Legal Malpractice Claims-Made Coverage Issues When a Two-Person Law Firm Splits
When a two-attorney law firm dissolves, one of the most overlooked issues is maintaining continuous protection under a claims-made attorney malpractice insurance policy. While the attorneys focus on dividing clients, assets, and ongoing matters, failing to properly address malpractice insurance can create significant uncovered exposure years after the partnership ends.
Understanding how claims-made coverage works and addressing the firm’s prior acts coverage can help former partners avoid costly and unexpected liability.
Why Continuous Claims-Made Coverage Matters
Attorney malpractice insurance policies use a claims-made policy form. Making a claim about an alleged error to the current insurer triggers coverage providing that the reported act occurred after the prior acts date.
When a two-person firm splits, the original partnership effectively ceases to operate. The dissolved partnership’s malpractice exposure does not disappear. Claims made arising from past legal work can occur years later.
The key question becomes: Who insures those past acts after the partnership is gone?
The Risk of Waiting Until Renewal
One common mistake is allowing the existing malpractice policy to remain active until its anniversary date and then deciding how to address past liability.
A better approach requires cancelling the partnership’s Lawyers Professional Liability (LPL) policy when the split occurs and immediately addressing the firm’s prior acts exposure. The reasoning is simple: once the attorneys begin operating under new firms, they are no longer practicing under the old partnership entity. The partnership LPL provides coverage on behalf of the named insured firm. Their new entities require their own malpractice coverage from the first day of operation.
Gaps or misunderstandings during this transition can create significant coverage disputes later.
Why Tail Coverage Often Makes Sense
The most effective solution for the dissolving two-attorney firm is purchasing an Extended Reporting Period Endorsement (ERP), commonly known as tail coverage.
An ERP extends the claim reporting period under the firm’s final malpractice policy for the period purchased. By purchasing the ERP when the firm dissolves, the former partnership’s past acts remain protected under the firm’s final policy.
This approach creates a clean separation:
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- The dissolved partnership retains coverage for its historical work.
- Each attorney obtains a new malpractice policy for their new firm.
- Future coverage issues are simpler and more clearly defined.
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The Problems With “Career Coverage”
Certain malpractice insurers offer “career coverage” that follows the individual attorney and protects against claims arising from past legal work. While this may sound appealing, it can create complications.
If one former partner later allows coverage to lapse while the other maintains insurance, a claim against the former partnership may leave both attorneys exposed. The situation can become even more problematic if the attorney whose acts caused the claim now has no insurance when the claim is made. In that scenario, both former partners could potentially face an uncovered claim.
For that reason, relying solely on individual career coverage may not provide the certainty that a dissolved partnership requires.
The Challenge of Predecessor Firm Coverage
Another common strategy involves one or both attorneys attempting to obtain predecessor firm coverage under a new malpractice policy.
The difficulty arises with malpractice policies defining a predecessor firm as an entity for which the new insured is the majority successor in interest. Typical policy language requires the new successor firm acquires a majority of the predecessor firm’s assets and liabilities.
In a true 50/50 partnership split, neither attorney is a majority successor. As a result, the dissolved firm may not qualify as a predecessor firm under the new policy’s definition.
This can create uncertainty about whether the new policy responds to claims arising from the former partnership’s legal work.
Cost Analysis: ERP vs. Prior Acts Coverage
Attorneys initially resist purchasing tail coverage because of the upfront cost. However, that analysis may not tell the full story.
When the old firm purchases an ERP, each attorney starts a new malpractice policy without prior acts coverage. Policies without prior-acts coverage are less expensive than policies that must insure historical exposures. Premiums start at approximately 50% less without prior acts coverage, and new firms typically benefit from reduced premiums during the early years through step-rating structures.
Over time, the premium savings offset the cost of the ERP, while also providing a clearer and more reliable coverage structure.
Best Practices for a Two-Person Law Firm Split
When dissolving a two-attorney partnership, firms should consider the following:
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- Address malpractice insurance immediately when the split occurs.
- Avoid relying solely on assumptions about future coverage.
- Carefully review predecessor firm definitions in any new policy.
- Understand the limitations of career coverage.
- Evaluate the purchase of an Extended Reporting Period Endorsement (ERP) to protect the dissolved firm’s past acts.
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The dissolution of a two-person law firm creates unique claims-made coverage challenges that can persist long after the partners go their separate ways. While career coverage and predecessor firm coverage may appear to offer solutions, both approaches can leave former partners vulnerable to unexpected coverage disputes.
Purchasing an ERP at the time of dissolution provides the most reliable way to preserve protection for past acts while allowing each attorney to establish a clean malpractice insurance program for their new practice. By addressing continuous claims-made coverage properly, attorneys can reduce uncertainty and better protect themselves from future malpractice claims arising from their former partnership.
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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
