Note: This article is written in collaboration with Synchronize Insurance Services, powered by Lockton Affinity. In 2022, Lockton Affinity formed Synchronize, combining the specialized expertise of Lockton Affinity, SBG Inc., Blueprint Insurance Services and Freedom Partners to provide one, all-encompassing business solution for clients in the financial professionals industry. Synchronize leads the industry in its specialty, making it more efficient, affordable and accessible to do business.
Running a law firm involves more than just managing cases and clients — it requires protecting the firm’s financial stability and ensuring its longevity. Two critical types of insurance that law firms should consider are Key-Man Insurance and Buy-Sell Insurance. These policies safeguard against unexpected disruptions caused by the loss or disability of a vital team member or partner, helping firms maintain continuity and protect their future.
What Is Key-Man Insurance?
Key-Man Insurance, sometimes called Key-Person Insurance, is a life or disability insurance policy taken out by a law firm on an essential individual whose expertise, leadership or client relationships are critical to the firm’s success.
This could be a founding partner, a rainmaker with a significant client portfolio, or an attorney with specialized expertise. Key-Man Disability Insurance specifically protects the firm if the key individual becomes disabled and is unable to work.
Why Law Firms Need Key-Man Insurance
There are several reasons law firms find Key-Man Insurance to be advantageous:
- Financial Protection: The loss or disability of a key individual can lead to reduced revenue, especially if they are responsible for a large portion of billable hours or client retention. Key-Man Insurance, including disability coverage, provides funds to offset these losses.
- Operational Continuity: The policy can cover costs associated with hiring and training a replacement or managing the transition period, whether the key person passes away or is incapacitated.
- Client Confidence: Demonstrating that the firm is prepared for unexpected changes, such as a key person’s disability, reassures clients and maintains their trust.
For example, if a senior partner who generates 30% of the firm’s revenue becomes disabled or passes away unexpectedly, the firm could face a significant financial hit. Key-Man Insurance, with both life and disability components, can provide a lump-sum payout or ongoing benefits to help cover lost income, recruitment costs, or other expenses while the firm adjusts.
What Is Buy-Sell Insurance?
Buy-Sell Insurance is typically tied to a buy-sell agreement, a legal contract that outlines what happens to a partner’s ownership interest in the firm if they die, become disabled or leave the firm.
This type of insurance policy funds the purchase of the departing partner’s share, ensuring a smooth transition of ownership.
Why Law Firms Need Buy-Sell Insurance
There are several reasons law firms find Buy-Sell Insurance beneficial:
- Seamless Ownership Transitions: Without a funded buy-sell agreement, the firm or remaining partners may struggle to buy out a departing partner’s share, leading to financial strain or disputes.
- Protects Firm Value: Buy-Sell Insurance ensures the firm remains financially stable by avoiding the need to liquidate assets or take on debt to fund the buyout.
- Avoids Unwanted Partners: It prevents a deceased or disabled partner’s heirs from becoming unintended owners, which could disrupt firm operations or decisionmaking.
For instance, if a partner with a 25% stake in the firm becomes disabled or passes away, their share might pass to their spouse or heirs, who either may not be attorneys or may not be aligned with the firm’s goals. Buy-Sell Insurance provides the funds for the remaining partners to purchase the share, keeping control within the firm.
How These Policies Benefit Law Firms
Together, Key-Man Insurance and Buy-Sell Insurance provide three key benefits to law firms:
- Risk Mitigation: Both Key-Man (including disability coverage) and Buy-Sell Insurance reduce the financial and operational risks associated with the loss or disability of a critical individual.
- Firm Stability: They provide the resources needed to maintain operations, retain clients, and avoid internal conflicts.
- Future Planning: These policies demonstrate a commitment to the firm’s long-term success, which can attract top talent and reassure stakeholders.
Practical Steps for Law Firms
For law firms interested in the benefits these policies provide, getting started is easy and begins with four simple steps:
- Identify Key Individuals: Determine who in your firm is indispensable, whether due to their client base, expertise or leadership role.
- Review Partnership Agreements: Ensure your buy-sell agreement is up to date and funded with an appropriate insurance policy.
- Consult an Insurance Professional: Work with an advisor specializing in law firms to tailor policies, including Key-Man Disability Insurance, to your specific needs.
- Regularly Reassess Coverage: As your firm grows or changes, update your policies to reflect new partners, revenue streams or key personnel.
Conclusion
Key-Man Insurance, including disability coverage, and Buy-Sell Insurance are not just optional safeguards — they are essential tools for protecting your law firm’s financial health and ensuring its resilience in the face of unexpected challenges. By investing in these policies, you can secure your firm’s future, maintain client trust, and provide peace of mind for partners and employees alike.
Explore how Key-Man Insurance and Buy-Sell Insurance can be customized to suit your firm’s unique needs today. Contact your Lockton Affinity Lawyer Insurance specialist or call (844) 307-5960 to get started.