Aug. 18, 2016
Back when it was just about unheard of to sue your Lawyer for legal malpractice, professional liability insurance policies provided very broad coverage for individual insured lawyers. In fact, named lawyers had the same status under the policy definitions as the Law Firm aka the Named Insured. Insurers stated right in the Declarations page:
Named Insured: XYZ Law Firm and those individuals named in question number # of the application.
This practice meant that in the absence of a specific prior acts retroactive date the individual lawyers named in the application enjoyed full prior acts coverage even from work on behalf of another law firm or full career coverage. They were also covered for acts performed outside of the scope of their employment for the named Law Firm or were provided “moonlighting coverage”.
Insurers quickly learned that they were at risk for claims coming from prior law firms and non-sanctioned moonlighting activities that they did not underwrite nor adequately rate for. Coverage for “Lateral Hires” was soon to be a thing of the past and by the 1990’s, policy definitions migrated for the most part to the familiar “acts on behalf of” wording of today. Former firm coverage for individual lawyers is no longer automatic and must be underwritten and endorsed back into most current day Lawyers Professional Liability Insurance policies. Pro Bono activities, sometimes requiring formal consent by firm management, is the only moonlighting activity insured for.
This tightening of the definition of insured has played havoc in properly insuring individual lawyers' prior acts when firms split up. And breakups for large and small firms alike occur regularly today. It used to be no problem to find continuous prior acts coverage for spin-offs and other partnership breakups even if there was no true successor entity surviving. Not nowadays! Now when a split occurs and law firms dissolve with no successor firm to carry on, it’s pretty much a given that the new entities and their lawyers individually will have a prior acts exclusion under any new policy for the new entity. Retro Date Inception or RDI is the term used to refer to this blanket exclusion of all prior acts under a professional liability insurance policy. It is like buying claims made insurance for the very first time.
The good news is if a Tail option is purchased that the new policy’s premium will be heavily discounted for the next four or five years because claims from the new practice are unlikely in the first few years. The bad news is that unless the dissolved entity purchases an Extended Reporting Period Endorsement, you can kiss any hard earned individual career coverage that you have so carefully protected since the date you were admitted, goodbye! This applies to current partners or owners, previously employed lawyers and even deceased and retired lawyers of the firm and any of its predecessors.
So, to avoid a potential uninsured career, lawyers practicing in a group setting, need to be prepared to buy Tail coverage should the “group” split up and there is no successor to continue to insure the former firm, and its lawyers’ prior acts. Partnership agreements need to address the possibility of a firm dissolution and plan for funding the cost of an Unlimited Tail which can easily amount to 2 ¾’s or 3 times the policy’s annual premium. Likewise, lawyers leaving a firm to join another firm, need to be aware that while the former firm’s insurance is responsible for claims arising from acts on their behalf, should that firm cease to exist and not buy Tail Coverage, you could be uninsured. Your new firm’s policy will not cover you unless prior firm coverage for you is specifically endorsed.
Cindy Wiedman, founded Wiedman Insurance Services, LLC (LiabilityPro Insurance Advisors*) August 1, 2014. Cindy is a Registered Professional Liability Underwriter (RPLU) and has designed and administered professional liability insurance programs over a 35-year career working for various insurance administrators in the Midwest such as Shand Morahan & Company, Kirke Van Orsdel, Marsh and Lockton Affinity.
*Currently working with investment advisory businesses domiciled in Iowa, Minnesota, Kansas, Illinois and Nebraska.