Premium FinanceLaw firms often finance their attorney malpractice insurance with a premium finance company.  It is a good way to manage cash flow.  Problems happen though when a law firm allows their attorney malpractice insurance go into cancelled status with the finance company for premium nonpayment.  Law firms need to realize that the premium finance company as part of the agreement to finance attorney malpractice insurance is given a power of attorney to cancel the coverage for nonpayment.

Once the finance company has issued the cancellation notice and the insurer receives this notice, even if the insurer waits a few days to actually process the cancellation acknowledgement, many insurers consider the coverage cancelled on the effective date requested by the premium finance company.   If a claim is reported after the premium finance coverage cancellation date your legal malpractice insurer could deny coverage. 

One of the crazier things is when a law firm uses the pending cancellation notices as a trigger to pay the finance company.  In addition to racking up fees, there are other ramifications to frequently letting your coverage cancel and then having it reinstated.  Most malpractice insurers have a set number of nonpayment cancellations and reinstatements that they will do.   This varies widely by insurer from no tolerance to 3 or 4 times to cancel and reinstate.  Once the firm reaches that magic number, your insurer may refuse to reinstate.  If they refuse to reinstate, you are likely in a backdating situation to try and protect your past acts and with many attorney malpractice policies you may have no ability to purchase an Extended Reporting Period endorsement (ERP).

If you cannot find an insurer that is willing to backdate, which is extremely difficult if you have been cancelled for premium nonpayment, you lose your past acts coverage.  Given that an attorney malpractice insurance policy is a “claims made” policy and even if you have paid for coverage for many years, you suddenly are bare for past acts and have no coverage.  The options to fix this situation are very expensive and very limited.

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