Year-end is the time that many law firms split up and one of the questions is what’s the cost for attorney malpractice insurance tail coverage or an extended reporting period endorsement (ERP).
This question came from an email from a law firm that was planning on splitting up at year-end. They were trying to save a few bucks. They did not really seem to care about the consequences of not getting the Firm ERP, they just want to save money.
Which Costs Less a 2-Member Firm ERP or One Attorney Malpractice Insurance Policy with Predecessor Firm Coverage?
Your question of which costs less, alternative #1 predecessor firm coverage where one attorney assumes 51% of the assets; or alternative #2 having the firm purchase an ERP (Extended Reporting Period Endorsement or Tail) for both partners?
Alternative #1:
There are a lot of depends in this answer. For easy math assuming the expiring hypothetical fully rated law firm’s premium was $2000 for 2 attorneys and the cost of an unlimited ERP is 3.5 times expiring. The cost of the firm ERP is $7,000.
Assuming no claims each hypothetical attorney could in theory buy a new policy for $500 each without prior acts coverage. And assuming that the premium doubles in 5 years back to $1000 per year per attorney, the 5-year insurance cost for each attorney is $3800. Multiply this times 2 for $7600 plus the $7000 ERP; the 5-year insurance cost is $14,600.
Alternative #2:
Hypothetically fully rated law firm splits with one attorney controlling 51% of the assets. This one fully rated hypothetical attorney continued the coverage for just 1 attorney at $1000 per year with predecessor firm coverage. The other hypothetical attorney purchases a policy without prior acts coverage starting at $500 per year that increases to $1000 per year at the end of year 5. 5-year cost for the attorney with predecessor firm coverage is $5000. Cost for the hypothetical attorney that starts new coverage is $3800 over 5 years. Total cost for this alternative is $8800.
Answer:
Given this hypothetical firm alternative #2 is $5800 cheaper. The attorney without prior acts coverage will have to have a lot of trust and hopes that the attorney with the predecessor firm coverage will continue attorney malpractice coverage that protects both attorneys’ past acts. This is kind of like trusting your divorced spouse to protect your interest after the divorce.
Please note that this example does not recommend alternative #1 or alternative #2. All of the costs are hypothetical and actual circumstances will vary.
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Lee Norcross, MBA, CPCU
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