What insurance coverage applies during a law firm dissolution?

Law firm dissolution creates one of the most significant insurance exposures an attorney can face. When the firm ceases operations and cancels its malpractice policy, all rights to report future claims under that policy end unless an extended reporting period is purchased. Since malpractice claims can surface years or even decades after the underlying work was performed, tail coverage is essential.

The cost of tail coverage at dissolution is typically 150 to 300 percent of the final annual premium, depending on the duration of the extended reporting period. An unlimited tail provides the most comprehensive protection but is the most expensive option. The dissolution agreement should clearly specify who is responsible for purchasing and paying for the tail coverage. In many dissolutions, the cost is borne by the firm's remaining assets, but if assets are insufficient, the partners may need to fund the tail from personal resources.

Each departing partner's situation must be individually evaluated. Partners who join an existing firm may be able to obtain prior acts coverage under their new firm's policy, potentially avoiding the need for separate tail coverage from the dissolving firm. Partners who retire need tail coverage because they will have no future policy under which to report claims. Partners who start new solo practices should attempt to obtain prior acts coverage from their new carrier dating back to the dissolving firm's retroactive date.

Beyond malpractice, the dissolving firm must address its other insurance obligations. Business property, general liability, and workers compensation policies need to be properly canceled. Employment practices liability tail coverage may be warranted if the dissolution involves terminating employees. Any pending or potential claims under any line of coverage should be reported before policies are canceled. The firm's insurance broker should be engaged early in the dissolution process to coordinate the orderly wind-down of all coverages.