Lawyers Journal

The simple beauty of a claims-made policy -- captured in its title, description and coverage provided -- conceals an equally simple, but not at all beautiful, danger. This is because, as noted by the Supreme Judicial Court, "[t]he purpose of a claims-made policy is to minimize the time between the insured event [the claim asserting the alleged negligent act or omission] and the payment [by the insurer]."¹

Accordingly, coverage exists under a claims-made policy if, but only if, the claim against the insured is first made during the policy period. Depending upon the particular policy, there may also be an additional requirement that the allegedly negligent act, error or omission giving rise to the claim occurred after the retroactive date stated in the policy. That aspect and its various ramifications are matters that, perhaps, can be explored in another article.

Today's exploration is limited to the fact that, as simply and honestly stated, the coverage provided in a claims-made policy ends when the policy ends. Most attorneys at least implicitly acknowledge that reality by ensuring that, as one policy expires, it is succeeded by a renewal or successor policy. This guarantees, at least for the period of the successor policy, continuing claims-made coverage.

But as Mark Twain once said, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." What is frequently overlooked by attorneys is the potentially pernicious effect brought about by the sometimes quite substantial interlude between the commission, or alleged commission, of a negligent act and the eventual first assertion of the claim stemming from that commission. The tail, an attorney's potential exposure to a claim, whether justified or not, can continue for an indeterminate period of time after the alleged action giving rise to the claim.²

The applicable statute of limitations for malpractice actions against attorneys is "three years next after the cause of action accrues."³ However, the action does not accrue until the misrepresentation or error is discovered or reasonably should have been discovered by the claimant.⁴

Additionally, limitations periods are tolled by a claimant's minority or incapacity caused by mental illness,⁵ or by an allegation that the defendant fraudulently concealed the cause of action from the knowledge of the clamant.⁶ Specifically as to attorneys, the limitations period for commencing suit can be tolled by the doctrine of continuing representation. Because a client has a right to place confidence in his attorney's ability and good faith, he consequently does not have to be concerned with the accrual of a cause of action against the attorney until the attorney's employment as attorney is
terminated.⁷

Nor does "that sleep of death" contemplated by Hamlet deliver surcease. A legal malpractice cause of action survives an attorney's death,⁸ permitting suit to be filed against the estate of a deceased attorney. Should it be the potential claimant who dies, his executor or administrator is entitled to file an action against the attorney "at any time within the period within which the deceased might have brought the action or within two years after his giving bond for the discharge of his trust … ."⁹

That statute further states, ominously, that an action "may be commenced by the executor or administrator within three years from the date when the executor or administrator [not the decedent on whose behalf he makes the malpractice claim] knew, or in the exercise of reasonable diligence, should have known of the factual basis for a cause of action."¹⁰

The simple point, and the simple danger, of all this is that the risk of a claim being asserted - and the attendant necessity of incurring what could be substantial defense fees in repelling the claim - can and will continue long after a claims-made policy comes to an end. Attorneys, who by nature, custom, tradition and their own practice, exert considerable effort and caution to protect their clients, should exercise the same caution and prudence in their own behalf.

However, many automatically, perhaps wishfully, assume that retirement, bringing their practice to an end, transferring to a new legal practice in association, or even disability or death, means that they can also safely dispense with insurance protection. Proceeding on that assumption is short-sighted and economically perilous. It deprives them of both indemnity and defense (sometimes more colorfully described as "litigation insurance")¹¹ coverages for claims that are subsequently made during and in the vacuum they have carelessly created.

This danger also confronts attorneys who, anticipating going into practice with a different set of attorneys or law firm, liquidate or dissolve their current law practices. Although the legal enterprises or law firm they join may indeed have its own professional liability policy, such policies customarily only provide coverage for claims made with respect to actions, conduct or omissions allegedly committed in the service of the legal enterprise or law firm, the named insured. They do not extend coverage for claims arising from acts or conduct occurring prior to the attorney's signing on with the new group of attorneys or law firm.

Some insurers will provide, if requested by the named insured, so-called "prior acts" coverage. Such policies are relatively rare, and the willingness of law firms to request such coverage, necessitating an additional premium payment for exposures for which they cannot be held responsible, even rarer.

Most professional liability policies contain provisions which enable an attorney to obtain coverage for this tail exposure. The basic underlying purpose of the provisions is to permit the attorney to purchase coverage that will protect him from claims made against him, subsequent to the ending of the policy, for acts or conduct that occurred prior to the ending of the policy.
Generally, such provisions provide "extended reporting period" coverage. They do not create or set up a new policy. Rather, they will treat a claim first made during the extended reporting period as having been made during the now ended period of the policy.

Specific extended reporting period provisions vary, depending upon the policy. Here the admonition that appears on the first page of virtually all claims-made policies, that the insured should "review this policy carefully," becomes most important and definitely should not be ignored.

Extended reporting period tail coverage can be purchased for a limited period of time, or indefinitely, for an unlimited period, the number of years selected by the attorney determining the amount of the premium charge.

In terms of value and peace of mind, the unlimited period of coverage should be purchased, even though the premium charged for the unlimited extended reporting period may be as much as 225 percent of the premium charge for the
expiring policy.

That may seem like a large sum, but since the protection being purchased is perpetual, since an extended reporting period for only one year after the policy has come to an end customarily costs 100 percent of the premium of the expiring policy, and since defense litigation costs incurred in resisting malpractice claims continue to ascend, the advantages of purchasing the unlimited extended reporting period are many.

The decision to purchase the extended reporting period coverage usually must be made within 60 days after the expiration of the policy, and payment of the required premium, in full, is necessary. Generally speaking, most policies state that the limits of liability for the extended reporting period chosen will be the full limits of the policy pursuant to which the extended reporting period is purchased.

The attorney must be aware, however, that these limits will not be replenished or reinstated with each new year of the extended reporting period. Rather, the limits, whatever they are, are for the entirety of the extended reporting period and will be reduced by any defense or indemnity payment that the insurer makes.

Some few policies - among them the Lawyers Professional Liability Policy issued through the MBA Insurance Agency under the Lawyers Professional Liability Claims Made Insurance Program sponsored and provided by the Massachusetts Bar Association to its members - permit, in certain circumstances, extended reporting period coverage, at no premium charge, for an insured attorney who, for whatever reason, including death or disability, ceases the practice of law during the policy period.

Also, in a few policies (again, the Lawyers Professional Liability Policy issued through the MBA Insurance Agency is one of these) an attorney, other than a sole proprietor, who is insured under the policy covering the law firm, association or group of attorneys with which he is employed, is entitled to purchase an "individual tail policy" upon leaving, for whatever reason. This is an actual policy, issued only to the departing attorney, which will cover him for claims that might be made against him for acts or conduct in which he engaged while employed by the entity from which he is leaving. The attorney must pay a premium to obtain this individual tail policy.

There is no obligation on the individual attorney to purchase this individual tail policy. There may well be no need for him to purchase it, if the firm from which he is leaving is one which he believes is likely to continue in existence far into the future and which, during that future existence, will continue to purchase liability insurance coverage. Even though he has left the firm, that individual attorney will still qualify as an insured under that firm's policy for any claim that might be made against him for acts or services he rendered while employed by the firm.

However, if the attorney has any concern about the longevity of the firm from which he is departing, or about that firm's likelihood or intention to continue purchasing professional liability coverage in the ensuing years, he has the option to purchase the individual tail policy.

An attorney's current policy may not have, or may not have favorable, extended reporting period or individual tail policy provisions. If that is the case, individual standalone policies are available, primarily in the surplus lines market, which will provide coverage in the same general manner for an attorney's tail exposure. The premium charged for such policies is usually high.

Very careful attention must be directed to the proposed policy's insuring agreement, definitions, exclusions, conditions and policy period sections, especially since the forms and provisions used in these surplus lines policies are not reviewed, approved or regulated by the Division of Insurance.

Exactly what extended reporting period, individual tail policy or other tail coverages might be available to an attorney who is retiring, ceasing practice or in any other way changing or modifying his law affiliation or practice, will necessarily depend upon the particular policy then insuring him, as well as the insurance market in general. He must carefully review and consider the choices provided to him by his policy and consult, either with his insurance broker or with an informed professional knowledgeable about such policies and their coverages, to address any doubts or questions he might have.

It is imperative, however, that he conduct that review, analysis and consultation. He definitely should not elect to forego coverage in the future for claims that might result from his past actions and conduct.

In some rare, non-litigious and utopian universe, ignorance may well be bliss. But that aphorism provides no comfort or protection in today's litigious climate. As observed in another context by the noble and worthy fool in As You Like It, "thereby hangs the tale."

Richard R. Eurich is a senior partner at Morrison Mahoney LLP, primarily concentrating in insurance policy interpretation, coverage, bad faith and extra-contractual liability litigation and issues. He is chairman of the MBA Insurance Committee, and is an instructor and frequent speaker on insurance law and insurance-related topics.

¹Chas. T. Main, Inc. v. Fireman's Fund Ins. Co., 406 Mass. 862, 865 (1990).

²See e.g., Hendrickson v. Sears, 365 Mass. 83, 91 (1974) (passage of 10 years between alleged negligent certification of title and commencement of action).

³M.G.L., c. 260, §4.

⁴Hendrickson 365 Mass. at 91 (1974).

⁵M.G.L., c. 260, §7.

⁶M.G.L., c. 260, §12.

⁷See Murphy v. Smith, 411 Mass. 133, 136-138 (1991).

⁸McStowe v. Bornstein, 377 Mass. 804, 808 (1979).

⁹M.G.L., c. 260, §10.

¹⁰Id.

¹¹Hanover Ins. Co. v. Golden, 436 Mass. 584, 587 (2002), quoting Rubenstein v. Royal Ins. Co., 429 Mass. 355, 358 (1999).