Your law firm partnership agreement is a working document for the firm as well as a guide to what would happen should the partnership end. Most agreements lack direction when it comes to dealing with the professional liability insurance in the event of an ending to the partnership.
It is well accepted by firm partners that law firms need professional liability insurance to cover their practice. As a matter of asset protection for the partners, the insurance policy and firm cash are the only protection between your client-turned-plaintiff and your personal assets. It is less discussed and known that firms need professional liability insurance coverage after they cease practicing together as a firm to cover the trailing personal liability from the legal work completed during the life of the firm. This coverage is issued as a policy endorsement called the Extended Reporting Period Endorsement, also known as the “tail policy”.
Having been involved as the insurance broker in many law firm closures (and related disputes), it is common for partners to disagree about the tail. Your partnership agreement should clearly address the tail issue to short circuit needless disagreements, sleepless nights, and fear of claims chasing you into retirement or a career with another firm.
Your partnership agreement should state that in the event the partnership ends, the firm will execute all tail options available to be paid by firm assets. This makes sense to all of the partners that the insurance coverage that was adequate during the active practice period should continue the needed protection for the subsequent personal liability in the post active practice years. In rare circumstances, the tail options limits might not be enough insurance for the future liabilities, but as a rule of thumb and starting point, it must be agreed that as a minimum the firm will execute its available tail options. Your professional liability broker can help you with that too.
What other law firm partnership issues related to risk management do you suggest for effective managing partners? Post your suggestions below.
