A solo attorney merges with a small legal practice specializing in real estate. The merger goes smoothly, the firms combine their client lists, and everything seems to be on track for growth. But two years later, a claim lands on their desk. A former client of the predecessor firm alleges negligence in handling a property title, and now, the newly merged firm is facing a six-figure lawsuit. Without the right coverage in place, this claim could wipe out the firm’s finances and reputation. Enter predecessor firm coverage. For insurance agents and brokers, understanding how this coverage works — and when to recommend it — can be the difference between protecting your client’s business and leaving them vulnerable to unforeseen risks.
What Is Predecessor Firm Coverage?
Predecessor firm coverage is an important part of Lawyers Professional Liability Insurance. It provides liability protection for claims arising from the acts, errors, or omissions of a firm that has merged, been acquired, or dissolved, provided the successor firm agrees to take on this exposure. Essentially, it acts as a safety net, assuming any liabilities tied to the predecessor firm’s professional services are still covered under the successor firm’s policy. It’s particularly relevant for practices undergoing transitions, such as law firm mergers, acquisitions, or expansions. The new or restructured firm can maintain continuity of coverage and mitigate risks tied to past actions while also focusing on its future.
Key Coverage Considerations for Predecessor Firm Coverage
When assessing the need for predecessor firm coverage, there are several important factors to consider:
- Claims-Made Policies: Most professional liability policies operate on a claims-made basis, meaning that the policy in effect when the claim is reported — rather than when the alleged error occurred — responds to the claim. Without predecessor firm coverage, liability from past acts might go uninsured if a firm transitions to a new policy or ownership.
- Policy Retroactive Date: The retroactive date determines how far back in time the coverage applies. It needs to include the predecessor firm’s timeline so that claims from prior acts are adequately covered.
- Firm Transitions: Predecessor firm coverage becomes essential during mergers and acquisitions or when solo practitioners expand their practice to include additional attorneys. These changes increase the risk of past liabilities’ resurfacing, particularly if the predecessor firm no longer carries its own insurance.
- Tail Coverage: In some cases, purchasing extended reporting period (ERP) coverage — or tail coverage — may also be necessary to complement predecessor firm coverage. This helps bridge any potential gaps during a firm’s transition.
- Risk Profile of the Predecessor Firm: Understanding the predecessor firm’s claims history, size, and practice areas is crucial when evaluating the appropriateness of adding this coverage. Firms with high-risk practice areas, such as real estate or intellectual property, may require additional scrutiny.
Why Small Firms and Solo Practitioners Need Predecessor Firm Coverage
Small firms and solo practitioners are especially vulnerable when merging with another practice or expanding their operations. Educating your clients on the importance of predecessor firm coverage is vital. It safeguards their hard-earned reputation, minimizes financial risk, and helps them weather potential legal challenges from prior activities.
At MiniCo, we understand the unique risks facing small law firms and solo practitioners. That’s why our exclusive Lawyers Professional Liability program includes comprehensive coverage options, including predecessor firm coverage, to address the evolving needs of your clients. Our dedicated program underwriters specialize in customizing insurance solutions for small firms of 1-25 attorneys. MiniCo’s exclusive admitted program is available in most states, with non-admitted options available nationwide. Connect with us today to get a quote or explore our attorneys’ insurance solutions.
