Lee NorcrossAttorneys are very intelligent creative people who sometimes do dumb things.  Attorney Malpractice Extended Reporting Period Endorsements (ERP or Tail) are expensive.  Some firms have gone to great lengths to figure out ways to avoid buying an ERP to save money.  Unfortunately for the attorneys a bad creative solution can be costly.  The following money saving idea for an alternative ERP is not recommended.

A three member law firm decides to end their partnership.  The firm is splitting up 1/3., 1/3, 1/3.  The firm is advised to buy an ERP for the Firm’s current Attorney Malpractice policy as none of the new firms will constitute a predecessor firm for insurance purposes.   (Basically most Attorney Malpractice Insurance policies require at least a majority of the assets end up with one new firm to have a predecessor firm.)

The Firm decides that purchasing an ERP is too expensive.  So they agree that each member will buy a new attorney malpractice policy with ‘career coverage’, to protect each attorneys individual past acts.  Each attorney knows that if they get sued for something that happened at the old firm the individual attorney that performed the act will have coverage but the other members will not. 

No worries.  The firm members decide to draft a side agreement that obligates each attorney to pay for any matter that might arise from the old firm equally 1/3, 1/3, 1/3.  Problem with this is that their new malpractice insurers are not obligated to provide a defense or coverage based on this agreement.  So even though the one insurer that insures the attorney that might commit the act will likely pick up the full indemnity payment each attorney is now obligated for 1/3 of the damages.

The firm splits up.  Problems start with the firm’s idea to not buy an ERP from the very beginning.  One member decides not to purchase a new policy on a timely basis.  That member does eventually purchase a new policy but because it took so long it was done without prior acts cover and no career coverage.

Of course less than a year later, the member that did not have ‘career coverage’ gets sued for work done while at the old firm.  This attorney has no insurance coverage for this work.  The suit not only names this individual member, but the other 2 former members of the firm individually and as a firm.  The 2 former members that have ‘career coverage’ are provided a defense by their new malpractice insurers.  But they were left to pay the damages out of their own pocket which was many times the cost of the ERP.  The side agreement of ‘mutual aid’ was not honored by their new malpractice insurers.

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