Law Firm Disability Insurance Explained: 3 Risks Attorneys Often Overlook

Losing a partner, a key team member, or your own ability to work — even for a short time — can mean big financial problems for small law firm owners. Here’s how law firm disability insurance helps safeguard your firm’s financial stability.

It’s Not Personal: Disability Insurance for Your Law Practice

Most attorneys are familiar with personal disability insurance. It’s most commonly used to protect income by paying a monthly benefit if a covered individual is disabled. Disability insurance can be purchased individually or as a group benefit that covers full-time partners, associates and other employees.

Did you know that you can insure your practice with disability insurance? The following is a quick summary of three sometimes overlooked risks to your business and how to mitigate them with law firm disability insurance.

Three Risks to Your Law Practice

1. Risk: What if a key employee or associate couldn’t work because of a disability?

Who is your most important employee? While every employee is important, most partners or owners can easily point to those that are absolutely critical. Whether it’s a practice manager, an associate who’s in line to become a partner or a paralegal with a great deal of experience, almost every law firm that’s not a true solo practice has a key team member.

Take a minute to identify that employee or those employees in your practice. Then think about what would happen to your practice if that person became sick or injured. If they are critical to the firm’s success, their absence could create a significant financial strain. Here are some examples:

• The cost to conduct a thorough search for a replacement
• The cost to hire a temporary person to fill the role
• The loss of revenue if the employee was billing for legal work

The good news is there is a solution to this problem — key person disability insurance. Here is a quick summary of how these policies work:

• The firm is the owner of the policy.
• The key employee is the insured person.
• The firm, not the employee, is the recipient of benefits.
• Benefits can be paid monthly or in a lump sum.
• The waiting period before benefits begin usually ranges from 90 to 730 days.

An example might be helpful:

• ABC Law has a practice manager, Susan, who supervises all operations.
• They purchase a key person disability insurance policy on Susan with a lump sum benefit of $100,000.
• If Susan is disabled for 180 days, the firm will file a claim with the insurance company. Once the claim is approved, $100,000 will be paid to the firm. This money could be used to fund a search for a replacement, cover the cost of a temporary person, and/or to offer a signing bonus to sweeten a job offer.

2. Risk: If I became disabled, how would my partner(s) buy my share of the practice?

Buy-sell agreements between partners often include provisions that address both the death and the disability of a partner. Life insurance is a common tool used to fund the agreement if a partner dies.

Formal funding for the disability portion of the buy-sell agreement is less common, but potentially more important because the likelihood of a disability during the working years is higher than that of premature death.

Disability buyout insurance is designed specifically for this purpose. Here are some details:

• The buy-sell agreement determines the policy owner. The owner could be the practice itself with an entity purchase agreement, or the partners can own policies on each other with a cross-purchase agreement.
• Each partner is insured.
• The beneficiary of the policy is the same as the owner.
• Benefits can be paid monthly or in a lump sum.
• The waiting period for benefits is longer than a typical disability policy. One carrier offers options of 365, 540 and 730 days.

An example follows:

• Bill and Peggy each own 50% of Smith and Jones, PC. 
• They have a cross-purchase buy-sell agreement that addresses both the death and disability of one of the partners.
• At the end of 2024, a formal business valuation pegged the value of the firm at $800,000.
• Bill and Peggy could purchase disability buyout policies to fund the purchase of the practice if one of them became disabled.
• Bill would own the policy covering Peggy, and Peggy would own the policy covering Bill.
• The policy would pay $400,000 in a lump sum to the healthy partner if the benefit is triggered after 365 days.

It is important to know the value of your practice when drafting a buy-sell agreement. One of our insurance company partners offers free informal business valuations for law firms (and other businesses) with more than $500,000 in annual revenue. The same company will also review existing buy-sell agreements, helping firms keep their documents current.

3. Risk: How would I pay my business expenses if I was temporarily disabled? 

Your personal disability insurance policy is designed to help you pay for your personal expenses if you become disabled. How would you pay business expenses — your rent, your employees’ salaries and other overhead expenses, if you were temporarily sick or injured? Disability business overhead expense insurance can solve this problem.

If your practice is small, the disability of an owner or partner can create a big financial problem. Cash flow is interrupted, but bills will continue to come in. Here is a quick list of some common business expenses:

• Employee and contractor salaries
• Salary for a replacement attorney
• Property-based expenses like rent
• Utilities and phone bills
• Accounting, billing, and collections fees
• Janitorial, security and maintenance services
• Professional and trade association dues and subscriptions
• Office supplies, including software subscriptions and postage
• Real estate taxes
• Malpractice, liability and other business insurance premiums

Here is a quick summary of how a business overhead disability policy works:

• The firm usually owns the policy.
• The firm is also the beneficiary.
• Benefits are paid monthly to reimburse expenses incurred.
• Common waiting periods are 30, 60 and 90 days.
• Payout duration options are usually 12, 18 or 24 months.

And, here is an example:

• Frank Gilman owns Gilman Law, PC.
• He’s a solo attorney with an office manager and a paralegal. His monthly salary expense is $10,000.
• Frank rents a small office that costs $2,000 per month with all utilities included.
• Other office expenses are $3,000 per month.
• A replacement attorney would cost $8,000 per month.
• Frank applies for a disability business overhead policy with a 90-day waiting period and a face amount of $23,000 per month ($15,000 to cover office expenses and $8,000 for the replacement attorney). If he’s disabled, the policy will reimburse his overhead expenses for up to 24 months.

Risk Management Reminder

Managing business risk isn’t complicated, but it’s not always something that’s top of mind or a high priority. If you haven’t given some thought to these business risks, it might be a good time to do so.

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