It is amazing the problems an accounting firm or law firm can create for themselves by failing to notify their Malpractice agent/insurer of changes to the firm. Malpractice Insurance Policies Require Timely Notification of Firm Changes. When Attorneys and Accountants come and go from a firm or a firm is dissolved or merged it is critically important to keep your insurer informed. Many policies require this timely notification within 30 days of the event or as soon as practical. But the reality is that especially for firm mergers or dissolutions, these events should be discussed with your insurance agent prior to the event.
The Silent Treatment could get a Claim Denied
Malpractice Insurance for accountants and attorneys are written on behalf of the named insured firm. The accountants and attorneys that work for the firm are covered under the firm’s policy. Last thing you want is to report a claim for an accountant or attorney that has been working for the firm but the insurer knows nothing about (some insurers only require notification at renewal). This could be a reason to have a claim denied depending on the facts.
A bigger issue is if a firm has dissolved or merged with no notification to the insurer. The former firm members operate under the mistaken belief that they are still covered under their current policy until expiration but really have no coverage. Malpractice Policies have clauses defining what a ‘material change’ is. Dissolution of the firm or a merger is normally defined as a ‘material change’. The lack of notification of a ‘material change’, can get a claim denied and could affect your coverage for past acts.
Why continuous claims made coverage important?
References to continuous ‘claims made’ coverage are often made. With an ‘occurrence’ policy where a coverage gap means that there is a period on time with no coverage, but coverage while insurance was inforce in the past still provides coverage for past acts. A gap with a ‘claims made’ policy means that past acts coverage stopped when the coverage gap began. There is no coverage for claims reported after the policy terminated unless an Extended Reporting Period Endorsement (ERP) is purchased or there is a successor firm that the insurer has approved for prior acts coverage. The insured’s right to purchase an ERP generally ends between 30 to 60 days after coverage termination. A ‘material change’ can trigger coverage termination. Once ‘claims made’ prior acts coverage is lost, it could be lost forever. This leaves the old firm and its members exposed.
‘Best practices’ is to read your policy as to timing requirements. By not doing so may cause you a coverage problem later. This is not an all-inclusive list, but these events need to be reported to your agent and/or malpractice insurer promptly:
- Change of address. Remember most policies only require notice be mailed to the last ‘known’ address.
- Become aware of a potential claim or incident
- Disciplinary matters from a governing body or government entity
- (For Lawyers policies only) Add or delete attorneys
- Decision to purchase or exercise your rights to purchase or request a ERP or Tail with the monies needed to purchase
- Material changes in the firm should be reported immediately:
a. Firm purchasing, merging, splitting or buying another firm
b. Firm closing or ceasing doing business
c. Name of firm changing
d. Ownership of firm is changing and/or more than 50% of members changing
e. Firm is changing the type of legal structure, ie from a LLC to a PC