When Trust is Broken: Law Firm Employee Theft
Law firms operate on trust; trust between attorney and client, trust in ethical practice, and trust in the people behind the scenes who manage the books and keep the business running. But what happens when that trust is betrayed from within?
Employee theft and embezzlement at law firms are far more common than many would like to believe and the consequences can be financially and reputationally devastating. Worse yet, many firms discover too late that they lacked the proper insurance coverage to recover their losses.
How Often Does It Happen? More Than You Think.
According to the Association of Certified Fraud Examiners (ACFE) 2024 Report to the Nations, the professional services sector, which includes legal services, sees significant losses from internal fraud:
- Asset misappropriation (such as embezzlement) accounts for 89% of all occupational fraud cases.
- The median loss in the legal sector is $120,000 per incident.
- The average scheme goes undetected for 12 to 18 months.
Small to mid-sized law firms are particularly vulnerable. Many rely on long-term, trusted staff to handle accounting and trust account management — without sufficient oversight. A 2022 study published in Law Practice Today revealed that over 25% of law firms with fewer than 25 attorneys had experienced some form of internal financial fraud in the past decade.
What are the Consequences?
Financial Losses
- Theft from client trust accounts can lead to immediate disbarment or bar complaints.
- Embezzlement of operating funds can cripple payroll, lease payments, and vendor relationships.
Reputational Damage
- Allegations of mishandling client funds—even if caused by an employee—can destroy client confidence.
- The risk of bar complaints, audits, and public exposure grows exponentially after a breach.
Legal and Regulatory Exposure
- Many states mandate immediate reporting to regulatory bodies if client funds are compromised.
- Firms can face civil lawsuits, disciplinary actions, or even criminal liability in egregious cases.
The Insurance Coverage You Need Before It Happens
Having the right insurance in place can mean the difference between recovery and collapse. At L Squared Insurance, we help law firms across the country protect themselves with these essential coverages:
1. Crime and Employee Theft Coverage
Also known as crime insurance, a properly endorsed policy covers direct losses from employee dishonesty.
Ensure your policy includes:
- Theft from client trust accounts
- Coverage for bookkeepers, contractors, and non-attorney staff
- Optional extensions for social engineering or wire fraud
2. Lawyers Professional Liability Insurance (LPL)
- May respond if a client sues the firm for financial harm caused by an employee’s misconduct.
- Important: LPL won’t cover intentional criminal acts by firm members but can respond to negligent supervision claims.
3. Cyber Liability Insurance
- If digital theft or phishing is involved, a properly endorsed cyber policy may cover funds transfer fraud, data breaches, and related forensics.
- Consider adding social engineering and crime riders for robust protection.
How to Reduce the Risk
While insurance is critical, prevention starts with good internal controls:
- Segregate financial duties — never let one person control both accounting and disbursement.
- Regular audits by third-party firms or bar association auditors.
- Dual sign-off on trust and operating account transactions.
- Rotate roles and require vacation time — prolonged presence is a red flag in fraud detection.
- Implement anonymous employee reporting systems.
- Firms must remember trust is not a substitute for oversight. Trust but verify.
If your firm hasn’t reviewed its crime, cyber, or LPL policies recently, now is the time. At L Squared Insurance, we specialize in protecting law firms from the known and the unexpected.
Contact Me Today
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
