What to Do If Your Law Firm Gets Sued – How to Protect Your Finances
If you're a partner in a law firm, you're already no stranger to risk. But when that risk shows up in the form of a lawsuit against your firm—especially in today’s regulatory climate—it’s not just the business that could take a hit. Your personal finances could be at risk, too.
Even if the firm has solid legal representation and a strong defense, the ripple effects can be real: reduced or delayed distributions, partner capital calls, unexpected tax complications, and, in extreme cases, exposure of personal assets. That’s why it pays—literally—to have a financial strategy in place before anything goes wrong.
Here’s how to protect yourself:
1. Make sure the Firm is Protected
The first line of defense is ensuring your firm has the right insurance coverage in place. At a minimum, that includes professional liability (or errors and omissions) insurance tailored to your practice areas and case size. You’ll also want robust business liability insurance to cover general risks—like accidents on-site or property damage.
Today, cyber liability insurance is increasingly essential. Whether it’s a data breach or ransomware attack, cyber risks can hit firms hard—and fast.
Just like you protect your personal finances with different types of coverage, your firm’s insurance needs to cover every angle. A strong insurance foundation is key to keeping a lawsuit from turning into a financial disaster.
2. Separate and Shield Your Personal Assets
Make sure your personal finances are structurally protected. That means:
Keeping business and personal accounts completely separate
Considering umbrella insurance or other personal liability coverage
Talking to a planner or attorney about whether a trust or alternative structure might make sense
If your name is on the door (or even just on the partnership agreement), you don’t want your personal savings exposed.
3. Maintain a Personal Emergency Fund
Many partners rely on firm distributions for cash flow—but those can get delayed if the firm is dealing with legal trouble. An emergency fund outside the firm gives you a buffer if income is disrupted, especially if bonuses or profit shares are paused.
If your household depends on your draw, protect that flow like it’s your own business—because it is.
4. Have a Backup Plan for Tax Surprises
Lawsuits can lead to all kinds of unexpected tax issues—like uneven income, K-1 delays, or unplanned capital calls. Get ahead of it by:
Talking to your CPA and planner about what happens if things slow down
Reviewing your estimated tax payments
Looking for tax-advantaged ways to preserve cash (like adjusting retirement contributions)
You can’t control the litigation timeline, but you can prepare for how it might affect your bottom line.
5. Plan for Cash Liquidity
Don’t get caught with all your assets tied up in long-term investments. If your firm needs a capital infusion or distributions get cut, you’ll want cash available. Building in liquidity—without disrupting your broader wealth strategy—is something a financial planner can help with.
Final Thought
Hopefully, your firm never ends up in court. But if it does, having a personal financial defense strategy is just as important as the firm’s legal one. At Hark Financial Planning, we work with law firm partners and self-employed lawyers to build financial plans that are ready for anything—including the unexpected.
If your firm is facing legal uncertainty—or you just want to be prepared—let’s talk.
