Attorney Malpractice Insurance may not Cover Escrow (IOLTA) Accounts
Large balances in Escrow (IOLTA) trust accounts are an inviting target for cybercriminals inside and outside a law firm. If these funds disappear, do you have insurance coverage for this event?
A “trusted” law firm employee manages the funds, balances the accounts, deposits funds, and writes checks. Unfortunately, a “trusted” employee is a leading loss cause for trust accounts. In addition to employee theft, cybercriminals outside the firm may dupe staff or attorneys into disbursing funds to the wrong party or an unauthorized person gains access to the IOLTA account. Or an outside person could drain the account with a bogus check.
Law firms carry attorney malpractice insurance and business owners insurance (BOP). But did you know that attorney malpractice insurers may specifically exclude coverage for these accounts because of theft? Or if not specifically excluded, it is not a covered cause of loss for an attorney malpractice policy.
This is a typical attorney malpractice policy exclusion from the AIG policy:
“7. Conversion, Misappropriation, or Commingling.
To any claim based upon or arising out of the intentional or unintentional conversion, misappropriation, or improper commingling of any client funds or property or trust account funds or property, or funds or property of any other person held or controlled by any of you in any capacity or under any authority. including loss or reduction in value of such funds or property.”
This leaves the BOP.
The BOP may contain coverage for funds theft. But often the sub-limits in the BOP for this coverage are too low to cover the IOLTA account balances. Law firms need to review their BOP coverage to determine if this sub-limit is adequate to meet their needs.
If possible, the firm may increase the theft sub-limit for Employee Dishonesty & Forgery coverage on the Business Owners to an adequate limit. But depending on the BOP insurer, they may limit this coverage to $25,000 or $50,000. A BOP may or may not cover theft by conversion. BOPs may sub-limit theft of funds via computer funds transfer fraud.
A properly endorsed Cyber policy may provide coverage if a computer is involved. But even today not all fund thefts involve computers.
While cyber insurance is important purchasing a properly endorsed Crime Insurance policy adds another layer of protection. In addition to Employee Theft; a crime insurance policy can cover perils such as:
- Computer & Funds Transfer Fraud’
- Money & Securities
- Depositors Forgery or Alteration
- Credit, Debit, or Charge Card Forgery
- Money Orders & Counterfeit Currency
- Investigation Expenses
- Identity Theft Recovery Expenses Reimbursement
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Lee Norcross, MBA, CPCU
California License # 0D87292
L Squared Insurance Agency, LLC ® DBA in California as L2 L Squared Insurance Agency, License # 0L93416
Managing Director, CEO
Lee@L2Ins.com
616-726-7080
