When a 2 member law firm partnership splits, the best approach is to purchase an Extended Reporting Period Endorsement (ERP/Tail) when the split occurs. The ERP as part of the last attorney malpractice policy extends the reporting period for the number of years purchased.
The firm should cancel the Lawyers Professional Liability Insurance Policy when the firm split occurs. The firm should not wait until the policy anniversary to cancel or purchase an ERP. Once the practice ends the attorneys are not working for the insured partnership firm. New insurance coverage should begin when the attorneys start working for their new entities.
An insurer may offer “career coverage” for the individual attorneys that protects the individual attorney’s past acts. Problem with this approach is if one of the partners stops carrying insurance and the old Partnership gets sued, this potentially opens liability to both partners with insurance for only one partner. If the former covered partner without the insurance is the one that committed the alleged acts, both partners may face a claim without coverage.
The other alternative is that one or both attorneys try obtaining a “predecessor firm” coverage endorsement for the old firm on their new policy. Problem potentially arises with the new attorney malpractice policy definition of a “predecessor firm.” The definition likely defines a predecessor firm as a new entity having acquired a majority of the assets or number of attorneys coming from the dissolved firm. A 50/50 split does not give either former partner a majority.
This typical definition:
“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 attorney malpractice policy to prior claims.
At first glance the ERP cost appears expensive. But with the ERP inforce, this allows each partner to start with a new attorney malpractice policy without past acts coverage. Policies without prior acts coverage are approximately 50% less than a policy with prior acts coverage. During years 1 to 5 the new entity goes through “Step Rating” at a reduce premium. The premium savings reduction approximates an ERP’s costs. In the end, the “best” approach of covering the predecessor firm’s past acts costs no more than the approaches that could lead to uncovered losses.
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Lee Norcross, MBA, CPCU
California License # 0D87292
L Squared Insurance Agency, LLC ® DBA in California as L2 L Squared Insurance Agency, License # 0L93416
Managing Director, CEO
Lee@L2Ins.com
616-726-7080
