Given the issues with claims-made insurance for attorney malpractice insurance thought and planning on how to handle the attorney malpractice exposure should start prior to the split. If your two 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 endorsement is attached to your last attorney malpractice insurance policy extending the reporting period for a set number of years purchased. It must be purchased from the incumbent insurer.
The old partnership should cancel the attorney malpractice insurance policy when the firm split occurs. Waiting until the anniversary date of the policy and then purchase an ERP is a bad idea. The reason is that once the firm splits up each lawyer in theory is working for or is a new entity. At inception the new entity(s) need their own insurance coverage.
Some insurers offer ‘career coverage’ for the individual attorney that protects the individual attorney’s past acts. There are appropriate reasons to obtain ‘career coverage’ but this is not one of them. With both attorneys relying on this option if one of the partners stops their insurance in the further and the old partnership gets sued, it could open up the liability to both partners with insurance for only one partner. 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 insurance coverage.
The other alternative is that one or both attorneys try purchase 'predecessor firm' coverage for the old firm on a new policy. Problem with this is that most attorney malpractice policies 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 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 opens the successor firm’s attorney malpractice insurance to claims that may not be the responsibility of the attorney with the coverage if they were committed by that attorney’s former partner. The insurance history is tainted for the successor firm with a commensurate increase in insurance premiums.
At first blush it appears that the cost of the firm ERP is the more expense choice. But it allows each partner to start with a new attorney malpractice policy that does not cover past acts. It also untangles the old partnership relationship. Then consider that a policy without prior acts coverage is approximately 50% of the cost of a policy with prior acts coverage. Given this the savings from years 1 to 5 with the new entity going through “Step Rating”, is approximately equal to the cost of the firm ERP. In the end, choosing wisely is no more costly then choosing poorly.