A few issues arise when a malpractice claim is filed against an attorney working for the insured firm when that attorney leaves the firm while the claim is pending. In addition, the question frequently arises as to how the claim will affect the firm’s future risk rating. This article is intended to provide a partial refresher on how your professional liability insurance policy works and how it applies to the claims situation described here.

The first thing to remember is that the Named Insured on the policy is listed on the declarations page under the heading “Named Insured.” Typically, in the case of a law firm, it is the firm entity. The type of entity rarely matters.Generally, the individual attorneys are “Insureds” as long as they are partners of or stockholders in the “Named Insured” entity or they are employed attorneys who work on behalf of the “Named Insured.” This includes lawyers who enter the firm during the policy period and those who have left the firm entity, under certain conditions.

When a claim for negligence is alleged against an attorney, the individual attorney is typically named in the suit as the offending party. In addition, in most cases the law firm will also be sued for failing to supervise the attorney’s work, vicarious liability or under some other theory. Savvier claimant’s attorneys know where liability lies. That is why risk managers remind firms of their obligations and encourage them to set up procedures to monitor each other’s work product and performance. This oversight can be accomplished in many different ways, ranging from informal weekly meetings on case progress and workloads to random audits of files on a regular basis. We understand that as professionals it is difficult and time consuming to “police” your partners and colleagues. This issue is particularly difficult in smaller firms that have been together for some time where more deference is given to other members of the firm because individual workloads demand attention. The lack of oversight in smaller firms may also partially explain why, according to ABA studies, the largest number of claims comes from firms of two to five attorneys. For your reference, I would encourage you to review the plethora of risk articles available on this site and in other publications about how to set up a process to review attorney work.

When handling a claim where both the firm and the individual responsible attorney are named, one of the first questions that the claims attorney must consider is whether a conflict exists between the two parties. In most cases, the interests are aligned and no conflict exists. Even in situations where the allegedly negligent attorney left the law firm under less than amicable circumstances, the interests of the parties will still be aligned. Unless the attorney was acting outside his authority for the firm, it is unlikely any real conflict exists between the two parties. If counsel is needed, ALPS will normally hire one defense counsel to represent both parties. This keeps down the cost of defending claims which is a factor that may have an impact on the firm’s risk rating for future underwriting purposes. In all cases the firm needs to remain active in the claims process not only to protect its interests but also because of future risk implications for the firm. Remember, even if the responsible attorney leaves the firm and a loss payment is made, the claim will be reflected in the firm’s loss history and will have an impact on future underwriting. In some cases, the firm may even get a reputation for “bad hires” and become the target of multiple malpractice lawsuits.

The firm needs to promptly notify the insurer when the responsible attorney leaves the firm. This may seem obvious; however, I am aware of a recent situation (unfortunately not the only one) where an attorney in a malpractice claim left the firm while the claim was pending against him. No suit had been filed; no conflict existed between the attorney and the firm; and, defense counsel was hired to defend the claim. No one notified ALPS or the attorney defending the claim that the attorney had left the firm. Eventually, the matter was settled with the consent of the responsible attorney as described by the terms of the policy. Consent of one Insured is sufficient.

ALPS later received a call from the firm asking why it had not been informed of the settlement negotiations. Although the firm agreed with the result, the members of the firm were upset because they had not been involved in the settlement discussions. Secondly, they were not aware of the fact that due to the amount of the loss payment, they would be assessed a surcharge in their next renewal premium and the payment would impact the firm’s loss history. The responsible attorney may just want the matter behind him and wants the insurer to pay, sometimes more than the claim is worth. Conversely, sometimes the responsible attorney refuses to pay anything despite the potential exposure. The firm may be able to help temper both of these mindsets by being supportive and rational. In the claim discussed above, no one in the firm had taken an active role in the claims process and everyone assumed the responsible attorney was keeping them apprised of the status of the claim. Unfortunately, this was not the case. The firm needs to remain involved in the process by providing contact information and notifying us when there is a change in status of the attorney or for that matter the firm. This will assist us in providing the best service to our Insureds.

The other question that often arises, most often at renewal time when the firm sees the premium impact or the firm faces non-renewal, is: “Why are we (the firm) being stuck with the claims history when the offender has left the firm?” The answer goes back to the definition of the “Named Insured” found in the policy. The law firm is the Named Insured and the claims history for all attorneys who have been members of the firm working on behalf of the firm will impact the firm’s loss history and risk assessment. We are often asked by firms why they are being “penalized” for a mistake by an attorney who is no longer with them. The answer is that the firm is not being “penalized” for its claims history; rather it is being assessed for its future risk, according to its previous loss experience.

In summary, the best way to avoid these issues is to remain vigilant as a firm to all of the factors which create an atmosphere for claims, including oversight of colleagues. Then, in the unfortunate circumstance when a claim arises, the firm must remember to actively participate in the claims process to ensure that the interests of everyone are properly served.

Claims Corner is not legal advice. It does not, and is not intended to, respond to any individual situation or concern. The reader must conduct independent research and analysis to determine the constraints and best way to act for each matter in each jurisdiction.

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