When Partners Depart – Another Potential Gap in Malpractice Insurance Coverage

I have written and lectured extensively regarding issues which arise when attorneys depart firms, both from the perspective of the firm, as well as from the perspective of the departing lawyer(s).  There are lots of considerations from ethical and statutory perspectives.  There is often a tension which is not easily resolved between the interests of the departing lawyer(s), the firm, and the client.  Here is yet another consideration.

Many people are quick to compliment me by stating that they read The Pennsylvania Bar News  just for my articles.  I readily admit that my first go-to are the tremendously helpful “Avoiding Liability” columns by Jeffrey P. Lewis of Eckert Seamans Cherin & Mellott LLC.   In his column of October 18, 2010, he writes about the implications of Berry & Murphy, P.C. v. Carolina Casualty Insurance Company, 586 F.3d 803 (10th Cir. 2009).  In this case,  a shareholder unknowingly committed malpractice in the representation of plaintiffs in a personal injury action while he was with the insured firm.  A year later this attorney left the firm and joined another firm, taking the client with him.  Shortly after that, he petitioned the court to withdraw his appearance.  Replacement counsel subsequently wrote to him to place him on notice of a legal malpractice claim.

The problem arises in that the attorney reported the claim to his malpractice carrier at his current firm.  However, he failed to report the action to his former firm, where he was employed when the alleged malpractice had occurred.  Should the replacement counsel have also notified the former firm?  The former firm did not find out about the malpractice action until it was commenced in federal court more than a year later, after it had transitioned to a new insurance policy period.  Not according to the 2-1 decision of the 10th Circuit panel, which affirmed that replacement counsel’s notice to the former shareholder constitutes notice to the former law firm.  As a result, the former law firm was denied coverage for its failure to report the claim in a timely manner.

Lewis notes in his column the irony and injustice to the former law firm which results from the court’s opinion.  Policy language played a key determining factor in the ultimate outcome.  Even more ironic, when one considers that when law firms “compare” policies, they compare provisions, like the presence or absence of “the hammer” but ignore seemingly innocuous variations in policy language.  Often these minor points become big arrows in the back.

One important point to learn from this, is that this is yet one more area of concern which must be addressed by attorneys who have transitioned to another firm, as well as by the firms from which they departed.  When a law firm is going through its application process for malpractice insurance, whether a first time or a routine renewal, it should require each attorney to respond in writing to the question “Do you know of any act, error, or omission which might reasonably give rise to a claim?”  Any affirmative answer on the application will trigger an exclusion from coverage under the new policy.  That means that anything unearthed during this query process should be promptly disclosed to the current carrier, e.g. put them on notice.  That is the only way to ensure that if an eventual claim is made, all will be covered under the applicable policy.

We now realize that the definition of “attorney” in this case should include any attorneys who were with the firm during the current soon-to-expire  policy term.  The need for this information is just another reason why both departing attorneys and former firms should do all within their power to remain civil and professional in dealing with departures.   And I’ve got many, many more reasons. 

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