Attorney Malpractice Extended Reporting Period (ERP or Tail) Endorsements are expensive. This is a tale of a firm that went to great lengths to figure out a way to avoid buying an ERP. Unfortunately, a bad creative solution can be costly. The following money saving idea for an alternative ERP is not recommended.
A three member law firm decides to end their partnership. The firm is splitting up 1/3, 1/3, 1/3. The firm is advised to buy an ERP for the Firm’s current Attorney Malpractice policy as none of the new firms will constitute a predecessor firm for insurance purposes (basically most Attorney Malpractice Insurance policies require at least a majority of the assets end up with one new firm to have a predecessor firm).
The Firm decides that purchasing an ERP is too expensive. They agree that each member will buy a new attorney malpractice policy with ‘career coverage’ to protect each attorney’s individual past acts. Each attorney knows that if they get sued for something that happened at the old firm the individual attorney that performed the act will have coverage, but the other members will not.
No worries. The firm members decide to draft a side agreement that obligates each attorney to pay for any matter that might arise from the old firm equally 1/3, 1/3, 1/3. The problem with this is that their new malpractice insurers are not obligated to provide a defense or coverage based on this agreement. Each attorney is now obligated for 1/3 of the damages and expenses.
The firm splits up. Problems start with the firm’s idea to not buy an ERP from the very beginning. One member decides not to purchase a new policy on a timely basis. That member does eventually purchase a new policy but because it took so long it was done without prior acts coverage and no career coverage.
Murphy’s law is in full force. Less than a year later the member that did not have ‘career coverage’ gets sued for work done while at the old firm. This attorney has no insurance coverage for this work. The suit not only names this individual member, but the other 2 former members of the firm individually and as a firm. The 2 former members that have ‘career coverage’ are provided a defense by their new malpractice insurers. But they were left to pay the damages out of their own pocket which was many times the cost of the ERP. The side agreement of ‘mutual aid’ was not honored by their new malpractice insurers.
As a side bar: an ERP purchase is kind of like prepaid coverage. Because the cost of an attorney malpractice policy without prior acts is about 1/3 the cost of a full prior acts policy, in about 5 years, depending on the length of the ERP purchased, the overall cost works out to be about the same. In many cases, the cost of the ERP is just the time value of money.
Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080