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Neal Sedaka Breaking up is Hard to DoAttorney Malpractice Extended Reporting Period Endorsement (ERP) premiums are a multiple of the policy that is inforce at the time the coverage is terminated.  So if the premium is $20,000 and the firm purchases an unlimited ERP that the insurer has a multiplier cost of 3.5 the cost of that ERP is $70,000 (20,000*3.5).

If you have an 8 member firm at the time the final malpractice policy was written $70,000 divided by 8 costs $8750.00 per member.

Some insurers refund premiums when members leave other insurers only change the premium at the time of renewal.  If you have a firm that starts the year with 8 members but by the middle of the year there are only 2 left, unless planning for the ERP cost is done prior to members leaving, the 2 remaining members could be on the hook for the entire $70,000.  This has happened.

The other consideration for the firm slowing dissolving is the rights of members who have left prior to coverage termination.  Once a member leaves the firm their right to purchase an ERP from the incumbent insurer ends at the time the member departs the firm.  If the firm dissolves at a later time the members that have left do not have a right to go back and purchase the ERP at a later date.  So if the remaining firm members determine that they do not want to bear the cost of the ERP, the previously departed members are out of luck if they are concerned about their past acts.  This has happened.

As with the malpractice insurance costs when the firm is operating being allocated to the firm members, the firm also needs to plan on the cost of purchasing an ERP when discussions start about the firm breaking up.  As with the division of firm assets and clients having a plan as to how to deal with the ERP costs prior to the breakup is essential.  The old Neal Sedaka song says it all, “Breaking up is Hard to Do”.

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