Risk Management
Have license, will travel, Part I: Lawyer mobility leaves circuitous
trail of risk
Few concepts in risk management create more confusion than "tails"
and prior-acts coverage. Learn how to protect yourself and your clients
when leaving a law firm in part one of this series, "Have license, will
travel."
By Ann Massie Nelson
The days when a lawyer served in a single law firm from graduation to
retirement are long over. Most lawyers - at least once during their
careers - will leave one law firm to join or form another firm, or to
practice in the public or private sector. Some lawyers will change firms
or employers several times, building a longer and more convoluted trail
of malpractice exposure.
Professional liability insurance covers a law firm and the lawyers
named on the policy application for claims made and reported during the
policy period. When a malpractice claim is made against a lawyer who has
left the firm, the firm's policy will respond to defend the firm and,
when necessary, pay the claim. The lawyer may or may not be covered
under the former firm's policy.
However, claimants often name both the individual lawyer and the
former law firm in malpractice suits. Now the former firm, the lawyer
and their respective insurance companies (if they are insured) must
determine who will defend whom, who will fund costs and ultimately who
will pay the claim.
Even if the lawyer and the former firm are insured with the same
company, questions arise, including:
- When did the alleged malpractice occur?
- Which firm's limits of liability apply?
- Whose deductible applies?
- Who will pay the deductible?
- Who will authorize the insurance company to proceed with defense or
settlement?
How professional liability insurance differs
If professional liability insurance were "occurrence" insurance, like
auto insurance, the answers to these questions would be simple,
theoretically: The policy (or policies) in effect at the time of the
"accident" would apply.
But when does an alleged error or omission (the accident) occur in
legal representation stretching over months or years? To further
complicate matters, the statute of limitations on legal malpractice
claims in Wisconsin runs from the date of discovery, so a negligent act
could lie dormant for years before it is discovered and reported.
Because neither lawyers nor their insurance companies can predict
when past mistakes will rear their heads, professional liability
insurance is sold on a "claims-made" basis. Claims-made policies - if
prior-acts coverage is provided - defend and pay claims made and
reported during the policy period, regardless of when the negligent act
occurred. The policy in effect when the lawyer first becomes aware of
and reports the claim or potential claim is the policy that is
"triggered" for coverage. Again, multiple polices may be involved once a
claim is brought forward.
Ann Massie Nelson is director of communications at
Wisconsin Lawyers Mutual Insurance Co. Past risk management columns
appear on the WILMIC web site, with
permission of the State Bar of Wisconsin.
Being left bare
Problems can arise when the policies in question differ substantially
in limits, deductibles or other provisions. For example, Lawyer A, a
partner in a large, personal injury firm with multi-million dollar
insurance limits, unexpectedly leaves the firm and joins a small
firm.
The small firm's insurance coverage may be sufficient for Lawyer A's
new work; however, the policy limits are inadequate for the lawyer's
exposure from the previous firm. If the previous firm subsequently
dissolves, discontinues insurance or is turned down for insurance
coverage, Lawyer A could be left uninsured or "bare" for legal work
performed while practicing at the former firm.
Three ways to cover yourself
- If you are leaving private practice, purchase an extended claims
reporting period or "tail" endorsement from your firm's current
insurance carrier. A tail is not a new policy. A tail simply extends the
time you have to report a claim under your firm's existing policy. The
same limits (or the balance on the limits, if other claims exist),
deductible and restrictions apply.
A word of caution: Your insurance carrier may not offer a tail
endorsement or could limit the tail to a specified number of years.
Remember, the statute of limitations runs from the date of discovery, so
an unlimited tail provides the best long-term peace of mind.
- If you are continuing in the private practice of law and you don't
have coverage with the prior firm, request prior-acts coverage from your
new professional liability insurer. Prior-acts coverage protects you for
all the years you've been in private practice.
Be aware that the new insurance company might refuse you prior-acts
coverage in one of two ways: by limiting coverage to legal work
performed after a certain date or by restricting coverage to work
performed only at the new firm. Study the coverage agreement and
definition of insureds in the policy.
- Plan ahead for departures from your firm. A well thought-out,
written plan can provide guidance during what often is a tumultuous time
in a law firm. The plan should address:
- who will purchase the tail for the lawyer leaving private
practice,
- how long of a tail to purchase (usually one- to five-year or
unlimited),
- who will be responsible for paying the deductible should a
malpractice claim arise, and
- who will participate in decision-making regarding the claim's
resolution.
Next installment in the "Have license, will travel" series: How to
communicate with clients and handle open and closed files when you move
on.
Wisconsin
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