Build Your Own Law Firm #1: Malpractice Insurance

Risk is the first consideration for any business owner.  Starting a new business is an inherently risky proposition: You may be leaving a salaried position.  You may misjudge the market for your services.  You may be overcome by the business management responsibilities that threaten to strangle your technical proficiency.

But, for lawyers, the notion of risk mostly starts and ends with the specter of committing malpractice.  With so many rules and laws governing the profession, attorneys are rightly concerned with screwing up — even if they do so without malice.  That’s why lawyers starting new firms are always looking to acquire malpractice insurance, in the first instance.

Before you rush to get a policy, however, there are some things you should know.

The When.  If you’re a new lawyer and you don’t have any clients, you don’t need malpractice insurance.  Who is going to report you, or sue you?  So, if you don’t anticipate taking on your first client for 6 months, don’t pay for insurance until you do.  The insurance acquisition process is relatively quick, and some providers now offer cloud-based application and renewal options. It’s important to note, as well, that professional liability insurance is a ‘claims-made’ policy.  That means that the insurance must be in place when the claim is made by the client, not when the alleged incident of malpractice occurred.  Practically speaking, then, even if it took you three weeks to get your malpractice insurance squared away, it’s very unlikely that your first client will be making a complaint about you in that window.  You could, of course, extend that window, and try to guess at which point your first complaint comes in, to try get away with not paying for malpractice insurance for a little while longer; but, that’s the most dangerous game — better to get the policy in place right after you sign your first client.  If you’re starting up with a historical practice behind you, of if you’re porting over a book of business, you’ll want to understand what ‘tail’ coverage options you have, in case claims arise out of your prior practice.  But, know that, in some states, like Massachusetts, malpractice insurance is not required: you’ll just have to report whether or not you have it.  Of course, you’d be crazy not to get it, even when you don’t, technically, have to.

The Where.  There are a number of sources for acquiring professional liability insurance for lawyers.  Many attorneys will turn, in the first instance, to bar associations, some of which have full-scale insurance agencies, but most of which maintain partnerships with insurance companies.  Just be careful here, because in many cases, that partnership means that the bar association provider will not be able to shop rates: they’re locked into working with their partner.  Similarly, you can buy malpractice insurance directly from large, name carriers, like Liberty Mutual or Travelers.  If you use a private insurance agency, you will have in your corner an agent, who can shop you around for the best rate.  But, regardless of whether you use an agent or not, you should compare several options before deciding on a policy.  Policy limits will be defined, mainly, by your risk profile and tolerance; but, keep in mind that, in some cases, especially if you’re being referred cases by branded networks, lawyer referral services or agencies (like title insurance companies), you may be required to maintain certain policy limits by those organizations.  Finally, since professional liability insurance is just another type of insurance, like your home, auto or life insurance, bundling it with other insurances may save you some money.

Claims Made. Not all malpractice insurance policies are created equal.  Your rate will depend on several factors.  If you are starting a law firm right out of law school, your rates will be lower, in part because, statistically, new lawyers are a low risk for malpractice claims (they’re still being careful), and in part because new lawyers have a ‘short tail’ or no tail at all — there are no past clients who can make a claim at the time the policy is signed.  Rates rise as the tail grows — as the list of past clients increases.  Your rates will also depend on your practice area.  Statistically, some practice areas (like family law) have higher incidences of claims than others.  And, if you decide to practice in those areas, you’ll pay for the privilege.  In certain cases, including patent law or intellectual property law, it may be difficult to find coverage at all, if you’re opening a solo or small firm law office.

Ride-Along.  Your rate will also be affected by the policy riders that you choose.  There are a number of different ‘riders’ that could attach to your basic malpractice insurance policy; these are additional coverages (like ‘full collision’ or rental car coverage on your auto insurance) that will push your rate upward.  Umbrella coverage of some kind is not uncommon.  Cyberinsurance, to protect against data breach, is increasing in popularity, for obvious reasons.

Once you have your malpractice insurance in place, you can practice with increased confidence; and, if you choose wisely, you can save money, while simultaneously covering as much of your risk profile as possible.

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