In this article, answers are provided for many common, and not so common, questions surrounding this key coverage for predecessor firms under professional and E&O policies.
The exposure to and the existence of coverage for claims from so-called predecessor firms is a key issue in professional liability insurance. When buying coverage for law, accounting, architectural firms, medical practices, and the myriad of businesses now covered by miscellaneous errors and omissions (E&O) liability policies, this area must be carefully analyzed and addressed.
What Are Predecessor Firms and What Exposures Do They Generate?
The first question can best be answered with an example. Law Firm A consists of eight attorneys. Three years ago, two of these attorneys were partners in Law Firm B, which was acquired by A. Firm B is considered to be a predecessor firm.
An exposure to claims from a predecessor firm exists if certain currently insured persons under a professional liability policy were, at one time, members of a predecessor firm. In the above scenario, Firm A is exposed to claims from the professional activities conducted by the two attorneys while they were part of Firm B, the predecessor firm.
How Does Predecessor Firm Coverage Apply?
The availability of predecessor firm coverage under a professional liability policy depends on the way in which the policy defines the term "predecessor firm." Under the definitions found in nearly all professional liability policies, an organization qualifies as a "predecessor firm"—and an insured—if the majority of the predecessor firm's assets were acquired by the named insured. (See Figure 1, below.)
Assume in the above example that Firm A, when it acquired Firm B, took over cases comprising 50.1 percent of Firm B's gross projected annual billings at the time of the acquisition. In this situation, Firm B and the two lawyers previously associated with Firm B—who are now working for Firm A—would have coverage for their professional acts while they worked for Firm B under Firm A's policy.
On the other hand, assume that Firm A acquired files comprising only 30 percent of Firm B's estimated gross annual billings. In this instance, the predecessor firm, Firm B, and its personnel (the two attorneys now working for Firm A) would not be covered for acts prior to the acquisition, given the failure to attain the "majority of assets threshold," as indicated in Figure 1.
Figure 1 Representative Predecessor Firm Definition and Coverage Provision
PREDECESSOR FIRM means any entity engaged in Legal Services to whose financial assets and liabilities the Named Insured is the majority successor in interest.INSURED means … any lawyer or professional corporation who is a former partner, officer, director, stockholder or shareholder or employee of the Named Insured or Predecessor Firm, but only in rendering or failing to render Legal Services on behalf of the Named Insured or Predecessor Firm.
Source: Zurich Insurance Company; Lawyers Professional Liability Insurance Policy
Do Most Types of Policies Provide Predecessor Firm Coverage?
The prevalence of predecessor firm coverage within a professional\E&O liability policy depends on the type of coverage involved. Generally, nearly all policies written for lawyers and accountants provide it. Not all, but a majority of forms covering architects and engineers and insurance agents and brokers contain such coverage. Only a handful of forms that cover medical and miscellaneous professionals contain predecessor firm coverage. Accordingly, when such coverage is necessary but not found within a policy's "regular" provisions, it should be requested.
How Do Professional Liability Insurers Cover Predecessor Firms?
Insurers will normally agree to cover predecessor organizations, as long as the insurer has had the opportunity to underwrite such predecessor firms. Consequently, the application forms of insurers whose policies automatically provide predecessor organization coverage typically request that the insured provide detailed information concerning the predecessor firm. Generally, such applications contain a separate questionnaire or an individual section within the application requesting information about the predecessor firm's operations and claim history.
The key question posed by insurers concerning predecessor firms relate to details about any situations that have not yet, but present the potential for giving rise to claims in the future. Accordingly, claims arising from such circumstances will be excluded, even if predecessor firm coverage is granted.
What If a Policy's "Predecessor Firm" Definition Precludes Coverage?
Often, a particular predecessor firm is precluded from coverage by a policy's definition of "predecessor firm." Typically, this occurs when: (1) a majority of the predecessor firm's assets were not acquired by the named insured or (2) when a policy contains no predecessor firm coverage provision. In the both instances, the acquired firm should be added as a named insured on the current organization's policy. Although this could involve additional premium, this step will remove any ambiguity regarding the insurer's coverage intent, assuming, of course, the insurer is willing to cover the predecessor firm exposure.
What about Coverage for Insureds' Acts at Other Firms?
A different but related question often arises in conjunction with predecessor firm issues: To what extent is there coverage for current personnel for their acts while they were associated with other firms? For example, assume that a claim is made against an attorney, who was previously employed by another law firm, and that law firm is neither a "predecessor firm" nor a "named insured" under the current policy. The question is sometimes asked as to whether there would be coverage for the attorney's acts—while at the prior firm—under the current policy.
The general rule in such instances is that coverage "follows the organization" rather than "follows the individual." Therefore, in this situation, coverage would apply under the prior firm's policy (if there is one), rather than under the current firm's policy.
In unusual instances, coverage might be arranged to cover the attorney's professional acts at the prior law firm under the current firm's policy. (Such coverage would be necessary, if, for example, the firm had dissolved, was not acquired by another firm, and no longer maintained professional liability coverage, either in the form of a current policy or by means of an extended reporting endorsement to an expired policy.) However, in actual practice, this is rarely done.
The issue of coverage for predecessor firms is important because at some point, nearly all types of organizations covered by professional\E&O liability policies will be confronted with this exposure. In all but the most unusual circumstances, one of the following two approaches should be applied.
The acquired firm meets the "majority" definition as explained within this article. Simply complete the application questionnaire dealing with the predecessor firm's operations. Accordingly, coverage for the predecessor firm will be "automatic."
The acquired firm does not meet the "majority" definition, or the policy does not contain a predecessor coverage provision. Provide the necessary details about the acquired firm's operations and claim history. Then, request that the acquired organization be a "named insured" under the policy. Remember that most insurers are amenable to covering a predecessor organization exposure provided they have the opportunity to underwrite it. Accordingly, many such insurers willing to do so have supplementary applications that can be submitted along with their "regular" applications. It is important to request and obtain these supplements and to submit them if predecessor firm coverage is desired.
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