Beyond burnout: the insurance fallout of mental health in legal practice

Beyond burnout: the insurance fallout of mental health in legal practice

Australian law firms are increasingly grappling with the dual impact of mental health-related illness and performance, both of which are driving significant exposure across two critical insurance lines: Salary Continuance (income protection) and professional indemnity (PI) insurance. Managing mental health risks by controlling psychosocial hazards is no longer a peripheral concern in the legal profession – it is central to the risk landscape.

This convergence of risks is not just theoretical. It is already reshaping underwriting decisions, claim volumes, and insurer appetite. One of the clearest indicators of this shifting risk landscape is the recent decision of a leading life insurer to step back from providing Salary Continuance insurance to law firms – a decision that highlights the growing concerns about the sustainability of covering mental health-related claims in high-pressure professions.  The legal industry must confront a difficult truth: unmanaged wellbeing is no longer just a cultural issue – it’s a financial liability and a reputation risk.

The converging crisis: mental health and insurance exposure

Legal practice is inherently high-pressure.

High work demands, high conflict environments and exposure to trauma create an environment where stress and burnout are outcomes of poorly managed psychosocial hazards. These conditions affect individual wellbeing and increase the likelihood of extended absences and professional mistakes. When a lawyer perceives that they don’t have the resources to meet the demands of their job this causes burnout.

Missing critical deadlines, changes in behaviour between colleagues or decreased visibility in the firm are the early warning signs that intervention is required. Firms that don’t have a plan to intervene early will face consequences from workplace safety regulators and insurers.

The result is a compounding of risk across insurance lines. An increase in Salary Continuance claims is one lead indication of risk for the sector, as more professionals are unable to work for mental health reasons. At the same time, the risk of PI claims increasing due to errors being made by overworked or unsupported staff can become evident. 

It’s important to note, that it is not suggested that PI premiums are currently rising. In fact, the PI market for Australian law firms remains competitive, with many insurers continuing to offer favourable terms to well-managed firms. The focus here is on risk awareness and long-term sustainability. By not putting preventative measures in place to manage psychosocial risks in the workplace, the profession could be facing significant long-term risks. 

A market signal from a leading life insurer

A leading life insurer’s decision to exit the Salary Continuance market for law firms is a clear indication of how serious the issue has become.

According to broker and industry feedback, this is due to a combination of high claim volumes, long claim durations, and underwriting challenges, particularly in firms that lack robust mental health and psychosocial risk controls.

This development has left many law firms scrambling to understand how this impacts their Salary Continuance program and what actions can be taken to address the mental health risks evident in the legal profession. More importantly, it highlights a growing trend: Salary Continuance insurers are no longer willing to absorb the cost of unmanaged mental health risk in the legal industry.

If capacity and coverage is reducing for mental health related claims, across all personal injury insurance classes (Salary Continuance and Workers’ Compensation), this leaves numerous questions for firms to consider such as how to provide financial support when an individual is unwell or will the lack of financial support lead to a rise in claims across other insurance classes. In addition, the crucial period between a lawyer’s behaviour changing and them becoming unwell increases the likelihood of professional errors such as missed deadlines, poor communication, inadequate supervision – all of which are common triggers for PI claims. In this way, the absence of personal injury financial support, including through Salary Continuance, can indirectly heighten a firm’s exposure to other claims.

Legal precedents and insurance implications

Recent case law reinforces the seriousness of these risks.

In the High Court case of Elisha v Vision Australia Ltd [2024] HCA 50, the court awarded $1.4 million in damages to a former employee who suffered psychiatric injury due to the employer’s failure to follow its own disciplinary procedures. The injury was deemed reasonably foreseeable, and the employer’s internal policies were found to be contractually binding.

While this case did not involve a law firm, the principles are directly applicable. Had the injured party been a legal practitioner, the firm could have faced not only employment liability but also a PI claim if the mental health issues had contributed to a professional error. The case underscores the legal and financial consequences of failing to manage psychosocial risks in the workplace.

The interplay between salary continuance and PI

The relationship between salary continuance and PI insurance is more than coincidental, it is causal.

When a key staff member is absent due to mental health issues, the burden often falls on remaining team members. This can lead to increased workloads, reduced oversight, and a higher likelihood of mistakes. Conversely, when staff continue working despite being unwell, often due to a lack of Salary Continuance, the risk of error also rises.

This creates a feedback loop where poor mental health management leads to both increased absenteeism and increased professional risk. For insurers, this means that mental health is no longer just a health issue – it is a material underwriting concern.

A strategic imperative for law firms

For law firms, the message is clear: managing mental health is not just about lunch and learn sessions, it is also about managing insurance risk and establishing prevention plans to manage psychosocial hazards in the workplace.

Firms must demonstrate compliance with local and global psychosocial risk management codes of practice, such as those outlined in ISO 45003 and Safe Work Australia’s model codes of practice. They should also engage proactively with insurers, providing transparency around Psychosocial Risk Management Prevention Plans, and action plans relevant to each priority hazard in the firm. Incoming codes of practice in Victoria are also likely to see mandatory reporting on the management of complaints to mitigate the ballooning $1.6B deficit in the Workers' Compensation Scheme. 

This aligns with our earlier guidance in our Insights Brief, 5 Focus Areas for Australian Law Firms -  Preparing for PI Insurance Renewal in 2025, where we highlighted mental health as a key priority for firms seeking to strengthen their risk profile and maintain favourable insurance outcomes.

Howden’s People Risk team has now lead Parliament, insurers and voices of industry such as the Law Institute of Victoria through the best practice strategy. Our teams are placed nationally and leverage our global infrastructure to transform the way our clients work.

Conclusion

Psychosocial Risk Management is reshaping the insurance landscape in legal practice. The convergence of Salary Continuance and PI claims is a warning sign that cannot be ignored.

The withdrawal of a life insurer from the market is not an isolated event, it reflects a broader recalibration in the insurance sector, where psychological injury and illness is now seen as a core underwriting consideration. It is also a key driver for government as they work to improve underperforming compensation schemes in major portfolios such as Victoria and New South Wales. 

For law firms, the path forward is clear: those that invest in Psychosocial Risk Management, demonstrate risk maturity, and engage proactively with their insurers will be better positioned to secure coverage and control premiums. This is in addition to the fundamental imperatives of being positioned to properly support their people and deliver high quality services to clients.

Our People Risk team is well positioned to help your firm understand the implications of these challenges and to explore a range of tailored, risk-led solutions that support systemic improvements in risk management - protecting both your people and your practice.