What insurance considerations apply when buying an existing law practice?

Acquiring an existing law practice is one of the most insurance-intensive transactions in the legal profession. The buyer inherits not just the seller's client relationships and goodwill but also potential liability exposure from the seller's prior work. Proper insurance structuring is essential to avoid inheriting uninsured risk.

The single most important insurance step is verifying that the selling attorney has purchased adequate tail coverage. The seller's tail policy protects against malpractice claims arising from work performed before the sale. Without tail coverage, claims from the seller's prior work could be directed at the buyer, particularly if clients perceive the purchase as a continuation of the same practice.

As the buyer, you need a professional liability policy effective on the closing date with a retroactive date that covers any ongoing matters you are assuming. If you are taking over active client files, your retroactive date should extend back at least to the date the earliest assumed matter was opened. The carrier will underwrite this retroactive exposure based on the nature of the assumed matters and the seller's claims history.

Review the seller's complete claims history and any pending or potential claims before closing. Outstanding claims or circumstances that could give rise to claims should be allocated in the purchase agreement, with clear provisions for insurance responsibility. Any pending claim should remain the seller's responsibility under their tail policy.

The purchase agreement should include insurance representations and warranties. The seller should warrant that they have maintained continuous malpractice coverage for a specified period, that they will purchase tail coverage with minimum specified limits and reporting period, and that they have disclosed all known claims and potential claims.

Budget for the insurance costs of the acquisition. Your own policy premium may be higher during the first few years because you are assuming an existing book of business with unknown risk characteristics. Additionally, if the seller has not yet purchased tail coverage, you may need to negotiate a price reduction to account for this cost, which typically runs 150% to 200% of the seller's final annual premium.

Work with a broker experienced in law firm transactions to structure the coverage transition. The broker can coordinate between your carrier and the seller's carrier to ensure seamless coverage continuity.