Avoiding Gaps in Lawyers Professional Liability Insurance Coverage

The term “The Great Resignation” was coined to explain the mass exodus of workers from the workforce when pandemic restrictions lightened and remote workers were summoned to return to brick-and-mortar offices. This included attorneys (particularly younger attorneys) who left, joined, or formed new firms to conform to their ideal “new normal” workforce model. Many are likely unaware they may have jeopardized their lawyers professional liability insurance coverage (LPL) to the extent they may be left with gaps in coverage.

When attorneys leave, join, or form a new law firm, they must take great care to understand how these actions could affect their own insurance coverage, as well as coverage for predecessor and successor firms. All too frequently, attorneys do not consider the insurance implications that arise when they transfer or change firms until after the change is made, at which point it can become much harder for the parties involved to agree on and get appropriate coverage in place.

When attorneys leave firms, coverage usually remains in force for their client representation during the time they were employed by their now-predecessor firm, providing the predecessor firm continues to maintain an insurance policy or purchases an extended report period (ERP) in the event the firm discontinues coverage.

Departing attorneys also have the option of purchasing their own ERP (“tail”) and should carefully consider doing so, especially if they have reason to believe a predecessor firm may not continue to renew its LPL insurance policy, may dissolve, or may not purchase an ERP.

One reason attorneys leaving firms are hesitant to purchase an ERP is because the premium for this coverage can be costly. Even so, the decision to purchase or not to purchase should be given thoughtful consideration.

When joining new firms, attorneys should ensure they have a full understanding of the insurance coverage for them under the firm’s current insurance policy, and also ensure they are added to the policy in a timely manner, pursuant to the policy conditions, which can vary from carrier to carrier.

When adding an attorney to a firm, those doing the interviewing and hiring should ask about an applicant’s LPL insurance coverage history, as well as his or her claims and grievance history.

The firm should submit an application to its carrier providing information about when the attorney will start to work for them, the attorney’s practice areas, prior LPL insurance coverage details, and the attorney’s claims and grievance history. Unless an attorney is seeking coverage for prior acts, most carriers will not charge an additional premium mid-term. However, some carriers charge a full rate for attorneys joining a firm within so many days of policy issuance (30 days, for example).

Dissolving a Predecessor Firm and Beginning Anew

It is not unusual for members to break away from a firm to form a new firm, or to completely dissolve a firm and start anew. This is where maintaining prior acts coverage can be problematic. Often, a predecessor firm can be included in the new firm’s insurance policy, if the new firm has assumed at least 50 percent of the predecessor firm’s assets and liabilities, and if at least 50 percent of the attorneys from the predecessor firm become members of the new, successor firm.

Because policies can vary greatly regarding who is insured under an insurance policy, be sure to fully read the associated insurance policy and consult with a knowledgeable insurance agent to ensure obtaining the broadest possible coverage.

“Predecessor Firm” means any sole proprietorship, partnership, professional corporation, professional association, limited liability corporation, or partnership engaged in legal services and to whose financial assets and liabilities the firm listed as the Named Insured in the Declarations is the majority successor in interest.

ERP/Tail Coverage

An ERP or “tail” is a purchase option a policyholder has in place to avoid gaps in coverage. When an attorney leaves a firm, becomes disabled, or retires, purchasing an ERP extends the time for reporting claims. Historically, ERPs have not increased or reinstated the policy’s limit of liability, although some carriers have begun to offer attorneys departing from a firm an additional limit of liability, available for purchase.

For coverage to apply under an ERP, the act giving rise to a claim must have occurred after the retroactive date of the policy and on or before the policy termination date.

If an insured changes insurance carriers, but maintains the same retroactive date, it should not be necessary to acquire an ERP from the initial carrier. However, LPL insurance policies can and do differ greatly in their scope of coverage. Also, carriers do not always interpret similarly worded coverage terms the same. Accordingly, always carefully consider purchasing an ERP, regardless of the insured’s reason for carrier departure or policy cancellation.

There can be several variations between the provisions associated with ERPS, including the following.

Time to Elect

LPL insurance carriers will provide a strict time frame in which an insured may elect to purchase and pay for an ERP. These time frames may vary from a few days to a few months.

ERP Availability

Many carriers allow an insured (either the first-named insured, or the attorney scheduled under the policy of the first-named insured) to purchase an ERP if the insured decides to cancel or non-renew the policy. (This is defined as a two-way ERP.) Others allow an insured to purchase an ERP only if the carrier cancels or non-renews the policy. (This is defined as a one-way ERP.)

Some carriers of LPL insurance policies provide for the issuance of a free ERP, for a specified period of time, if the insured retires, dies, or becomes disabled, if he or she has been continuously covered by the carrier for a specified number of years.

However, what has been given can be taken away! Some carriers offering these free ERPs do so conditionally, based upon ongoing, continuous retirement or disability of the insured. If the insured attorney resumes the practice of law, he or she must repay the carrier well over 100 percent of the annual premium that was in effect on the ERP’s issuance date.

ERP Duration

LPL insurance carriers differ in the length of the ERPs they offer. Some offer more than one option, such as offering one-year, three-year, or unlimited ERP durations. Others only offer one option.

Insureds should understand the application of the statute of limitations as it pertains to legal malpractice actions, to ensure they purchase an ERP that extends insurance coverage to provide for the maximum length of protection.

ERP Cost

Carriers often include language in their policies pertaining to the cost of an ERP. This cost is often a percentage of the expiring policy’s premium, with a common variance of 100–200 percent. The percentage naturally varies depending on the length of the ERP. Some carriers’ policies specify that the premium will be determined in accordance with the carrier’s rules and rates in effect at the time the ERP is purchased. This type of policy provision, while it may be unavoidable, puts insureds at a disadvantage, because they will not know what the premium will be until it is time to purchase the ERP.

ERPs—Summing It Up

Understanding the many variables that apply to ERPs helps an insured make informed and wise choices when selecting coverage or making a decision to switch carriers.

Having the option to purchase an ERP or, under some policies, receive a free ERP in the event of retirement, death, or disability can provide an attorney-insured great peace of mind. Accordingly, attorneys should take care to understand the conditions necessary to be eligible for an ERP under an LPL insurance policy.

About the Author

JoAnn Hathaway is the practice management advisor for the State Bar of Michigan and the author of Legal Malpractice Insurance in One Hour for Lawyers, published by the ABA.

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