractice insurance typically has a higher price tag. On average it costs $7,500 and can be as high as $50,000. Additionally, the average payout is over $300,000 and can total up to $4 billion per year for the medical industry.
While you are not likely to face many legal malpractice claims during your practice of law, even one claim could prove devastating to your career, largely because of the cost associated with malpractice claims. Having professional liability coverage can prevent a bad situation from becoming a nightmare.
Todd Carney is a graduate of Harvard Law School. He holds a Bachelor’s degree in Political Science and Public Communications. He has also worked in digital media in New York City and Washington D.C. The views in his pieces are his alone and do not reflect the views of his employer.