Insurance Considerations for Transitioning Attorneys
As a professional in today’s complex legal environment, there is tremendous value in having a sound professional liability insurance solution. Unfortunately, as of today, there is not just a single, universally viable product for law firms. Law firms, in particular, are susceptible to being sued for millions over alleged errors. With a continued rise in defense costs that can easily surpass six figures, professional liability claims have the potential to be crippling to a business. Additionally, although a lawyer’s act or omission may occur in work performed today, a claim stemming from that wrongful act may not be realized or made against the lawyer for a significant period of time, perhaps even years down the road.
An underlying premise of an Errors & Omissions (“E&O”) policy is that the insurance company shall pay a covered claim, including defense costs, on behalf of an insured, up to the limit of liability purchased. To many, this is not immediately clear as there are many different coverage provisions that need to be reviewed prior to determining a covered claim. For a member in transition, the innate intricacies of an E&O policy may lead to more questions than answers.
An E&O “loss” references the amount an insurer is legally obligated to pay as a result of a claim, typically including defense costs. If appropriate professional liability limits are not selected, defense costs alone may quickly mount, thereby reducing the limits available for other claims, and can eventually exhaust the limit of liability. Whether it be for a breach of fiduciary duty or malpractice, it is not uncommon for defense costs to far exceed a case’s settlement value.
An “insured,” which includes the designated firm, typically extends to the firm’s current partners, principals, directors, officers, shareholders or other members of the firm while performing in their respective capacities. For coverage to continue to be afforded to such individuals that have left a firm, it is imperative that a firm’s E&O policy form be broad enough to maintain them as insureds. While a departed firm member may sleep better believing they remain covered, the scope of coverage for past individuals is limited to claims arising from their services rendered while with the insured firm. Coverage does not follow an individual to a new role or employment outside of the insured firm.
A fundamental feature of most professional liability policies is its “claims-made” reporting provision. Claims, which are most frequently received in the format of a written demand for monetary damages, largely stem from an alleged error by a firm while performing its professional services; however, if a claim is not reported to the carrier per the terms of the contract, it is unlikely that coverage will be available.
Unlike an “occurrence based” policy, the policy that is triggered and responds to a claim on a claims-made policy, is the policy that is in effect when a claim is first made against an insured and reported to the responsible insurance carrier. This method prevents multiple policies from responding to a series of related wrongful acts that occurred over multiple policy periods. To avoid forfeiture of coverage, an insured may be required to notify its carrier of an E&O claim during the same policy period it was received or within a brief grace period, such as thirty (30) to sixty (60) days, post policy expiration. If reported to the carrier during the post expiration period, the claim would most often need to be received by the insured during the policy term. Ultimately, if the claim reporting provisions are not met by the insured, the lawyer or firm will forfeit coverage under that policy.
In the event an insured elects to terminate or no longer renew its E&O coverage, it is wise to purchase an extended reporting period, commonly known as a “tail”, from the incumbent insurer. The realization of a professional liability error is far different from that of your typical automobile accident or home fire. Since an attorney’s exposure for claims likely stretches well past a policy’s expiration date, a tail policy creates an additional extended time period to report claims. Tails are typically offered for terms of one (1) to five (5) years, although under certain circumstances for an unlimited period of time, and are made effective as of the date of termination or non-renewal of the policy. It is important to recognize that the tail coverage only applies to professional services rendered, or wrongful acts committed, prior to the effective date of the policy’s termination.
Tail coverage is offered by many of the standard and non-standard E&O carriers. Should the need for such coverage arise, there is often a fairly significant variance between the number of years of coverage that a carrier is willing to provide and the subsequent cost of such coverage. If a firm’s current carrier does not offer the desired extended reporting terms, there are certain stand-alone carriers who are able to bridge the gap. Insurers typically require the purchase of an extended reporting period to occur within a specific number of days from the expiration date or the ability to procure the tail will be lost. To avoid a lapse in coverage, possibly due to acquisition or financial burdens, securing favorable tail coverage is essential. Even if the tail cost is high, the payments are due in full at the time of purchase and are considered fully earned and non-cancellable.
Transition within the law industry is inevitable, but not without potential pitfalls from an insurance perspective. If an attorney is moving from one firm to another, the new firm’s E&O carrier will most often only respond to claims arising from work performed on behalf of the new firm. Certain policies will extend coverage to the attorney’s previous work, but this is not the assumed standard. To avoid relying on the prior firm’s ongoing E&O coverage, or possibly lack thereof, in some circumstances an attorney may have the option to purchase an individual tail policy from the prior firm’s carrier upon departure.
In conclusion, a comprehensive review of your E&O insurance solution is strongly recommended to ensure appropriate and adequate coverage is in place. In the present climate, with law firms performing a myriad of professional services, it is vital to a firm’s longevity and financial health to have a tailored E&O program that properly accounts for all of the varied exposures. It is imperative that both the firm and its respective attorneys take into consideration their prior acts, as well as the prior acts of attorneys who are no longer with the firm.