Attorneys are very intelligent creative people. Lawyers Professional Liability Insurance Extended Reporting Period Endorsements (ERP or Tail) are expensive. In trying to figure out ways to avoid buying a Lawyers Professional Liability Insurance Extended Reporting Period Endorsement and save money, Lawyers have come up with some very creative solutions. All are very bad ideas. Here is one of many.
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. (Most Lawyers Professional Liability Insurance policies require at least a majority of the assets come to the new firm to be 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. All of the attorneys knowing that if they get sued for something that happened at the old firm the individual attorney that performed the act has coverage, but the other members will not. To address the lack of coverage, the members of the firm decide to draft a side agreement, that obligates each attorney to cover any matter that might arise from the old firm and to be covered equally 1/3, 1/3, 1/3. Problem with this is that their new malpractice insurance carriers are not obligated to provide a defense or coverage based on this agreement.
The firm splits up. Problems with the firm’s idea to not buy a firm ERP start from the very beginning. One of the members decides not to purchase a new policy on a timely basis. Member does eventually purchase a new policy but because it took so long it was done without prior acts coverage.
About a year later, the member that did not have “career coverage” gets sued for work done while at the old firm. 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 had “career coverage” are provided a defense by their new malpractice carriers. But they were left to pay the damages out of their own pocket which. The settlement was many times what the cost of the ERP would have been. As expected the side agreement of “mutual aid” was not honored by their malpractice carriers.