What role do indemnity agreements or law firm malpractice policies play in covering judgments against clients?
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Executive summary
Indemnity agreements and law‑firm malpractice (professional liability) policies operate in the same risk landscape but perform different jobs: indemnity clauses shift contractual responsibility for losses between parties, while malpractice insurance pays defense costs and judgments for covered negligence claims — yet many malpractice policies expressly exclude liabilities the insured assumed by contract, creating a frequent coverage gap [1] [2] [3].
1. What indemnity agreements actually do: a contractual risk shift
An indemnity clause is a contractual promise that one party will compensate the other for specified losses, including “judgments, settlements, fees, costs, and expenses,” and can be written broadly enough to require a law firm to reimburse a client even for third‑party claims or the client’s own liability if the clause so states (Thomson Reuters; Bloomberg Law) [1] [4]. Law departments and sophisticated clients increasingly insert wide indemnities into outside‑counsel guidelines, and at least one court has enforced such a one‑sided indemnity against a law firm, confirming the contractual potency of those clauses (Peabody & Arnold; Bloomberg Law) [5] [4].
2. What malpractice insurance typically covers: defenses and negligence judgments
Professional liability insurance for attorneys — labeled legal malpractice, professional indemnity, or E&O — is designed to cover claims alleging negligence, errors, omissions or breach of professional duties, and commonly pays defense costs and awards or judgments within policy terms and limits (Higginbotham; Zurich; ICS Legal) [2] [6] [7]. Coverage forms vary (claims‑made vs. occurrence), policy limits and deductibles differ, and policies can distinguish between defense costs and indemnity payments for settlements or judgments (First Indemnity; Brown & James) [8] [9].
3. The crucial disconnect: many policies exclude contractual indemnities
A recurring and well‑documented feature is that many malpractice policies exclude “purely contractual obligations” or “any assumed obligation to indemnify,” meaning a firm’s promise to indemnify a client under a retainer or outside‑counsel guideline may fall outside coverage (Multnomah Lawyer Ethics Focus; Ralaw; NORCAL Group) [3] [10] [11]. In practical terms, an insurer may defend a malpractice claim against the lawyer but deny coverage for liability that exists solely because the lawyer contractually agreed to indemnify the client, leaving the firm to satisfy contractual payments from its own assets [3] [10].
4. Real‑world consequences: uncovered judgments and contested obligations
That coverage gap creates tangible risks: a firm may face “catastrophic” exposure if a broad indemnity is triggered, and clients may be left protected while the firm is uninsured for the contractual obligation (Practical Lawyer; Peabody & Arnold) [12] [5]. Plaintiffs’ counsel and clients can press indemnities aggressively; insurers and courts will parse whether a claim arises from the firm’s negligence (potentially covered) or from a contractual undertaking (often excluded), and some contracts have been enforced against firms even without a finding of fault [5] [4].
5. How firms and clients try to bridge the gap: negotiation, policy language, and market forces
Risk managers respond by carving indemnities to exclude liabilities “solely” assumed by contract, seeking insurer endorsements or higher limits, buying tail coverage where appropriate, or negotiating caps and fault‑based triggers (Brown & James; IBA; industry brokers) [9] [13] [8]. Insurers and regulators also influence behavior: some jurisdictions require disclosure if lawyers lack insurance for significant work, and international bodies note market pressures that make certain coverages scarce, which creates incentives for clients to push indemnities hard while insurers push back (IBA; First Indemnity) [13] [8].
6. Bottom line: indemnity agreements can obligate payment of client judgments, but malpractice policies often will not answer that bill
Indemnity clauses can legally obligate a law firm to cover judgments or settlements paid by a client, effectively shifting financial responsibility contractually [1] [4]. However, because many malpractice policies exclude assumed contractual obligations, firms cannot reliably count on their malpractice insurance to satisfy those indemnity promises; instead, coverage depends on the precise wording of the indemnity and the malpractice policy, any relevant endorsements, and sometimes litigation over whether the loss arises from covered malpractice or an excluded contractual assumption [3] [10] [4]. Readers should note that the sources document both enforcement of indemnities against firms and routine insurer exclusions, and that market and negotiation strategies are the primary levers to manage the resulting uninsured risk [5] [9].