Does malpractice insurance cover trust account and IOLTA errors?

Attorney trust accounts and IOLTA funds represent one of the most sensitive areas of law practice, and errors in handling these funds can generate both malpractice claims and disciplinary proceedings. If a client suffers financial harm because you negligently mishandled their trust funds, such as by disbursing funds prematurely, miscalculating settlement distributions, or failing to properly account for escrowed money, your malpractice policy generally covers the resulting claim.

However, the coverage has important limitations. Intentional misappropriation, conversion, or theft of client funds is universally excluded from malpractice policies. These acts constitute crimes, and no insurance policy covers intentional criminal conduct by the insured. If a partner or employee steals from the trust account, your firm's fidelity bond or crime insurance, not your malpractice policy, would respond to cover the loss.

Some malpractice policies contain specific exclusions or sublimits for claims arising from escrow, fiduciary, or trust account activities. Real estate attorneys who handle closings and hold escrow funds should pay particular attention to this language, as escrow-related claims can be substantial. If your policy sublimits escrow coverage, consider requesting the sublimit be removed or increased, or purchasing a separate errors and omissions policy for escrow activities.

To minimize trust account risk, implement rigorous internal controls including dual-signature requirements for disbursements, monthly three-way reconciliations, separation of bookkeeping and disbursement duties, and regular audits. Many malpractice carriers offer risk management credits to firms that demonstrate strong trust account controls, and some state bars now require specific trust account procedures as a condition of licensure.