Risk Management

Have license, will travel, Part I:

Lawyer mobility leaves
circuitous trail of risk

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.

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

1. 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.
   
   
2. 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.
   
   
3. 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.