Setting Up a New Law Firm
Prepared by David Solomon
Amity Insurance Agency, Inc.
Best Products and Services Award Winners since 1996
INSURANCE CONSIDERATIONS
MALPRACTICE INSURANCE
Malpractice Insurance is one of your single most important purchases and should not be purchased on price alone. Like most things in life, you get what you pay for. Malpractice insurance is a coverage that should be purchased before accepting clients, whereas malpractice insurance is written on a Claims-Made basis.
When you have a personal medical or legal concern you would seek the advice of a specialist, the same holds true with your professional liability insurance. Although many agencies say they offer this product, few are familiar with the companies offering this coverage and the differences between the policies. Align yourself with an agent or agency that is familiar with legal malpractice and has knowledge of policy language and coverage.
POLICY HIGHLIGHTS/COVERAGE CONSIDERATIONS
All legal malpractice policies are Claims-Made.
Claims-Made. This is a frequently misunderstood term. Claims-Made means that the company insuring your firm at the time a claim is made, or an incident reported, may be responsible for defending the claim. I use the phrase "may be responsible for defending the claim" because there are two triggers to offering a defense:
(1) The attorney or firm had to have legal malpractice insurance at the time of the alleged act, error or omission and…
(2) The attorney or firm has maintained continuous malpractice insurance and meets the definitions such as Insured and Predecessor Firm.
Definitions of Insured. A critical section of the policy as it defines who is being insured. What protection is offered the firm for New Hires, Contract Attorneys or Of-Counsels? Are there limitations or restrictions?
Predecessor Firm. Whether you are setting up a practice, joining a new firm or merging, are your past acts covered?
Death or Disability. Will the policy continue in the event of a permanent disability? Will you need to continue paying your premiums? Is my estate protected in the event of my death? What are the responsibilities of your administrator in the event of your death or permanent disability?
Extended Reporting Period (Tail coverage). Does your policy allow you to purchase a lifetime extended reporting period option? Is there an option for a free lifetime tail if you retire or leave the practice of law?
Fiduciary Protection. Are the limitations or restrictions reasonable for your practice?
Title Agents Coverage. Is coverage built into the policy form or do you need to request an endorsement?
Claims Expenses Outside the Limit. Before paying a judgment the insurance company's cost of defending you is deducted. This could have very serious consequences. Does the insurance carrier offer an option that will allow you to purchase additional limit for claims expenses up to or equal to the full policy limit?
Other provisions to be considered in a professional liability policy include definition of legal services, consent to settle clause, full prior acts coverage, aggregate deductible, first dollar defense, disciplinary and licensure defense, career coverage for new hires or mergers?
WORKERS COMPENSATION INSURANCE
Required in all states for all employees, including part-time employees, independent contractors and corporate officers of an "S" and "C" Corporation, even if not drawing an income. Policy assures repayment of medical care, medical expenses and compensation for lost earnings that result from accidents at or related to work. Principals/owners or members of an LLP or LLC are not eligible for this benefit.
PREMISES LIABILITY INSURANCE
OFFICE CONTENTS
VALUABLE PAPERS
Most leases not only require liability insurance, but that the landlord be named as an Additional Insured. Many sole practitioners that share office space are under the delusion that the landlord's policy will defend them. WRONG!! (unless you are a named insured on their policy).
Many small firms often overlook these coverages or feel there is no need for this type of policy. Big mistake! You need to protect yourself against slips and falls that may occur in, on or near your office and for damage to your property and client files.
Working out of your home? If you work out of your home, your homeowner policy will deny coverage for bodily injury claims to clients or prospective clients. Some companies now offer a small business endorsement to cover this type of liability exposure.
How expensive would it be to reproduce your client files? There are some documents that cannot be reproduced or replaced. What many attorneys underestimate is the cost to research and reproduce valuable papers or documents lost or destroyed by a covered hazard. Most business owners policies offer only $5,000 or $10,000 coverage for this peril.
There are insurance companies who have designed policies specifically for the legal community. They warrant your consideration as they offer higher limits on many coverages needed by law firms and offer coverage not available on the standard business owner policies.
EMPLOYMENT PRACTICES LIABILITY INSURANCE (EPLI)
An EPLI claim can happen...
A legal secretary brought a complaint against the firm and a senior partner of the firm alleging that she had suffered sexual harassment by the partner. Although the firm contended that her charges had been investigated and taken seriously, the jury found that the firm had "failed to take all reasonable steps to prevent the sexual harassment of plaintiff from occurring." The jury awarded the secretary nearly $7.2 million in damages.*
A female worker brought a complaint alleging that she had suffered sexual discrimination, sexual harassment and wrongful termination. The company argued that the woman was terminated for excessive absenteeism. The woman countered that other employees were not dismissed although they had poorer attendance records. The jury awarded the worker $1.1 million in damages.*
*Executive Risk Management Associates, Examples of Employment Practices Liability Claims (EPLI3 4/96)
NOT ALL EPLI policy forms are the same.
Law firms should consider a policy that contains the following coverage or options:
Punitive Damages Coverage. where insurable by law or include "most favorable venue" language.
Third-Party Coverage. Traditional EPLI policies only cover claims brought by the firm's employees. Employees could be subject to discrimination and harassment claims from interaction with clients, delivery personnel or other third parties.
Defense Costs Coverage. for breach of contract claims and wrongful acts arising out of workers' compensation and unemployment compensation claims.
No "Intentional Acts" Exclusion. Because most employment related claims arise out of some form of intentional conduct, this exclusion can seriously erode EPLI coverage.
Partners as Employees. Most policies do not include law firm partners within the definition of employee, leaving a gap for claims brought by partners.
Failure to Make Partner. Most policies exclude coverage for claims arising from an employee alleging discrimination in failing to become a partner.
Contract and Leased Employees. Does the policy protect the firm for actions brought by these individuals?
BUSINESS INTERRUPTION INSURANCES
BUSINESS OVERHEAD EXPENSE COVERAGE
As a small business owner, think for a moment what impact a debilitating illness or injury would have on your practice. How would your absence affect the practice's ability to generate income? How would the monthly expenses of operating the practice be covered? Would you be able to continue paying employee salaries, rent, heat, electricity, leases, interest on debt, insurance premiums or a temporary replacement for you? And if you're in a partnership, how will you pay your share of the partnership expenses if you are not generating revenue for the practice? If you decide to sell your practice, because of a permanent disability, a Business Overhead Expense policy will keep the doors open and help to preserve its market value.
Look for the same strong contractual features in a Business Overhead Expense policy as you would in individual disability income protection:
Non-cancelable - The policy cannot be cancelled for any reason other than non-payment of premium.
Guaranteed premium - The premium rate is set when you purchase the coverage and provides guaranteed protection up to age 65. Premiums can only increase if you purchase more monthly benefit! The policy should be guaranteed renewable between the ages of 65-75.
Partial Disability - A strong contract should cover partial disability in addition to total disability. If you become disabled and are able to return to work in a reduced capacity (limited hours, fewer responsibilities), you will still be able to cover your expenses.
Flexible and unique features - Be sure you can customize the policy to suit your needs and circumstances. Does the policy offer riders such as:
Future Insurability Option - as your business grows, this rider allows you to increase your monthly benefit without additional medical underwriting;
Professional Replacement Expense - this rider pays the salary of the person hired to replace you while you are totally disabled.
Additional Monthly Benefit - this rider provides an additional benefit to program around loans, special expenses and other coverage in force.
BUY-SELL AGREEMENTS. If your practice is a partnership or professional corporation with up to five principals, a Buy-Sell Agreement is recommended to spell out what happens to a partner's ownership interest in the event of death or disability. Typically, the agreement contains provisions for the purchase of the deceased or disabled owner's share of the business. If the agreement is not funded by an insurance policy, the risks can be substantial. Where will the money for the buy out come from? Will you be in business with the deceased or disabled owner's spouse or heirs?
A DISABILITY BUY-SELL policy is designed to provide funds for the purchase of the insured's share of ownership in the event of total disability. A Disability Buy-Sell policy is written with a 12, 18, or 24-month waiting period before a benefit is paid. This gives the practice time to determine if the disabled shareholder will recover and return. The Disability Overhead Expense policy can provide reimbursement for the disabled partner's share of expenses up to the time of recovery or the execution of the buy-sell agreement.
DISABILITY INSURANCE FOR KEY EMPLOYEES.
If you are between the ages of 27 and 50, you have at least a one in three chance of becoming disabled for three months or more some time before retirement.* And for many, it does not happen the way we usually think it happens. It might occur due to a fall from a ladder while painting your front porch or from participating in a favorite sport or from simply lifting that box that seemed a bit too heavy. Statistics show that heart disease and back problems are the two most common causes of disability.** The average length of disability for a 45 year-old is nearly three and one-quarter years. *** When disabled an individual not only stands to lose income, but contributions to benefit or retirement plans.
Chances are you depend on your current income level to sustain the lifestyle to which you are accustomed. Cut off your salary or decrease it for a substantial period of time while you are sick or hurt and something has to change-immediately and dramatically.
What if you don't have savings to rely on? You would need to depend on family and friends since few banks will secure a loan to someone who is not working.
You have two options, Individual Disability Insurance and/or Group Disability Insurance. Consider the following when reviewing contracts:
*1985 Commissioner Disability Table A
**Accident Facts, 1998 Edition, National Safety Council
***U.S. Department of Education, National Institute on Disability & Rehabilitation Research, Disability Statistics Abstract, Number 16, September 1996
INDIVIDUAL DISABILITY INSURANCE CONTRACTS
Is your coverage non-cancelable? You should purchase disability protection that cannot be cancelled for any reason other than non-payment of premium.
Can the insurer change the language in your contract? Your policy should have guaranteed definitions and language. In some contracts, the insurer has the right to change the contract language. For example, in some contracts the insurer can change the definition of disability to one that is much more favorable to the insurer.
Are the premium rates guaranteed for your coverage? The good contracts set a specific premium rate when you purchase the coverage and it is guaranteed not to increase until age 65. Other contracts allow the insurer to increase premiums throughout the life of the contract.
Does the definition of disability protect you in your occupation? Quality coverage says that you collect your benefits if "you cannot perform the important duties of your regular occupation and are not working in another". This protects the consumer by not allowing the insurance company to discontinue benefits if you are able to work in another occupation. Some definitions say "you cannot perform the duties of any occupation". This latter definition allows the insurer to insist on having the claimant go back to work at any occupation or face the possibility of discontinuation of benefits.
Does your contract cover partial and recovery disability? Good contracts protect the right of the insured to return to work without losing the entire benefit. For example, good partial disability coverage will pay 50% of the monthly benefit if your illness or injury only allows you to work part-time and your income is reduced by 50%. A good recovery disability provision allows you to return to work full-time after a lengthy absence and still receive benefits until your income returns to at least 80% of what you were earning prior to disability. These are important benefits which allow the insured to slowly transition back to work.
Can you customize your benefits and provisions? Important optional features include cost of living increases in your monthly benefit. For example, a contract may say that each year you are disabled your benefit is increased by 3% at a compounded rate. This protects the purchasing power of your benefit. Future insurability options allows you to increase your monthly benefit as your income increases without having to prove medical insurability. It is important to have a contract that fits your needs rather than a one size fits all.
Good disability contracts have guarantees. Lesser coverages allow the insurer to change provisions and prices (or cancel contracts). Protecting your income like any other asset is an important part of your financial planning, so choose carefully.
GROUP DISABILITY CONTRACTS
In most cases employer paid-group long term disability insurance or group association solves only a portion of income protection. Thus a supplemental (individual) disability income policy warrants your consideration to avoid a financial disaster.
If you have a group disability income insurance policy, or considering purchasing this policy you should check the fine print on these important points:
- Does the plan depend on your relationship with the association?
- Can the association, or insurance company, cancel the plan at any time?
- Do you own your policy or is the contract held by the association, and you are issued only a certificate?
- Are the rates fixed to age 65 or can they be increased?
- Have you read the definition of disability? Is it restrictive?
- What is the partial or residual benefit? How does it really work?
- A recovery benefit is critical for any fee for service professional. Does your contract have a
recovery benefit?
- Are you aware that benefits are reduced by payments from Social Security, Workers'
Compensation, and other sources?
- Are optional benefits such as Cost of Living increases, Future Insurance Option, etc. available?
Closing, Dissolving or Merging you Firm
INSURANCE ISSUES RELATING TO SEPARATION OF PRACTICES AND
LAW FIRM DISSOLUTION
MAJOR ISSUE
How do I protect myself against claims which might arise after I have left the firm, dissolved the firm, or merged the firm?
Read definition of Insured and Predecessor Firm of current policy and/or new entities policy.
Check to see if you are eligible for Prior Acts Coverage or Career Coverage if joining a new firm.
If merging your practice check to see if you or your former firm qualifies (meets the definition of) a Predecessor Firm on the new policy. If your firm's coverage (formation) was earlier than the firm you are merging with you need to make sure that your firm and it's predecessors, if any, will be covered.
The safest way to ensure that you are protected is to purchase a Lifetime Extended Reporting Period or Tail Coverage, if available.
MERGERS, LATERAL HIRES AND THE
POSSIBILITY OF CONFLICT OF INTEREST SUITS**
Mergers, acquisitions and increased mobility of attorneys brings with it increased possibilities for conflicts of interest. Disqualification from a representation is a common result of a firm's failure to manage or plan for "inherited" conflicts adequately. Disqualification can lead to professional liability losses.
In Dewey v R.J. Reynolds Tobacco Co., 109 N.J. 201, 536 A.2d 243 (1988), the Supreme Court of New Jersey was faced with a motion to disqualify a law firm from representing the plaintiff. An attorney who became a member of the law firm representing the plaintiff had previously been a member of the law firm representing the defendant tobacco company. The attorney had, in fact, billed time for work he had done on behalf of the tobacco company while a member of his former firm.
The Court held that while under normal circumstances, disqualification of the plaintiff's law firm would be required, the complexity of the case, and its rapidly approaching trial date, made it questionable whether another attorney could properly handle the case on behalf of the plaintiff. Disqualification of the attorney (and firm), the Court opined, would produce undue prejudice to the plaintiff as well as to the judicial system in general. Thus the Court did not sustain the motion to disqualify plaintiff's counsel. However, the Court ordered that plaintiff's law firm could not be compensated for any work the firm did on the case (including the forthcoming trial) subsequent to the time the attorney who had been a member of the defense firm switched sides and became a member of the firm that represented the plaintiff.
Vicarious Disqualification
The doctrine of shared confidence and attorney mobility combine to make the topic of vicarious or implied disqualification one of increasing relevance. While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so. In practical terms, when a member of the firm is disqualified, the whole firm is disqualified.
**The Minefields if Practice (CNA Risk Management Seminar 02/96)
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