One of the least understood or appreciated provisions in the typical lawyer professional liability insurance policy is when and why you need tail insurance; the option to purchase an extended claims reporting period, commonly referred to as a “tail”. Many lawyers have never read their errors and omissions policy and are completely unaware of the coverage afforded or the risks entailed in failing to understand the intricacies of their policy. The dangers of such ignorance are especially prevalent when attorneys switch insurance companies, move from one law firm to another, or retire from the active practice of law. Attorneys who would never dream of ignoring such a critical document when representing their clients blithely assume that having purchased a policy they are “covered.” Many retiring attorneys believe that since they are no longer practicing, there is no need for continuing insurance coverage. The penalty for this cavalier attitude is often devastating. Having practiced law for decades while paying considerable premiums, it is the foolhardy attorney who neglects to purchase “tail” coverage during his retirement.
Many retiring attorneys’ misconceptions regarding the need for continuing coverage following retirement are based upon their confusion over how insurance policies have changed over time. In its infancy, lawyers’ errors and omissions policies were written on an “occurrence” as opposed to “claims made” basis. Under an “occurrence” policy an attorney received coverage for acts, errors or omissions which occurred during the period the policy was in effect. Thus, it was irrelevant when the claim or suit was advanced against the lawyer; there was coverage so long as the alleged act, error or omission “occurred” during the period in which the policy was in force and effect. As a result, there was no need for a retiring attorney to purchase insurance after retirement.
With the advent of the discovery rule for statute of limitations purposes, it became not only possible, but inevitable, that an error might lie fallow for many years, or even decades, before being “discovered” and advanced against the attorney. This created a nearly impossible situation for insurance companies because they were unable to calculate, to any reasonable degree, the proper premiums for the risk. Especially in the fields of estates and trusts, real estate, business transactions, and the representation of minors, claims might lie dormant, and, then, be asserted ten, fifteen or even twenty years after the occurrence. As a result, every carrier writing professional errors and omissions policies abandoned the “occurrence” form and adopted some variation of the “claims made” form. This basic change necessarily altered how attorneys retiring from practice evaluated their coverage needs.
A “claims made” policy provides coverage for claims made during the policy period regardless of whether the act, error or omission giving rise to the claim occurred during or prior to the policy period. Thus, the date of the occurrence became largely irrelevant, and insurance companies were able to accurately predict the risk being accepted and, thus, charge an appropriate premium. Moreover, once the policy year expired, the insurance company, knowing that no future claims chargeable to that policy would be forthcoming, could quickly analyze claims history and adjust premiums for purchase policies. The pure “claims made” policy, however, posed several problems. Since a claim is deemed “made” when a demand for damages is advanced against the Insured, it often results that the claim is not reported to the insurance company until after the policy period expires.
In states such as Maryland, insurance companies cannot deny coverage as the result of an Insured failing to promptly report a claim in the absence of actual prejudice. Thus, insurance companies cannot generally rely upon late notice conditions, alone, to deny coverage. The Annotated Code of Maryland, Insurance Article §19-110 provides in pertinent part that:
An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.
Most insurance companies, therefore, altered the pure “claims made” form to require that the claim not only be made, but also, that the claim be reported to the insurance company within the policy period in order to trigger coverage. Thus, most policies in current use should more properly be called “claims made and reported” policies. It should be noted that distinguishing between a “claims made” and a “claims made reported” policy can be difficult, and Maryland courts generally have been reluctant to uphold the denial of coverage where the claim was made against the insured during the policy period, but not reported until after the policy expired. Until 2011, Maryland case law was clear that §19-110 did not apply to claims made and reported policies. See, St. Paul Fire & Marine Ins. v. House, 315 Md. 328 (1989). However, in 2011, the Maryland Court of Appeals issued its decision in Sherwood Brands, Inc. v. Great Am. Ins. Co., 418 Md. 300 (2011), in which the Court distinguished the prior case law and concluded that the policy’s notice requirement was not a condition precedent to coverage, but a covenant such that a breach required that the carrier establish actual prejudice before coverage could be properly denied.
While Maryland appellate courts have not rendered any decisions on this issue since Sherwood Brands, several cases from the U.S. District Court for the District of Maryland have spoken on the issue with varying results. In, Minnesota Lawyers Mutual v. Baylor & Jackson, 852 F. Supp. 2d 647 (2012), and Financial Industry Regulatory Authority, Inc. v. AXIS Ins. Co., 951 F. Supp. 2d 826 (2013), the U.S. District Court concluded that §19-110’s actual prejudice requirement was inapplicable to the subject policies. In Baylor & Jackson, the Court rejected the argument that §19-110 required the carrier to establish that it suffered actual prejudice as a result of the insured’s untimely notice in order to deny coverage and held that the subject policy requirement of timely reporting was no mere “notice provision,” but, rather, was incorporated into the definition of coverage and, therefore, became a condition precedent to coverage. A similar decision was rendered by the Honorable Paul W. Grimm in Financial Industries Regulatory Authority, supra.
On the other hand, in three other cases, the U.S. District Court concluded that §19-110 was applicable and required a showing of actual prejudice before coverage may be denied. See, McDowell Building, LLC v. Zurich Am. Ins. Co., 2013 WL 5234250 (2013); Navigators Specialty Ins. Co. v. Medical Benefits Admin. of MD, Inc., 2014 WL 768822 (2014); and Katlin Specialty Ins. Co. v. Aron, 38 F.Supp.3d 694 (2014). In each of these cases, the Court concluded that §19-110 applied, thereby requiring a showing of actual prejudice before coverage may be denied.
While the status of Maryland law, as it relates to the applicability of §19-110 to claims made and reported policies, remains somewhat unclear and very case specific depending on the language of each applicable insurance policy, the fact remains that an insured faces a significant risk of not having insurance coverage if a claim is not both made and reported during the applicable insurance term.
The switch from an occurrence to a “claims made and reported” form created a huge problem for lawyers retiring from the practice of law. With occurrence policies, there was, of course, no need to continue purchasing insurance following retirement because the retired attorney would not be committing “new” acts, errors or omissions. The retiree’s prior occurrence polices would, therefore, apply to any claims made in the future, since they would, by definition, be based upon acts, errors or omissions which occurred during one of the earlier policy periods. However, under a “claims made and reported” policy, once the last policy period expired, any claims made, even though based upon acts, errors or omissions which occurred while the policy was in effect, would not be covered. Hence, the need arose for an extended reporting period to protect the attorney for claims made, after his last policy expired, for acts, errors or omissions which occurred during earlier policy periods.
These “tails” do not provide coverage for new acts, errors or omissions, but rather, simply allow the Insured to report claims based on prior acts, errors or omissions following the normal expiration of the policy term. The precise terms of the extended claims reporting options differ from policy to policy. The main point is that the “tail” option provisions differ widely, and it is important to be cognizant of the applicable provisions that may best suit an individual’s needs. As a result, Eccleston and Wolf strongly recommends that retiring attorneys, or attorneys switching firms or policies, consult with an expert insurance broker with a practice concentrated in the realm of professional errors and omissions insurance.
For the solo practitioner who decides to retire, the choice seems fairly simple and straightforward. Simply put, the solo practitioner contemplating retirement should seek either an unlimited or long-term tail provision. While the cost may seem high at a time when your income may be limited, the risks entailed are too great to forego the protection afforded. For those individuals retiring from a stable law firm, which is likely to indefinitely carry on the business, the decision is more complex. Most errors and omissions policies contain a provision making a retired partner or employee an “additional insured.” For example, one of the policies frequently issued in Maryland provides that the following are “additional insureds”:
1. Any former partner, officer, director, stock-holder or employee of the Named Insured Firm or Predecessor Firm named in the Declarations while acting solely in a professional capacity on behalf of such Named Insured Firm or Firms;
2. Any partner, officer, director, stockholder or employee of the Named Insured Firm or Predecessor Firm named in the Declarations who has retired from the practice of law, but only for those professional services rendered prior to the date of retirement from the Named Insured Firm or Firms.
Most policies contain similar, but certainly not identical, provisions. Thus, so long as the firm stays in business and continues to purchase insurance from the same insurance company, without a break, the retiring attorney is covered without the need to purchase additional tail coverage. Unfortunately, the firm may dissolve after the attorney’s retirement, or may drop its insurance or switch to a new company whose policy does not afford coverage. For example, even if the firm continues in business and maintains insurance coverage after the attorney’s retirement, the firm might switch to a new insurance carrier and accept a very restrictive prior acts exclusion or other limiting language in order to save on premiums. This could leave the retiring attorney in a vulnerable position. Even worse, should the firm dissolve, or cease to buy coverage of any type, the retiree could be left wholly uncovered. Thus, in a subsequent lawsuit, even if the former law firm is named as one of the defendants, the retiree will potentially bear the brunt of any adverse judgment and the defense costs associated therewith, especially if the firm is judgment proof following dissolution. Similar issues may arise when the attorney either changes insurance companies or changes firms.
The most important aspect of any determination as to what coverage you need is a firm grasp of the options available. It is imperative that when planning for retirement, you obtain and carefully review your insurance policy in order to ascertain the options available. It is also highly recommended that you discuss the various policies available with your insurance professional. If the professional you normally use only offers one product, or will not provide you with information on competing policies, you should contact Eccleston and Wolf to ascertain the names of qualified brokers who concentrate in this type of insurance. Most brokers and agents write policies across a broad spectrum. The question is whether the person who sells you auto and home coverage is the person you want advising you on this crucial issue. At the very minimum, three years prior to contemplated retirement is not too soon to begin thinking and planning how you will protect the fruits of a lifetime of labor.