Legal Malpractice Insurance is a form of professional liability insurance – or Errors and Omissions insurane – specifically tailored to the legal profession.
Sometimes mistakes or errors can happen. When they do, your client may seek recourse and decide to file a malpractice claim against you.
The longer you are in business and the more clients you take on, the greater chance you have of a claim being filed against you.
Unfortunately, just because a breach of standard didn’t occur doesn’t mean a client won’t bring a malpractice claim against you. This is especially true if the client doesn’t like the result of their case. Perhaps they had unrealistic expectations or are just bitter about the result. If and when this does happen, it’s best to be prepared – and covered – with malpractice insurance.
Why You Need Legal Malpractice Insurance
We get it. Law firms need to keep costs down.
But going without legal malpractice insurance is risky and could cost you big in the long run. Even if you are very careful, it is nearly impossible to avoid claims. That’s why it may not be worth it to skip on legal malpractice insurance.
And, let’s face it. It only takes one unhappy client.
The bad news is that if a client brings a claim against you and you win the case, you’ll still incur legal expenses, not to mention you will waste a lot of time. And when it’s all about billable hours, time is money.
If the lawsuit becomes costly, then it could also potentially lead to bankruptcy. When armed with legal malpractice insurance, law firms stay protected since the legal costs and any damages that are awarded to the client would be covered.
And since insurance payments are stretched out over time, it’s a lot easier to pay smaller amounts over a long period of time than needing to pay expensive legal fees and potential damages all at one time.
How much does legal malpractice insurance cost?
The short answer is it depends.
When you are trying to create a budget for the cost of legal malpractice insurance, it may be difficult to pinpoint an exact figure.
That’s because when an insurer calculates the cost of insurance, they use a a variety of factors to put that number together.
The cost for legal malpractice insurance will vary for each attorney or business. Below is a list of the key cost factors that affect the cost of insurance, with a brief explanation of each one.
Key Cost Factors
Law firm size
This one is pretty simple. The more attorneys that are in a law firm, the higher the cost will be. This is great news and a real advantage as a solo attorney since there aren’t multiple people that will need malpractice insurance.
A step rating is a system that insurers use to calculate policy premiums for lawyers’ malpractice insurance. The amount of time an attorney has been with the law firm is a big part of this rating.
The premium will start lower in the first year, at step one, and will increase over the years when it eventually reaches maturity in the sixth year of an attorney practicing law.
The idea behind the step rating is that the more cases the attorney has been part of, the more potential exposure the attorney has for a lawsuit from a client. That’s why the premium is the lowest in the first year as an attorney is just starting out obtaining clients.
If there are any claims, whether they be in the past or are currently pending, they will affect the cost of the insurance premium. Additionally, if a claim was filed in the last five years, the attorney will not be eligible for an admitted policy, which is generally a cheaper policy.
The amount of coverage you request in your insurance application will affect the cost. Though it probably goes without saying, we should point out that the higher your coverage amount is, the higher your premium will also be. Depending on the size of the law firm, a $1 million coverage may be perfectly adequate, but for a larger law firm, they may require a higher limit.
Generally, the maximum limit is $10 million. This is something that is particularly important to take into account when selecting insurance because you want to be sure that you have an appropriate amount of coverage, just in case you do encounter a claim.
Your deductible amount is the amount you will need to pay out of your pocket before the policy kicks in and pays for you. The higher deductible you have, the lower your premium will be.
That’s because you will pay more money up front before the policy kicks in if you have a higher deductible. The higher the limit, generally the higher the deductible will be. Similarly, if the deductible is on the lower end, then your premium will be likely be higher in cost.
Areas of practice
Area of practice is one of the factors that will make a big difference in the cost of legal malpractice insurance. While criminal law and insurance defense is typically on the lower end, personal injury cases and intellectual property are generally on the high end.
When it comes to intellectual property, patent work is generally considered a very high risk area of practice. However, the insurer will review several things with your application, including how much time is devoted to patent work, your experience level, and the risk management procedures that you have in place.
With personal injury cases, the reason this area is considered riskier is due to the potential for deadlines to not be properly followed and also accepting clients with unrealistic expectations about how much money they may receive if they win the case.
When you are getting a quote for coverage, the insurer will review the areas of practice and caseload as well to determine the cost of your insurance.
Risk management practices
A solid risk management strategy is not just a good idea for your business for obvious reasons, but also for your insurance application. Having strong risk management practices in place will make a difference when it comes to your malpractice insurance premiums.
If you can show that you have systems in place, it could mean a lower insurance premium for you. Factors that contribute to the assessment of risk management practices include the client selection process, scheduling software, client communication, and if there are any lawsuits against clients for things like outstanding invoices. In addition, if you take continuing education classes, you may receive a lower rate.
The location of your private practice will affect the cost of your insurance. If you practice in a small, rural area, then you will likely pay a less expensive premium compared to attorneys who set up shop in larger metropolitan areas like New York or Los Angeles.
This is because the rate that you charge for services will vary based on the area and state you practice law in, with firms in bigger cities often charging more than firms in more rural areas. Generally speaking, firms that charge higher rates often see higher claims.
Are lawyers required to have malpractice insurance?
Not in every state. In fact, most states do not require attorneys to carry professional liability insurance. However, according to the American Bar Association, several states do have requirements for attorneys who do not carry legal malpractice insurance that most often includes notifying clients of their insurance status.
Alaska, Ohio, and New Hampshire
In Alaska, Ohio, and New Hampshire, attorneys are required to notify clients in writing if they have no malpractice insurance or if their coverage is less than $100,000 per claim and $300,000 aggregate. Additionally, if the malpractice insurance coverage is terminated or coverage falls below the limits mentioned above ($100,000 per claim and $300,000 aggregate), attorneys must notify clients.
In South Dakota, if an attorney has no malpractice insurance or the insurance coverage is less than $100,000 per claim, the attorney must indicate it on their letterhead.
Delaware, Virginia, Nebraska, and North Carolina
In Delaware, Virginia, Nebraska, and North Carolina, annual certification verifying whether an attorney does or does not carry malpractice insurance is required. Attorneys have to report this to the state’s mandatory bar or the state supreme court. However, there is no requirement regarding minimum limits attorneys must carry.
How much does professional liability insurance cost for an attorney?
Professional liability insurance costs will vary for attorneys depending on many of the key factors we mentioned above. The average premium for most attorneys with a fully rated policy is between $1,200 and $2,500 per year, with minimal limits. Of course, attorneys in the higher risk areas of practice will pay something more like $3,000 to $10,000 per year.