Insurance Essentials for Starting a Freelance Law Practice

If you are considering a freelance law practice, you need to consider several different types of insurance. Deciding which types of insurance to purchase depends on the risks involved absent coverage that will mitigate against unforeseen and financially impactful events.

Professional Liability Insurance

Professional liability insurance, also called errors and omissions or legal malpractice insurance, protects from claims resulting from negligence in providing legal services. For example, if you are responsible for the due diligence involved in a purchase and sale transaction and you fail to uncover material information that could lead to a financial loss or legal consequences for a client, like an unmitigated environmental contaminant or a land encumbrance, that failure could give rise to a legal malpractice claim. Similarly, you could be liable for legal malpractice if you provide incorrect legal advice or fail to provide information about relevant legal implications. If you fail to research a legal issue thoroughly, leading to a missed argument at trial, you could face a professional negligence claim.

Failing to adhere to professional or ethical responsibilities can give rise to legal malpractice. Many jurisdictions consider the applicable professional code of ethics or code of conduct as a standard of care for practicing law. Therefore, if you have a conflict of interest and fail to disclose it properly or obtain client consent, violating the rules of professional responsibility, the violation could give rise to a legal malpractice claim.

There is some measure of professional liability protection for those who provide services to a lawyer or law firm as independent contractors rather than as employees of the law firm. The law firm is ultimately responsible to its client for the legal services provided, even if a freelancer performed those legal services.

States vary in the cost of professional liability policies, which often depends on the availability of insurers in the state. States with more competition among carriers will likely have more competitive prices. However, some states only have one or two carriers that provide legal malpractice coverage, making obtaining coverage more expensive.

The area of practice will also determine the cost of a policy. Certain practice areas, like personal injury or medical malpractice, are considered higher risk. Lawyers practicing in high-risk fields may face higher premiums for professional liability coverage.

General Liability Insurance

In addition to professional liability coverage, you should consider obtaining general liability insurance, especially if working outside the home. Most businesses have general liability coverage, which provides insurance for claims of bodily injury or property damage occurring on a law firm’s premises or because of its operations, such as slip and fall accidents or damage to a client’s property.

A homeowner’s policy may provide coverage for these risks for freelancers working remotely from home. However, homeowners’ policies might contain an exclusion if business is conducted on the residential property that is insured, so it is important to review the policy to see what is covered.

If working from somebody else’s office or renting space, that office should have its own general liability policy. However, it is important to determine whether general liability insurance is in place and what it covers so that you don’t inadvertently assume the risk of accidents or property damage.

Property Insurance

Property insurance covers damage to your physical assets, such as damage to or the destruction of a building, equipment, or furniture resulting from events like a fire, flood, or vandalism. Again, if working remotely from home, a homeowner’s policy might provide property insurance coverage for a home office if there is no exclusion for space being used for business purposes.

If you rent space, you will likely need to purchase property insurance coverage. Even though most landlords will have a general liability policy, that policy will not cover your personal property or liability within the office space itself.

Cyber Liability Insurance

With the advent of technology has come an insurance product called cyber liability insurance. If you collect and store sensitive client information or have remote access to a law firm’s server and databases containing client information, there is a risk of data breaches or cyberattacks.

Cyber liability insurance covers the costs of data breaches or cyberattacks, such as response and recovery costs. For example, data breach response costs can encompass the expenses associated with investigating a data breach and notifying affected individuals, as well as the expenses for providing credit monitoring services. Many people have received notices in the mail from financial institutions or other organizations offering free credit-monitoring services for a year due to a data breach. The investigation to determine that there was a data breach, the cost of notifying consumers of that data breach, and the cost of the free credit monitoring services are all costs that were likely covered by a cyber insurance policy.

In addition, if a data breach or a cyberattack causes you to lose income because of a disruption in business operations, cyber insurance may also cover the resulting financial losses. For example, if you can’t work for a month while trying to restore client databases, you could use cyber insurance to protect against lost income. Cyber insurance may also cover costs related to ransomware attacks, including coverage for the ransom payment.

Workers’ Compensation Insurance

While a lawyer or a law firm with employees should consider other types of insurance, such as workers’ compensation or employment-related practices liability insurance (EPLI) coverage, you won’t need to if you work alone. However, if you have employees, other insurance, like workers’ compensation insurance, could be mandatory, depending on the rules of the state where you are based.

EPLI Coverage

EPLI coverage, which is not mandatory, provides coverage for claims of discrimination, harassment, wrongful termination, or other employment-related issues. Because employment-related lawsuits generally include legal fees for a prevailing employee, they can become very expensive.

Directors and Officers (D&O) Liability Insurance

If you form corporations, D&O liability insurance provides coverage for directors and officers who may be held personally liable for the decisions made on behalf of the law firm. An example of a claim that D&O coverage would typically insure is allegations of innocent but nonetheless illegal errors like improper tax accounting. In that case, D&O insurance could help cover the legal costs associated with defending against those allegations and any damages or penalties awarded or agreed to in the settlement of the claim.

Life Insurance

There are different types of life insurance policies available. Each has its pros and cons.

Term Life Insurance

Term life insurance is the simplest and cheapest type of insurance. It provides coverage for a specific and limited period, such as 10, 20, or 30 years. If you die within the policy term, a set death benefit is paid to your beneficiary.

You pay premiums during the policy term, and when the term expires, premium payments stop, and the death benefit is no longer available. If, for example, you have young kids and want to protect against the absence of income in the case of death to ensure there would be sufficient money for your family’s living expenses and college tuition for the kids, you could take out a 20-year or a 30-year term life insurance policy that would end after college when the children were in their twenties or thirties and able to earn a living for themselves.

Whole Life Insurance

Whole life insurance provides a permanent death benefit for your entire life if you pay premiums. You can use whole life policies as a savings or investment method because one of the components of a whole life policy, aside from the death benefit, is the cash value of the policy, which can grow tax-deferred over time. In addition, you can use the cash value to pay premiums or withdraw or borrow against it, subject to certain limitations. Whole life policies are usually much more expensive than term life policies. Moreover, if you surrender the policy while alive or withdraw some of the cash value, taxes and possibly a fee on the cash value of the policy or the amount withdrawn would be owed.

Universal Life Insurance

Universal life insurance is like whole life insurance in that it provides a permanent death benefit for your entire life, subject to the payment of premiums. However, universal life policies are generally more flexible than whole life policies regarding premium payments and death benefit amounts. For example, with a universal life insurance policy, you generally can adjust premium payments over time, subject to certain limitations. This allows you to increase or decrease premium payments based on varying financial circumstances or needs. With a universal life policy, you can also adjust the death benefit amount over time, subject to certain limitations.

Variable Life Insurance

Variable life insurance is like whole life and universal life insurance in that it provides a permanent death benefit and includes a cash value component that can be invested in various options, including stocks, bonds, and mutual funds. However, you generally have more control over how to invest the cash value component with a variable life insurance policy than with other types of life insurance policies.

Variable life insurance premiums are usually fixed and higher than whole or universal life insurance premiums. In addition, the death benefit of a variable life insurance policy is tied to the performance of the investment component of the policy, so as the value of the investment component fluctuates, so does the death benefit.

Whole life, universal life, and variable life insurance policies have fees and charges that a term life policy will not have. While many consider these types of insurance policies to be investments, the significant fees associated with these insurance products will eat into any return. Therefore, prior to purchasing any life insurance policy, it is important to carefully consider the need, the investment options, and the fees and charges associated with the policy. In addition, there are many overlapping features of whole, universal, and variable life insurance policies, including characteristics not discussed here. An insurance professional or an investment advisor can detail policy benefits, drawbacks, and differences.

Disability Insurance

Disability insurance is a type of coverage that provides income replacement if you become physically or mentally disabled and are unable to work. While the amount of the disability benefit typically depends on your income (the higher the income, the higher the disability benefit), disability insurance never covers 100 percent of lost earnings due to a disability.

Health Insurance

Health insurance is arguably the most important non-liability insurance product you need. If not covered by somebody else’s health insurance policy, such as a spouse’s, purchasing health insurance will probably be your biggest insurance expense.

Finding and purchasing health insurance can be a formidable process. The first step is to determine health-care needs. This includes understanding the type of medical care that may be necessary, including doctor visits and prescription drugs. If you do not have significant medical needs, you might be able to consider an entirely different health-care policy than someone who has diabetes and needs a $1,500 monthly prescription for semaglutide.

If researching and choosing a health insurance plan that fits medical and budgetary needs and applying for coverage seems too daunting or overwhelming of a task, there are insurance agents or brokers who can guide you through the process. Typically, as with life insurance plans, the health insurance company pays the agent or broker a commission, and you will not have to pay the agent or broker a fee. There are also online tools available to help compare the different plans, which will help you make an informed decision.

In sum, although liability and other types of insurance are significant expenses and perhaps the biggest expense you will have in starting a practice, ensuring the necessary insurance coverage is important because it provides financial protection against unexpected events, such as accidents, illness, property damage, or inadvertent negligence. Insurance can help you manage risk by transferring the financial burden of these kinds of unexpected events to an insurance company. It will help protect you from financial loss that might be too costly to bear and provide peace of mind by helping to mitigate potential financial risk. Therefore, insurance is a cost you cannot ignore when starting a practice.