In a world filled with mergers, acquisitions and changing partners, the importance of predecessor firm coverage is as important as ever for the legal industry. Unfortunately, in such a dynamic environment, attorneys often fail to consider their risk exposure related to these transactions from an insurance perspective.
In the case of a merger, predecessor coverage is often largely at the discretion of the underwriters and how much exposure they want to assume. In most cases, each of the merging firms will have their own professional insurance liability policies in effect with existing retroactive dates. Those retroactive dates – the most important part of the policy – determine what acts, errors or omissions are covered.
Even in a merger with a 50-50 split, or a marriage of equals, the predecessor firm(s) can be included in the new firm’s professional liability coverage because underwriters can and do have tools to honor all prior acts under one policy. However, if the underwriters are not open to taking on that type of liability, the new firm might want to consider purchasing a tail as part of its professional liability coverage.
Acquisitions & Name Changes
In cases of an acquisition or a firm name change with an addition or change in named partners, underwriters will often offer prior acts coverage if the named insured includes predecessor firms. Some underwriters may require each name or incarnation of the preceding firms be listed to ensure predecessor coverage applies.
Often, predecessor firm coverage is not considered until after the fact.
One of the biggest misconceptions is that following a merger or acquisition, the respective merging firms or the new entity will purchase tail coverage and subsequently enjoy coverage that protects the new firm. This is not always true as existing coverage may not be adequate. Some underwriters might decline to honor prior acts, though most underwriters can be flexible if necessary.
Also, tail coverage can be extremely expensive, and it is not always needed. For example, the new firm might be able to have their underwriter include prior acts coverage for the predecessor firms and avoid the need to purchase pricey tail coverage. At minimum, it’s a conversation firms should have with their agent or insurance broker.
Long before signatures are secured for any law firm merger, acquisition or formation of a new firm from new or existing partners, the attorneys leading these efforts should take the time to meet with their insurance representatives to explore how the change in organizational structure will impact their insurance liability. This likely won’t be a single conversation as these transactions can be layered with complications and underwriters have quite a bit of flexibility. A thoughtful discussion or series of discussions can paint a clearer picture of the risk underwriters must consider before creating a professional liability insurance policy tailored to the exact needs of the new firm – merged, acquired or otherwise formed.