Lateral Hires and Insurance Gaps: Protecting Your Firm When Adding Partners

Adding a lateral partner to your law firm is an exciting growth opportunity, but it comes with insurance complexities that many firms fail to adequately address. A lateral hire can introduce coverage gaps, inflate premiums, and expose the firm to unknown liabilities from the new partner's prior practice. Careful insurance planning before, during, and after the transition is essential.

The Prior Acts Problem

When a lateral partner joins your firm, they bring their professional history with them, including potential claims arising from work performed at their previous firm. Your firm's malpractice policy may or may not cover claims arising from the lateral's prior work, depending on how the policy defines covered persons and covered professional services. Most policies cover acts performed by individuals while they are members of the insured firm, which would not include acts performed at a prior firm. This creates a gap: claims arising from the lateral's prior work may fall between the two firms' policies.

Ensuring Continuous Coverage

The ideal scenario is for the lateral partner to be covered by their former firm's malpractice policy for all work performed there, whether through the firm's ongoing policy or through tail coverage. Before extending an offer, your firm should verify that the departing firm's malpractice coverage will continue to respond to claims from the lateral's prior work. If the former firm is dissolving, confirm that adequate tail coverage has been purchased. If neither protection is available, your firm may need to negotiate prior acts coverage with your own carrier to cover the lateral's prior work, which will likely increase your premium.

Underwriting Implications

Adding a lateral partner triggers a mid-term reporting requirement with most malpractice carriers. You must notify your carrier of the new attorney, their practice areas, their claims history, and their date of admission to the bar. The carrier will adjust your premium to reflect the additional insured attorney and may adjust the firm's overall risk profile based on the lateral's practice area and history. Failure to report a new attorney can result in a coverage dispute if a claim arises from their work.

Claims History Review

Before finalizing a lateral hire, conduct a thorough review of the candidate's claims history. Request a full disclosure of all malpractice claims, disciplinary proceedings, and bar complaints. Your carrier will ask about this history at renewal, and undisclosed claims can jeopardize coverage for the entire firm. A candidate with a significant claims history is not necessarily disqualified, but the information must be transparently reported to your carrier and factored into the hire decision.

Practice Area Considerations

A lateral partner who practices in a higher-risk area than your firm's existing attorneys can meaningfully increase your overall malpractice premium. If your firm primarily handles corporate transactions and you add a lateral who practices plaintiff personal injury, your blended rate will increase to reflect the higher-risk practice area. Quantify this impact with your broker before making the hire so the cost can be factored into the economic analysis of the lateral's addition.

Partnership Agreement Provisions

Your partnership agreement should address insurance obligations related to lateral hires. Key provisions include who bears the cost of any premium increase attributable to the lateral, responsibility for prior acts coverage or tail coverage from the former firm, disclosure obligations regarding claims history, and procedures for handling claims that arise from the lateral's prior work. Addressing these issues in advance prevents disputes and ensures the firm is protected.

A Checklist for Lateral Hires

Before bringing on a lateral partner, complete the following: verify the former firm's malpractice coverage status, review the candidate's full claims and disciplinary history, notify your malpractice carrier of the addition, confirm prior acts coverage for the lateral's prior work, quantify the premium impact of the addition, update your partnership agreement to address insurance obligations, and coordinate with your broker to ensure seamless coverage throughout the transition.