Key risk themes for Australian law firms in 2026

Navigating the risks and rewards of AI

Many law firms are adopting AI tools as part of their strategic investment in innovation and efficiency. Across the market, firms are increasingly developing internal guidelines to govern the responsible use of AI technologies, reflecting a proactive approach to risk management and client expectations.

As law firms continue to invest in AI-driven tools, this has become an area of growing interest for insurers given the nature and scale of the associated risks. One emerging issue is so called “silent AI”. Silent AI refers to AI related risks that are neither explicitly included nor excluded in insurance policies, creating ambiguity similar to the concept of “silent cyber”. These gaps can lead to unintended coverage issues for AI driven errors, bias, or system failures under traditional Professional Indemnity (PI) policies, exposing firms to unforeseen financial and legal risk.

AI adoption is also expected to materially affect the future of work within professional services, influencing role design, training requirements, recruitment strategies, and employee engagement. Insurers are increasingly considering how firms are managing these workforce impacts as part of their overall risk profile. 

AML and CTF regulatory change 

With impending regulatory change to Australia’s AML/CTF regime, law firms face increasing scrutiny from insurers in relation to AML and CTF compliance. In addition to increased operational burden, firms are exposed to potential reputational damage, regulatory investigations and fines arising from non compliance.

As AML/CTF non compliance is not directly a PI issue, it is important for firms to ensure their management liability cover is fit for purpose and provides appropriate protection for investigation and defence costs, as well as fines and penalties where insurable.

Our thought leadership on this topic, “Preparing for Australia’s new AML/CTF regime: lessons from the UK”, highlights the importance of learning from international regimes, particularly the UK experience, in preparing governance frameworks, training programs and insurer ready compliance documentation.  

Staying ahead of ongoing cyber threats 

Cyber risk remains a major concern for law firms, driven by client expectations, regulatory scrutiny, financial exposure and reputational risk. This heightened focus has resulted in underwriters placing greater emphasis on cyber governance, annual risk assessments, incident response planning and documented controls when evaluating coverage terms.

A critical insurance consideration is how PI and cyber policies interact, to avoid both gaps and unintended overlaps in cover. Policy wording, exclusions and aggregation provisions require careful review, as underwriters will scrutinise these areas closely to ensure clarity of intent and risk allocation.

Psychosocial risk

Psychosocial risks are under increasing regulatory scrutiny, with WHS laws requiring firms to identify and manage hazards such as excessive workloads, low job control, poor support and bullying. Failure to do so can lead to legal liability, reputational harm, and insurance exposure across PI, group salary continuance (GSC), and employment practices liability. Recent High Court rulings, including Elisha v Vision Australia Ltd [2024] HCA 50, have broadened employer liability for psychiatric injuries, making this an area of growing focus and complexity. The link between mental wellbeing of staff and PI claims is also of increasing interest to insurers. 

In addition, Safe Work Australia’s updated framework expands notifiable incidents to include psychological harm, violent events, work-related suicides and extended absences. This elevates psychosocial risk as a key underwriting consideration, making documented systems for early detection and compliance critical to insurer confidence and coverage terms.

The interplay between GSC, Group Life and PI

There is growing recognition of the interplay between GSC, group life and PI insurance, driven by the dual impact of mental health related illness on both employee wellbeing and professional performance. In response to claims experience, some life insurers have reduced capacity or exited the salary continuance market for law firms, citing higher prevalence of mental health claims, concentration risk and high sums insured.

Periods of employee absence, or employees working while unwell, can heighten the risk of professional error and place additional pressure on teams. This directly affects how firms manage risk, the availability and structure of insurance cover, and broader financial decisions about how best to support employees where insurer support is limited.

Taken together, these factors highlight the importance of addressing psychosocial risk, GSC, group life insurance and PI as part of a coordinated and holistic risk strategy.

NSW workers’ compensation reform

The Workers’ Compensation Amendment Bill will introduce staged increases to Whole Person Impairment (WPI) thresholds, significantly changing eligibility for lump sum compensation and common law claims. These reforms will drive insurer focus on workplace injury management and governance, increasing scrutiny of firms’ own risk controls and liability exposures at renewal.  

Provision of non-legal services

Many law firms are expanding into consulting and advisory services alongside their traditional legal practices, including areas such as data, risk, technology and transformation advisory.

Firms offering non legal services need to clearly define the scope and boundaries of these activities to avoid conflicts with their legal practice and unintended coverage gaps. This is particularly important where professional indemnity arrangements are limited to the provision of “legal services”. Careful review is required to ensure appropriate cover is in place for advisory and consulting work that falls outside traditional legal practice. 

Risks associated with advising on climate change

As law firms increasingly advise on climate change, sustainability and ESG related matters, associated PI risks are becoming more pronounced. Work involving green finance, sustainability linked transactions or climate related disclosures can give rise to allegations of misrepresentation or failure to disclose material risks, leading to litigation and reputational damage.

Rapidly evolving climate regulation and heightened public and regulatory scrutiny increase the likelihood of complex, high severity PI claims in this area. As a result, insurers are applying closer underwriting attention to climate related advisory work, with a growing focus on governance, expertise and risk controls.

The 2026 renewal period

For law firm leaders, these themes reflect the changing reality of running a modern professional services business. Decisions about technology, people, service lines and governance increasingly surface at moments of scrutiny, particularly around renewal, where assumptions are tested and priorities become clear.
Firms that are deliberate in how they navigate these trade-offs and can clearly explain how risks are identified and managed within their business, are better placed to engage constructively with insurers at renewal, reduce volatility in outcomes and build resilience in an increasingly complex operating environment.