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Partnership SplittingIf your 2 person law firm is splitting up and each going separate ways, the best approach for the firm is to Purchase an Extended Reporting Period Endorsement (ERP/Tail) at the time the split occurs.  The ERP is made part of your last Lawyers Professional Liability Policy extending the reporting period for the number of years purchased.

Note that the firm should cancel the Lawyers Professional Liability Insurance Policy when the firm split occurs.  The firm should not wait until the anniversary date of the policy and then purchase the ERP.  The basic reason for this is that once the firm splits up each lawyer in theory will be working for or as a new entity.  The new entity needs to have coverage on the date that it starts operating.

Many carriers do offer “career coverage” for the individual attorneys that will protect the individual attorney’s past acts.  Problem with this approach is if one of the partners stops their insurance in the future and the old Partnership gets sued, it could open up the liability to both partners and insurance for only one of the partners.  If the former covered partner without the insurance is the one that committed the acts, chances are that both partners may have to face a claim without coverage.

The other alternative is that one or both attorneys try purchase “predecessor firm” coverage for the old firm on their new policy.  Problem with this is that most lawyers professional liability define a “predecessor firm” as having a majority of the assets or attorneys coming from the dissolved firm.  A 50/50 split does not give either former partner a majority.

This typical definition is from the current Medmarc Insurance Company policy:

“Predecessor Firm means the legal entity or sole proprietorship that was engaged in the practice of law to whose financial assets and liabilities the Named Insured is the majority successor in interest.” 

Either the "career coverage” approach or the “predecessor firm” approach can open up the new firm’s Lawyers Professional Liability Policy to claims that were not the responsibility of the attorney as they were committed by the attorney’s former partner.

Even though it would appear that the cost of the ERP is expense, with purchasing the ERP for the old firm, it allows each partner to start with a new Lawyers Professional Liability Insurance Policy that does not cover past acts.  Generally a policy without prior acts coverage is approximately 50% of the cost of a policy with prior acts coverage.  The savings from years 1 to 5 with the new entity going through “Step Rating”, is approximately equal to the cost of the ERP.  In the end, the “best” approach of covering the predecessor firm’s past acts costs no more than “poor” approaches that could lead to uncovered losses.  

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2 Comments

Bryan Bruner said...
Which costs less when a 2 member firm splits up...predecessor coverage if 1 partner keeps 51% OF ASSETS/LIABILITY or both partners buying tail coverage?
TUESDAY, NOVEMBER 28 2017 6:29 PM
Lee Norcross, L Squared Insurance Agency LLC said...
Your question of which costs less, alternative #1 predecessor firm coverage where one attorney assumes 51% of the assets; or alternative #2 having the firm purchase an ERP (Extended Reporting Period Endorsement or Tail) for both partners?

Alternative #1:
There are a lot of depends in this answer. For easy math assuming that the expiring hypothetical fully rated law firm’s premium was $2000 for 2 attorneys and the cost of an unlimited ERP was 3.5 times expiring, the cost of the firm ERP would be $7,000.
Assuming no claims each hypothetical attorney could in theory buy a new policy for $500 each without prior acts coverage. And assuming that the premium would double in 5 years back to $1000 per year per attorney, the insurance cost for each attorney for the next 5 years would be $3800. Multiply this times 2 for $7600 plus the $7000 ERP; cost of the insurance for the next 5 years would be $14,600.

Alternative #2:
Hypothetically fully rated law firm splits with one attorney controlling 51% of the assets. With one fully rated hypothetical attorney continuing the coverage for just 1 attorney at $1000 per year with predecessor firm coverage. The other hypothetical attorney purchases a policy without prior acts coverage starting at $500 per year that increases to $1000 per year at the end of year 5. 5 year cost for attorney with predecessor firm coverage is $5000. Cost for the hypothetical attorney that starts new coverage is $3800 over 5 years. Total cost for this alternative is $8800.

Answer:
Given this hypothetical firm alternative #2 is $5800 cheaper. This is the math that you need to go through to answer this question. Plus the attorney without prior acts coverage will have to have a lot of trust that the attorney with the predecessor firm coverage will continue attorney malpractice coverage that protects both attorneys past acts.

Please note that this example does not recommend alternative #1 or alternative #2. All of the costs are hypothetical and actual circumstances will vary.

WEDNESDAY, NOVEMBER 29 2017 10:21 AM

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