Are You Really Insured?
Protect Your Law Firm from Loss Exposure
Pat yourself on the back. You bought legal malpractice insurance, known as Errors and Omissions coverage, to protect yourself and your clients. So, your firm, your clients, you and your family are secure, now, right?
Not by a long shot.
Embezzlement Is More Common Than You Think
You need a “crime policy” or its equivalent to protect you from malfeasance. Errors and Omissions insurance (E&O) provides coverage for negligent acts, not intentional ones. So when a friend recently confided that his firm had suffered a multimillion-dollar embezzlement by a senior member and worried whether the E&O coverage was adequate, I had to explain that E&O would provide no cover at all.
Usually, these thefts arise from attorneys using trust fund money. They can occur in firms both large and small. For example, a bankruptcy trustee in charge of millions of dollars in bankruptcy estate funds used the money to finance his small law practice. His addiction was practicing law; he just didn’t know how to run a profitable practice. Another example: A bank that had been trying to woo a large firm’s business for years was delighted when a senior commercial real estate partner opened two trust accounts with seven-figure balances. The problem was that the lawyer secretly opened and then embezzled these accounts. When the loss was discovered, his partners were shocked to learn of these accounts, and that their esteemed colleague had lost all the money in the stock market.
Employees, especially those entrusted with accounting duties, also steal. One firm’s employee processed fake bills from an accomplice, and the two split the money. A branch office manager of a medium-sized organization cashed clients’ checks. The firm discovered her acts when clients complained that the bills issued from the main office did not reflect their payments. A sole practitioner ordered a signature stamp so pleadings could be filed by staff while he was busy at court. His trusted secretary used the stamp on checks to empty his bank account.
No one anticipates these illegal activities. Insurance is for the losses we hope will never happen.
If the U.S. government, Target Corp and Sony Pictures can be hacked, your firm can be hacked. Your firm houses and must protect two data categories: firm data and client data. You can purchase cyber insurance fairly inexpensively. In 2015, a sole practitioner can buy it for an annual premium of $750 to $1,000.
The biggest cost of a cyberattack on a law firm will probably be for notifying clients whose data was compromised and providing them with free credit monitoring. For large firms especially, the damage to reputation can be significant. While there are hoops to jump through, financial loss due to reputation damage can be covered in a cyber insurance policy when the loss is definite, calculable and fortuitous.
The Office Is Your Home Away From Home
Just as you protect your home with homeowner’s insurance, you should protect your office with Business Owners Property (BOP) insurance. A BOP policy is an amalgam of coverages, including premises liability, commercial general liability, interruption of operations and others depending on your needs. Here are some sample losses covered by a BOP:
- A client trips and hits his head on the coffee table in your reception area, sustaining injury.
- A thief breaks into your office at night and steals electronic equipment (cyber insurance could also apply here).
- A fire breaks out when an employee heats metal in the office microwave, damaging property and mechanicals in the break room.
- A fire shuts down the office for three weeks.
You can purchase crime insurance, cyber insurance and BOP coverage as separate policies or as supplements to your E&O policy. An insurance broker will probably be most knowledgeable, but it’s worthwhile to check with your state bar and do some Internet research to make sure you are buying the most cost-effective coverage.
Insurance is not a substitute for good risk management. But you can never anticipate every peril. You will sleep better at night with protection against the unknown.
Theda C. “Teddy” Snyder mediates workers’ compensation cases throughout California. An attorney since 1977, she has practiced in a variety of settings and frequently speaks and writes about settlements and the business of law. She is a Fellow of the College of Law Practice Management. Based in Los Angeles, Teddy can be found at www.WCMediator.com, and you can follow her on Twitter @WCMediator.
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