What happens if my law firm is sued for more than the policy limits?

When a malpractice claim results in a judgment or settlement that exceeds your policy limits, the excess amount becomes the personal financial responsibility of the firm and, in many jurisdictions, the individual attorneys involved. Professional liability is one of the areas where the corporate form of a law firm, whether a professional corporation, PLLC, or LLP, may not fully shield individual attorneys from personal exposure, depending on state law.

Your malpractice carrier's obligation ends at the policy limits. Once those limits are exhausted through defense costs and indemnity payments, the carrier has no further financial obligation. Any remaining liability falls to the firm's assets and, potentially, the personal assets of the attorneys involved in the claim. This exposure can include personal savings, real estate, investments, and future earnings.

To protect against excess exposure, consider several strategies. First, ensure your primary malpractice limits are adequate for the type of work your firm performs. Second, purchase a commercial umbrella or excess professional liability policy that provides additional limits above your primary coverage. Umbrella policies for law firms can add $1 million to $10 million in additional coverage at a fraction of the cost of increasing the primary limits by the same amount.

In the event of a claim that may approach or exceed your policy limits, your carrier has a duty to act in good faith when evaluating settlement opportunities. If the carrier unreasonably refuses to settle a claim within policy limits and a subsequent judgment exceeds those limits, the carrier may be liable for the excess under a bad faith theory. However, relying on a bad faith claim as your safety net is not a substitute for carrying adequate limits. The best protection is prevention through proper limit selection and excess coverage.