Are You Adequately Protected? Understanding the Perils of being Underinsured

Attorneys who assume that obtaining legal malpractice insurance will adequately protect them from any type of claim arising in connection with the operation of their law practice may be in for a rude awakening.

Consider these scenarios. An attorney opens a phishing email, or opens an email from someone whose computer has been hacked. Now, a criminal has hacked the attorney’s security and the firm cannot access their information due to ransomware (where hackers encrypt files and demand money to restore access). Another attorney is accused of improperly signing clients already represented by another firm, and now faces a claim for tortious interference with a client contract. They’re covered by their professional liability insurance policy, right? Well, not so fast. Legal malpractice insurance is designed to cover the services provided as an attorney, and does not extend to every aspect of conducting one’s law practice.

This Article underscores the importance of conducting due diligence by understanding what your policy covers and what it excludes, and steps you can take to ensure you avoid the perils of being underinsured.

Understanding the Limits of Legal Malpractice Insurance

Simply put, you cannot rely on legal malpractice insurance to cover your entire law practice. Some common exclusions include:

Cyber security issues (security breach, cyber ransom, cyber extortion). Although, TLIE does cover up to $50,000 per claim (see below)
Dishonest, malicious or criminal acts
Issues regarding law services provided to entities owned by the lawyer or law firm
Bodily harm
Property damage
Regulatory or statutory penalties
False advertising
Conflicts between two parties covered under the same liability insurance policy
Workplace disputes

Understanding What is Covered

TLIE coverage includes the following:

Cyber Security Protection. $50,000 per claim in first party cyber security protection under a master policy with Tokio Marine HCC, a leader in cyber risk management. First party cyber liability insurance covers the cost of a data breach or cyberattack on the company that carries the policy, covering costs for cyber extortion, customer notification and remediation, network asset protection, online prevention training and cyber emergency helpline.
Deceptive Trade Practices Act (DTPA) Actions. TLIE’s Regular Policy* specifically provides coverage for DTPA additional damages if coverage is not otherwise excluded (e.g., when the DTPA violation also constitutes a criminal act).
Punitive and Exemplary Damages. TLIE’s Regular Policy contains no exclusion for punitive or exemplary damages.
Innocent Partner Protection. Criminal, dishonest, fraudulent and malicious acts by a lawyer are always excluded, but TLIE’s policies preserve coverage for innocent lawyers who neither participated or acquiesced in such acts, nor remained passive after having learned of such acts.
Hammer Clause. A “hammer clause” may limit the amount of coverage if the insurance company wants to settle a claim and the insured does not. If an insured refuses to consent to settle, the insurance company can limit coverage to the proposed settlement amount. TLIE’s policies have no hammer clause and provide for peer review in the event of a disagreement between the insured and TLIE regarding settlement.
Loss of Earnings. TLIE’s Regular Policy provides you with $500 for each day you are out of the office for trial, mediation, arbitration or your own deposition in defending a covered claim.
Grievance Defense. TLIE’s Regular Policy includes defense coverage of $25,000 per grievance complaint up to a maximum of $50,000 per policy year.

*TLIE offers two types of professional liability insurance policies for Texas lawyers. As the names would imply, the Regular Policy provides more comprehensive legal malpractice insurance coverage than the Basic Policy. As a lower cost alternative to the Regular Policy, the Basic Policy has lower limits, lower deductibles and less comprehensive coverage than the Regular Policy. You can find a comparison chart of TLIE’s Regular & Basic Policies here.

How To Protect Yourself and Your Firm

Review your professional liability insurance policy to fully understand what is and what is not covered.
Consider obtaining additional or supplemental cyber liability coverage. Keep in mind that the size of your firm is immaterial to whether you will be targeted. In fact, according to the 2019 ABA Cybersecurity Tech Report, 26% of law firms experienced a form of data breach.
If you’re insured through TLIE, consider whether obtaining additional cyber liability coverage from Tokio Marine HCC for an additional charge makes sense for you and your firm. Additional liability coverage provides higher limits plus third party cyber liability coverage. Whereas first party cyber liability helps you respond to data breaches on your own network or systems, third party cyber liability provides insurance for claims against you arising from a security breach (including litigation defense costs, regulatory fines and penalties).
Consider the benefits of obtaining a standard Business Owner’s Policy. The Texas Lawyers Professional Insurance Agency (a subsidiary of TLIE) has partnered with The Hanover to offer a Business Owner’s Policy, which provides:
- Building and personal property coverage for your law firm
- Liability coverage for bodily injury
- Advertising injury
- Property damage occurring on your premises or as a result of your law firm practices
- Enhanced computer equipment coverage
- Business income loss and extra expense incurred during property repair or replacement
- Valuable papers and records coverage on an off premises up to $25,000
Assess whether additional Business Owner’s Policy Coverage is important for your practice. Such coverage includes:
- Business income from dependent properties up to $100,000
- Billable hours loss settlement option on a per diem basis
- Claims expense up to $10,000
- Contractual penalties up to $25,000
- Library coverage up to $50,000