Attorney Malpractice policies are written on a claims-made policy form. With claims-made policy forms, when the policy terminates so does the coverage and there is no coverage for claims reported after the coverage termination date. The answer to this issue is an Attorney Malpractice Extended Reporting Period endorsement (ERP) should be purchased when a firm is closing and there is no successor firm. As the ERP is an endorsement attached to the last policy in-force, the in-force policy prior acts date is the prior acts date that is used by the endorsement. So there is no impact on the prior acts date when the firm purchases an ERP. The ERP merely extends the number of years that a claim can be reported if the act occurred while there was continuous claims-made coverage in-force.
Attorney malpractice ERP can be expensive. The ERP is calculated by using the last expiring policy premium that was in-force at coverage termination and is a multiple of that expiring premium. So if the policy premium were $20,000 annually, in this example purchasing an ERP for one year would cost $20,000 or one times the premium. (Note that all insurers have their own tables for calculating the premium of the ERP this is just an example). If the insured were to purchase an unlimited ERP in this example it would cost around 3.5 times expiring premium or $70,000 ($20,000*3.5). The ERP is fully earned and cannot be canceled by either party once put in-force. Nor can the premium be financed. This means that the entire ERP premium needs to be paid prior to an ERP being put in-force.
Now on to what happened.
A few years ago, a law firm was in the process of splitting up. The law firm’s annual malpractice premium was around $20,000. The state that the firm resided in had a ‘one-year’ statute for attorney malpractice. In this state it was from the date that a client would reasonable know that a malpractice error had been committed.
Faced with a potential $70,000 bill, the senior firm partner decided that a one-year ERP was adequate. The firm had been claims free for many years and knew of no issues that could reasonably cause a malpractice claim. The firm closed down and paid the $20,000 needed to put the ERP in-force. Almost 14 months to the day that the old firm terminated coverage and purchased a one-year ERP the old firm was served with a malpractice claim both individually and as a firm. The claim was reported to the prior incumbent carrier for the firm. Coverage was denied.
Many of the individual former partners reported the claim to their new incumbent insurers. As their new claims-made coverage did not extend to the old firm and did not provide past acts coverage to the date of the alleged error coverage was declined by their new respective insurers. One former partner was no longer in private practice and had no current insurance.
In the end the 6 partners were exposed to a mid-6 figure claim without any coverage. Purchasing the one-year ERP was ‘Penny Wise and Pound Foolish’.