Vol. 77, No. 10, October 2004

Professional Liability Casts a Long Shadow

by Ann Massie Nelson

Whenever lawyers retire, leave private practice, become disabled, die, or change firms, their professional liability exposure grows and changes, often in ways they never anticipated.

Take these familiar situations and consider how you would manage your ever-lengthening shadow of malpractice risk.

Leave or Retire From Private Practice

After practicing solo in southeastern Wisconsin for 25 years, you are elected circuit court judge. You notify your clients and ask them to stop by your firm to pick up their files. You recommend they seek other counsel, but you don't name any of your local bar colleagues, who may appear before you in court.

When you close your practice, you are unaware of any errors or omissions in your legal work; however, the Wisconsin statute of limitation for legal malpractice is six years from the date of discovery. For example, if you made an error drafting an offer to purchase real estate, the error may not be discovered until the next time the property changes hands.

An assertion of malpractice in your private practice could be costly, both financially and politically.

What should you do?

Before you take the bench, call your professional liability insurance carrier to discuss availability of an extended reporting period endorsement, more commonly known as a "tail" endorsement. Bear in mind that the tail endorsement simply extends the time you have to report a malpractice claim under your current policy; the limits of liability remain the same.

For the greatest peace of mind, request an unlimited tail (rather than a specified time period, such as one year or five years). Be prepared to make an investment; the premium for unlimited tail endorsements typically costs two to two-and-a-half times your last annual premium.

Become Of Counsel

Several years ago, you brought in two associates to help you with your thriving commercial law practice in the Fox River Valley. The practice grew, your associates became partners, and you and your spouse bought a vacation home, where you spend the winters. Although you continue to represent a few, select clients, aided by your high-speed Internet connection, you hand off business decisions to your partners and become "of counsel" to the firm.

When the firm's current professional liability insurance policy nears its expiration date, the remaining partners, looking for ways to cut overhead, choose a policy with lower limits of liability. A few months later, money issues lead to an impasse and the two partners split and join other firms.

You discover the now-dissolved firm's liability limits are inadequate to "make whole" your clients, should they be harmed by an error or omission in your firm's representation. Furthermore, the partners made no provision for continuing insurance coverage after the firm dissolved.

What should you do?

Call the professional liability insurance carrier and ask if a tail endorsement is available for the firm. Persuade the partners to purchase the tail on behalf of the firm. Typically, the option to purchase a tail ends 30 days after the policy expires.

Then, cross your fingers and hope that no lawyer has a claim that exceeds the policy limits. Once the liability limits are exhausted, the insurance carrier has no further obligation.

Become Disabled or Die Unexpectedly

On opening day of deer season, you experience chest pains and are rushed to the hospital for emergency heart surgery. Complications ensue. Instead of being out of the office for a week, you are away from your solo practice for several months. Your secretary attempts to notify all of your clients, the courts, and opposing counsel.

Unsure whether you will ever return to practice, your secretary takes another job. An important deadline on a personal injury matter passes and the client retains another attorney to investigate a malpractice action against you.

Your spouse retains an attorney to review your open files and hires an accountant to handle your business matters. Among your papers, the accountant finds your professional liability insurance policy and notes that the policy is set to expire soon.

What should be done?

The potential claim needs to be reported immediately to the insurance carrier to trigger coverage under the claims-made policy. If you expect to return to practice, you or the person handling your affairs would need to purchase another policy. If you become permanently disabled, investigate the option of purchasing a tail. Again, you may have only 30 days after the policy expires to act.

Sell Interest, Continue in Private Practice

After practicing for several years in Milwaukee, you sell your interest in the law firm to your long-term partner, move to the lake house, and open your own residential real estate practice. You trust your former partner to maintain adequate insurance coverage for the large, commercial real estate transactions you handled while practicing in Milwaukee. You take out a professional liability insurance policy that covers work performed at your new firm, but no prior legal representation.

Six months later, your former partner takes an in-house counsel position with a mortgage lender and closes the practice. The former partner, now the only person with the authority to exercise the tail, is on the fence about purchasing the tail.

What should you do?

Once again, you are in the precarious position of counting on someone else to maintain adequate insurance coverage for your work. As if that weren't enough to worry about, as a partner in the previous firm, you could be vicariously liable for work performed by former associates.

Ideally, in the sale of your partnership interest, you would include a provision that your former partner maintain insurance coverage and name you in the event that a tail endorsement, if available, is exercised.

Conclusion

The shadow of liability lengthens along with your years in practice. You can't practice law every day looking over your shoulder, but you can take steps to manage your risk and keep liability in check.

Wisconsin Lawyer