Law Firm Partnership Insurance Obligations

Law firm partnerships create layered insurance obligations that go beyond simply purchasing a policy. Partners face personal liability for firm obligations, lateral hires bring prior acts exposure, of-counsel arrangements blur coverage lines, and departing partners must navigate tail coverage decisions. This guide addresses the insurance considerations that every law firm partnership should understand and plan for.

Partner Personal Liability

In a general partnership, each partner is jointly and severally liable for the acts and omissions of every other partner within the scope of the firm's business. This means a malpractice claim against one partner can result in a judgment against all partners, putting personal assets at risk. Even in limited liability partnerships, which shield individual partners from vicarious liability for other partners' malpractice, the partner who committed the alleged error and any supervising partner remain personally exposed.

This liability structure makes adequate malpractice insurance coverage essential. The firm's policy is the primary protection for all partners. If the policy limits are inadequate to cover a judgment or settlement, partners may face personal liability for the excess. Firms should evaluate their per-claim and aggregate limits relative to the size and complexity of matters they handle and the personal assets partners have at stake.

Firm Policy vs. Individual Policies

Most law firms carry a single firm-wide malpractice policy that covers all attorneys, including partners, associates, and of-counsel. This is the standard and most cost-effective approach. The firm is the named insured, and all attorneys performing work on behalf of the firm are covered as insureds under the policy.

Individual malpractice policies, purchased by attorneys separately from the firm's policy, are uncommon but may be appropriate in specific situations. An attorney who maintains a side practice outside the firm's scope of work needs individual coverage for that work, as the firm's policy will not cover it. Partners in a general partnership may also consider personal excess policies if they are concerned about the firm's limits being insufficient to cover large claims.

When evaluating whether the firm's policy is adequate, review the definition of insured in the policy form. It should explicitly include partners, associates, of-counsel attorneys, employees, and the firm entity itself. Confirm that retired partners and former attorneys are covered for work performed during their tenure with the firm.

Of-Counsel Coverage

Of-counsel arrangements present unique insurance challenges. The of-counsel attorney may be considered an employee or independent contractor of the firm, and the appropriate insurance treatment depends on the nature of the relationship. If the of-counsel attorney works exclusively for the firm and under the firm's direction, they should be covered under the firm's policy. Confirm this by reviewing the policy's definition of insured and notifying the carrier of the of-counsel arrangement.

If the of-counsel attorney maintains their own practice in addition to work for the firm, a coverage gap can arise. The firm's policy covers work done for the firm, and the attorney's personal policy covers their independent practice. But if the policies have different carriers, disputes can arise over which policy responds when a claim involves work that touches both relationships. The safest approach is to explicitly address insurance in the of-counsel agreement, specifying which policy is primary for which types of work, and ensuring both carriers are aware of the arrangement.

Lateral Hire Coverage

When a partner or associate joins from another firm, they bring prior acts exposure with them. Work performed at the prior firm may give rise to malpractice claims years after the lateral hire has moved on. The question is which policy covers those claims.

The prior firm's policy covers claims arising from work performed at that firm, as long as the policy remains in force or the lateral hire is covered under the firm's tail coverage. However, if the prior firm dissolves without purchasing a tail, or if the firm's coverage lapses, the lateral hire may have no coverage for prior acts.

When your firm hires a lateral, ask whether the prior firm is maintaining its malpractice coverage or purchasing a tail. If neither is the case, discuss with your broker whether your firm's policy can be endorsed to cover the lateral hire's prior acts by extending the retroactive date for that individual. Some carriers will accommodate this, though it may increase the premium.

Departing Partner Obligations

When a partner leaves the firm, whether through retirement, lateral move, or dissolution, insurance obligations must be clearly addressed. If the departing partner is retiring from practice, they need tail coverage for claims arising from work performed at the firm. The partnership agreement should specify whether the firm or the individual partner bears this cost. Many well-drafted partnership agreements include provisions allocating tail coverage costs, often requiring the firm to purchase or fund the tail as part of the separation terms.

If the departing partner is moving to another firm, their new firm's policy should provide prior acts coverage by extending the retroactive date. This eliminates the need for the departing partner to purchase an individual tail. However, the departing partner should confirm in writing that the new firm's policy covers their prior acts before relying on it.

For firm dissolutions, every partner needs tail coverage, and the costs can be significant. If the firm carried a $30,000 annual premium, an unlimited tail might cost $45,000 to $60,000. Partnership agreements should address how dissolution tail costs are allocated, whether equally or in proportion to ownership shares.

Best Practices for Partnership Insurance Management

Designate one partner as the insurance coordinator responsible for managing the firm's coverage, tracking renewal dates, and ensuring compliance with carrier requirements. Include insurance provisions in your partnership agreement addressing minimum coverage levels, tail coverage obligations, and cost allocation for departing partners. Review your policy annually with your broker, updating the carrier on new hires, departures, practice area changes, and revenue growth. Maintain records of all prior policy declarations pages indefinitely, as they may be needed to establish coverage history for future claims. And budget for tail coverage as a standard firm expense rather than treating it as an unexpected cost when the time comes.