General Practice, Solo & Small Firm DivisionMagazine

Volume 17, Number 1
January/February 2000

RISK MANAGEMENT: Protecting Your Clients and Your Assets in Your Absence


The shingle may come down, but the liability for your work continues after you retire, go of counsel, become disabled, die, or sell your practice. Lawyers can protect themselves by studying the three R's-risk, resolution, and reality.

One lawyer, looking for new quarters, tells about the day he toured an office suite formerly leased by a law firm. "Cigarette butts were still in the ashtrays, the heap of unopened mail was six inches high, documents were stacked in the computer printer-there was even a lighted button flashing on the telephone. It was eerie, like someone yelled 'fire,' everyone ran out the door and never came back."

Imagine what would happen if you walked out the door today and never came back. Who would fulfill your commitments to clients? Would someone be able to close or sell your practice? How would you or your estate defend and pay any future malpractice claims?

Planning now for the day your shingle comes down (by choice or by chance) is a part of your professional responsibility to your clients and associates, particularly if you practice solo or in a small firm. Likewise, protecting yourself from the risk of a future malpractice claim needs to be a part of your family financial plan. In jurisdictions where the statute of limitations begins running from the date the client discovers your mistake, you and your estate may be at risk of a malpractice claim for an indeterminate amount of time.

Risk Management 101
In classic textbook terms, there are five ways to manage risk. You can:

  • Retain the risk (pay for defense and damages from your own pocket).
  • Reduce the exposure to risk (screen your clients, meet your deadlines, work in low-risk areas of practice, etc.).
  • Contractually transfer risk (not an option for lawyers).
  • Avoid risk altogether (not practice law).
  • Share the risk with others by purchasing insurance.

For most lawyers, sharing the risk through insurance is the most effective and pragmatic way to safeguard the financial interests of clients, law firms, and families.

Unlike other forms of insurance, lawyers' professional liability insurance policies are "claims-made" policies: They cover the lawyer for claims made and reported during the policy period, even if the error occurred years earlier. Compare that with auto insurance, where the policy in force at the time the accident occurred responds to the claim. Claims-made policies afford lawyers some peace of mind in a volatile insurance market, where the company that insured the firm at the time an error occurred may have long since left the lawyer insurance business.

How you use professional liability insurance will vary greatly, depending on your past and present law practice as well as your future plans. Not all options will be available to all lawyers; none of the options offers 100 percent security. Consider the following four common scenarios and how these fictitious lawyers could, with careful planning, manage their risk.

Lawyer Retires or Leaves Private Practice
Bruce Adams is a sole practitioner in a midwestern farming community. He has a general practice, with a high percentage of real estate work. After 24 years in the law, Adams is appointed on short notice to fill an open seat on the circuit court bench. He notifies his clients in writing that he will no longer be representing them and asks them to come by the firm and pick up their files. Because he does not want to appear to favor any local lawyers, Adams carefully avoids recommending successor counsel to clients. Instead, he includes a generic statement in his letter advising clients to "seek other legal representation."

The Risks:
Adams' state allows clients six years from the discovery of legal malpractice to file a claim. While he is unaware of any errors in his work, he recognizes that a mistake may not be discovered until decades from now, when a farm is sold or an estate is probated. He concedes that his short notice to clients may adversely affect his clients, particularly those with time-sensitive matters. Furthermore, by not offering current clients some guidance in selecting a successor, Adams runs the risk that the client will choose a lawyer who is not qualified to handle the representation, or who is uninsured. (An estimated 15 to 30 percent of lawyers in private practice do not carry malpractice insurance.) If successor counsel commits malpractice, the liability may follow a trail to the deepest pockets-even the pockets of a long black robe.

The Resolution:
After confirmation of his judicial appointment, Adams calls his professional liability insurance company to request a quote for an extended reporting period endorsement, commonly known as a "tail." A tail is not a new insurance policy; it simply extends the time Adams has to report a claim under his existing policy. The policy's restrictions and limits of liability-or the balance of limits if other claims have been paid-cannot be changed. Adams' insurance company offers him a choice between a five-year tail and an unlimited tail. Recognizing his long-term exposure and the possible repercussions of a malpractice claim on his public image, he chooses the unlimited tail.

The one-time premium Adams pays for the unlimited tail is 21/2 times his yearly premium, an expense he had not anticipated. Still, he feels fortunate that his insurance company offered an unlimited tail. A law school classmate who recently retired had been insured by a company that would not provide a tail endorsement, leaving Adams' classmate uninsured (or, in insurance terminology, "bare").

Lawyer Semi-Retires or Goes Of Counsel
Richard Baxter, age 64, practices law with two partners in a New England college town. Baxter would like to scale back his practice to spend more time with his family, maybe even go south for the winter, but the firm recognizes the marketing value of keeping his name on the letterhead. Not ready to retire completely, Baxter decides to remain of counsel rather than a partner. He continues to represent three or four long-term business clients, including a high-tech company that he helped grow from a small start-up business to a multimillion-dollar operation. Two years later, conflicts erupt within the firm, and Baxter's former partners go their separate ways.

The Risks:
When Baxter became of counsel, he turned over the firm's business decisions to his partners. When it was time to re-up their professional liability insurance, they compared rates and found they could reduce the firm's premium by going with an insurance company that was new to the professional liability market. Feeling pleased with their business acumen, the partners discovered they could save even more money by lowering the limits of liability from $10 million aggregate to $2 million.

Baxter now finds himself in a precarious position: If a client alleges malpractice in a patent application, for example, the insurance limits will not cover the full cost of defending and paying the claim. Furthermore, the partnership agreement did not mandate that the firm purchase an extended reporting period endorsement (tail) if the firm disbanded. Baxter is exposed to malpractice claims for all the years he has practiced law.

The Resolution:
Baxter promptly calls the firm's professional liability insurance carrier and discovers that, under their policies, an individual lawyer cannot obtain a tail endorsement. The firm has 30 days from the time of dissolution to exercise the tail, so Baxter grudgingly pays the premium on behalf of the now-dissolved firm. The tail does not reinstate the limits, just extends the time for reporting a claim under the last policy. Later, Baxter learns that the insurance company previously paid a large claim made against one of his former partners, reducing the available limits even further.

The Reality:
The limits of liability are inadequate, the future of the insurance company is questionable, but Baxter figures some coverage is better than no coverage. He crosses his fingers and prays that if the unthinkable happens, the insurance company will hire a topnotch defense lawyer who knows something about patent law.

Lawyer Unexpectedly Becomes Disabled or Dies
Laura Clark practices real estate and business law in a city on the West Coast. Driving to the closing of a large real estate development, she is involved in a tragic car accident and killed. Clark, 48, is survived by her husband, an engineer with the city, and two teenage sons. She was a sole practitioner who shared office equipment and split the salary of a receptionist with a family law practitioner across the hall. On her application for professional liability insurance, she listed the lawyer across the hall as the person who would be responsible for her practice if she were absent for an extended time. Unfortunately, Clark never discussed the matter with the other lawyer. Like many lawyers, she did not have a written plan or agreement with anyone qualified to handle her professional responsibilities in the event of something unforeseen happening.

The Risks:
Clark left behind a number of open files with imminent deadlines. The receptionist attempts to call clients and opposing counsel with the news but discovers that she cannot access Clark's electronic calendar or address file. An offer to purchase expires with no action, and Clark's client loses $250,000 in earnest money. The client threatens to sue for malpractice. Clark's husband, still trying to come to grips with his wife's death, realizes he has to do something, but what?

The Resolution:
Clark's husband contacts the family lawyer across the hall, who recommends he retain a real estate attorney to handle pressing matters and attempt to sell the practice while some market value remains. Mr. Clark also retains an accountant to audit the law firm's financial records, prepare bills for work completed, collect accounts receivable, and pay outstanding financial obligations.

Among the deceased's papers, the new lawyer unearths Clark's professional liability insurance policy, which expires soon. The new lawyer reports Clark's death and the potential malpractice claim to the company. The insurance company's standard procedure is to issue a one-year tail endorsement at no charge to the policyholder's estate; at the end of the year, the deceased's representative has 30 days to purchase a tail endorsement. On the advice of the retained lawyer, Mr. Clark purchases an unlimited tail. A claims representative documents the potential malpractice claim, a step needed to trigger coverage under a claims-made policy.

The Reality:
Small business owners need a succession plan to protect the market value of their business, Clark often had told her clients. Regrettably, she failed to follow her own advice. Without professional guidance and quick action on her husband's part, Clark's ostensible negligence to client matters would have continued, potentially jeopardizing her family's financial well-being and diminishing the market value of her practice. If the opportunity to purchase a tail endorsement had been missed, Clark's family would have remained wide open to liability for all of her years in practice.

Lawyer Sells Firm But Continues in Private Practice
For 12 years, Sara Davidson practiced personal injury law as a shareholder in a successful limited liability corporation in the Ohio River Valley. After much deliberation, she and her husband decide to move back to the Chicago area to be near family. Davidson sells her share of the practice to the other shareholder, Jean Evans. Davidson wants to take a few months off from law practice while she decides whether to interview with Chicago law firms or start over with her own private practice. Evans maintains the practice for several months before accepting a corporate general counsel position and closing the practice.

The Risks:
While her active practice is temporarily suspended, Davidson continues to be liable for any errors-actual or alleged-made during her 12 years of legal representation. As a former owner of the firm, she may be vicariously liable for negligent acts of her former associates as well. Evans' policy will continue to cover Davidson for work she performed on behalf of the firm; however, Davidson will always be looking over her shoulder and wondering whether Evans has maintained reliable coverage and adequate limits. At the time the practice closes, Evans is the only person with the authority to exercise the tail.

The Resolution:
Davidson writes a provision into the sales agreement that Evans must maintain insurance coverage with a reputable carrier and with sufficient limits of liability. Davidson further stipulates that Evans must obtain an extended reporting period endorsement (i.e., tail) that includes Davidson in the event that the practice closes.

When Davidson resumes practice in Chicago, she notes on her new insurance application that her past work is covered by the former firm. The new insurance company attaches a retroactive date of an inception to her policy and provides coverage for her legal work from that day forward. The premium she pays is significantly lower than if she had purchased a policy with full prior acts coverage.

Evans could have failed to purchase a tail, or the insurance company might have been unwilling to offer an unlimited tail. Davidson cannot purchase a tail from the previous carrier and may have forfeited prior acts coverage from her present carrier. While she may have a cause of action against Evans, she still does not have insurance coverage for her past legal work. A safer (albeit more expensive) route would have been to purchase an unlimited tail endorsement on behalf of the firm at the time she sold the practice.

Few concepts in professional liability insurance create more confusion than extended reporting periods (tails) and prior acts coverage. The four scenarios described above attempt to address the risk management options available to lawyers and their families at major life-turning points. These examples are by no means exhaustive. By anticipating risks, resolutions, and realities, you can ensure your liability is not your legacy.

Ann Massie Nelson is communications director at Wisconsin Lawyers Mutual Insurance Co., Madison, Wisconsin. She is a frequent contributor to Wisconsin Lawyer magazine and author of "50 Ways to Leave Your Client," which appeared in the Winter 1998 issue of The Compleat Lawyer. Melvin G. McCartney is president and chief executive officer of Wisconsin Lawyers Mutual Insurance Co. He is a former member of the ABA Standing Committee on Legal Malpractice and past president of the National Association of Bar Related Insurance Companies.

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