Understanding the Definition of “Damages” in a Legal Professional Liability Policy
When reviewing a legal professional liability policy—often referred to as lawyer’s malpractice insurance—one of the most important provisions to understand is the definition of “damages.” While it may seem straightforward, this term can significantly impact what is and is not covered when a claim arises.
No Standard Policy Language
One of the biggest misconceptions in legal malpractice insurance is a standardized policy. In practice, insurers define terms differently, so each policy may vary.
As a result, one insurance policy might accept certain forms of “damages,” while another could specifically exclude them. Because of this variability, attorneys cannot rely on assumptions or industry norms—they must carefully review their specific policy language.
Why the Definition of Damages Matters
Insurance coverage depends on how defined terms within the policy itself. Even though attorneys and clients may have their own interpretations, only the policy definition is legally binding.
This becomes especially important in malpractice claims, where the financial stakes are high. Misunderstanding the definition of damages can lead to unpleasant surprises—such as discovering policy loss exclusions after making a claim.
What Is Typically Included as Damages
In many legal professional liability policies, including the example in Attorney Malpractice Insurance Policy Definitions – punitive damages by insurer, damages are generally defined as:
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- Judgments
- Awards
- Settlements
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Nonetheless, any settlement for covered damages requires the insurer to be involved in the negotiation process and to give their approval. This highlights the importance of cooperating with the insurance company during the claims process to ensure coverage is not jeopardized.
What Is Excluded from Damages
Equally important—if not more so—are the exclusions. Unexpected surprises exist for certain lawyers to learn the damage definition exclusions in a malpractice insurance policy.
Common exclusions include:
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- Legal fees and expenses incurred by the insured
- Misappropriation or mishandling of client funds, including trust account issues
- Fines, sanctions, penalties, and forfeitures imposed by courts or regulators
- Punitive or exemplary damages, as well as multiplied awards
- Non-monetary relief, such as injunctions
- Amounts the insured is not legally obligated to pay
- Uninsurable matters under applicable law
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These exclusions can dramatically narrow the scope of coverage and are a frequent source of disputes between insured attorneys and insurers.
Common Coverage Pitfalls
A recurring issue in legal malpractice coverage is the assumption of coverage for all financial consequences of a claim. Usually, exclusions exist for court-ordered sanctions and attorney’s fees, with insurers not covering them.
Additionally, policies may contain broader exclusions related to specific practice areas, such as securities work, or conflicts involving closely held clients.
These limitations underscore the importance of reviewing policy exclusions carefully—especially when shopping for lower premiums, which may come with reduced coverage.
Key Takeaways for Attorneys
Understanding the definition of damages in a legal professional liability policy is essential for managing risk and ensuring adequate protection. Recommended best practices:
- Review policy definitions closely, especially “damages”
- Do not assume coverage based on general expectations
- Pay close attention to exclusions and practice-area limitations
- Consult with insurance professionals or legal counsel when evaluating policies
The definition of damages is more than just a technical detail—it is the foundation of your coverage. Failing to understand it can bring unpleasant surprises at claim time.
As the example in Attorney Malpractice Insurance Policy Definitions – punitive damages by insurer illustrates, knowing what is—and is not—covered can make all the difference when it matters most.
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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
